Insurers Escaping Duty to Defend Mixed Actions with New Exclusion Language
Insurers Escaping Duty to Defend Mixed Actions with New Exclusion Language
By David A. Gauntlett*
Introduction
Many cases address some claims that are potentially covered by insurance and some that are clearly outside coverage. The rule in California (and generally throughout the country) is that these “mixed actions” must be defended in their entirety.[1] Some jurisdictions allow the insurer to recover defense expenses associated with the non-covered claims.[2] In order to avoid these obligations, however, some insurers incorporated expansive exclusions that eliminate any coverage for an entire suit if any claims asserted fall within a stated exclusion.
Courts have allowed this policy language to trump the general rule regarding mixed actions despite precedent imposing strict requirements before these exclusions can rightfully be enforced. No court accepting these coverage reductive exclusions have evaluated whether the policyholder obtained adequate notice of the reduction in coverage purportedly effected by these problematic “Typhoid Mary” exclusions. As courts have been lax in their protection of policyholders, insurance brokers have a heightened duty to be aware of policies including such language and alert clients to their presence where they advise their clients of the import of the coverage they procure for their policyholder clients.
24th & Hoffman Investors, LLC v. Northfield Ins. Co.
The most recent California case to uphold one of these vexing exclusions is 24th & Hoffman Investors, LLC v. Northfield Ins. Co.[3] There, the court held that the insurance company could effectively contract around the rule requiring a defense of mixed actions by expressly excluding from coverage all claims in which an uncovered claim is asserted. The insurance contract at issue covered an investment company’s apartment complex, but a policy endorsement excluded claims arising from a violation of the duty to maintain habitable premises.[4] It also excluded any other claims asserted in an action in which a habitability claim is made.[5]
When an underlying action was filed against the insured alleging both habitability claims and claims not based on habitability, the insurer refused to defend, and the insured sued. The trial court granted summary judgment in favor of the insured, holding that the insurer owed a duty to defend the mixed claims under Buss. The Court of Appeal reversed, holding that because the policy expressly excluded all claims brought in an action that alleges habitability-related claims, the action was not mixed, and none of the claims were even potentially covered by the insurance provision. The Court held that “This conclusion does not run afoul of Buss; it renders Buss irrelevant.”[6]
California Supreme Court Precedent Ignored by 24th & Hoffman
In E.M.M.I. Inc. v. Zurich American Ins. Co.,[7] one of a tryptic of California Supreme Court cases supporting more rigorous review of the problematic exclusion provisions, the court held that policyholders are entitled to protections from the type of endorsement used in 24th & Hoffman.
“This rule [that any policy provision, including endorsements thereto, must be ‘conspicuous, plain and clear’ when an insurer purports to change what is otherwise a policyholder’s reasonable expectation of coverage] applies with particular force when the coverage portion of the insurance policy would lead an insured to reasonably expect coverage for the claim purportedly excluded.”[8]
The 24th & Hoffman court discussed the “conspicuous, plain and clear” test,[9] but it did not address the heightened requirement, which E.M.M.I. underscored given that the asserted claims clearly fell within the policy’s coverage portion.[10] Failure to address that heightened requirement means it cannot be cited as precedent to uphold an exclusion where the E.M.M.I. rule applies “with particular force” due to the exclusion’s contradiction of a policyholder’s reasonable expectations based on coverage provided.[11] The pertinent exclusion does not advise the policyholder that its right to a defense where any potentially covered claim is included in a lawsuit is purportedly eviscerated by this last paragraph of the endorsement. This analysis may not stand the test of time.[12]
Brokers Beware
Case law is clear that an insured need not read every form to validate that the broker fulfilled the client’s stated needs (i.e., replace coverage with the same previously in effect).[13] Because courts are failing to protect policyholders from these predatory exclusions, insurance brokers must be especially vigilant. Not all insurers sell policies with such restrictive endorsements, so brokers (who undertake to advise their clients on the coverage they are procuring for their clients’ benefit) need to be on guard to warn insureds of their presence in a policy. They also have a concomitant duty to search out policy forms that do not include it, or any limitation like it. Such diligence is required of any broker purporting to offer their policyholder clients the broadest coverage available in the market after their review of the policies selected for their insured clients, particularly if a well-informed client requests a policy without these overbroad exclusions.[14]
Conclusion
Often business litigation cases include negligence claims in order to ensure that there is at least a potential for insurance coverage. 24th & Hoffman Investors may throw a monkey wrench into that tactic. The duty of care falls to insurance brokers and, ultimately, policyholders themselves to be aware of these new tactics and seek coverage that does not allow insurers to escape defending mixed actions.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Buss v. Superior Court, 16 Cal. 4th 35, 49 (1997) (“[W]e can, and do, justify the insurer's duty to defend the entire ‘mixed’ action prophylactically, as an obligation imposed by law in support of the policy. To defend meaningfully, the insurer must defend immediately. ( Montrose Chemical Corp. v. Superior Court, supra, 6 Cal. 4th at p. 295.) To defend immediately, it must defend entirely.”)
[2] Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 658–59 (2005) (Insurer can recoup costs whenever the insurer “acting under a reservation of rights, defended an action in which, as it turns out, no claim was ever potentially covered.” In a “mixed” action involving both covered and uncovered claims, the insurer must defend them all, but it can recoup its costs of defense “attributable to the claims for which there was no potential coverage.”)
[3] 82 Cal. App. 5th 825 (2022), review denied No. S276783, 2022 Cal. LEXIS 7583 (Cal. Dec. 14, 2022).
[4] Id. at 831 (“[The policy] excludes claims ‘(1) [a]rising out of the: [¶] (a) Actual or alleged violation of any federal, state or local law, code, regulation, ordinance or rule relating to the habitability of any premises; [¶] (b) Breach of any lease, rental agreement, warranty or covenant to maintain a premises in a habitable condition; or [¶] (c) Wrongful eviction from, wrongful entry into or invasion of the right of private occupancy . . . due to failure to maintain a premises in a habitable condition.’”)
[5] Id. (“[The policy] excludes claims (2) ‘[a]lleged in any claim or “suit” that also alleges any violation, breach or wrongful eviction, entry or invasion as set forth in Paragraphs (1)(a)–(c) above.’”)
[6] Id. at 839.
[7] 32 Cal. 4th 465 (2004).
[8] Id. at 471 (quoting MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003)); see also Haynes v. Farmers Ins. Exch., 32 Cal. 4th 1198, 1208 (2004) (“[T]he notice of noncoverage of the policy, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear.”) (quoting Steven v. Fid. & Cas. Co., 58 Cal. 2d 862, 878 (1962)).
[9] 24th & Hoffman, 82 Cal. App. 5th at 836 (“[The endorsement] is clearly marked ‘EXCLUSION—HABITABILTY OF PREMISES’ and is on a separate page with a warning on the top line: ‘THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.’”)
[10] Id. at 831 (“The insurance policy provisions relevant here provide comprehensive general liability coverage to the insureds for allegations of bodily injury, property damage, and personal injury caused by an occurrence. There is no dispute that the underlying action alleged causes of action that on their face fall within these provisions . . . .”)
[11] Rosen v. State Farm Gen. Ins. Co., 30 Cal. 4th 1070, 1076 (2003) (“It is a well-established rule that an opinion is only authority for those issues actually considered or decided.”)
[12] My Choice Software, LLC v. Travelers Cas. Ins. Co. of Am., 823 F. App’x 510, 512 (9th Cir. (Cal.) Aug. 19, 2020) (“Applying the ‘arising out of’ exclusionary language to the allegations asserted in the Trusted Tech cross-complaint runs counter to the principle that . . . exclusionary clauses are interpreted narrowly against the insurer.”)
[13] Rios v. Scottsdale Ins. Co., 119 Cal. App. 4th 1020, 1027 (2004) (“A broker's failure to obtain the type of insurance requested by an insured may constitute actionable negligence and the proximate cause of injury.”) (quoting Desai v. Farmers Ins. Exch., 47 Cal. App. 4th 1110, 1118–20 (1996)); Bock v. Hansen, 225 Cal. App. 4th 215, 231–32 (2014) (Acknowledging the reality that policyholders do not fully understand policies and concluding they may rely on representations of brokers without independently verifying them “[a]bsent some notice or warning” from the broker).
[14] Nowlon v. Koram Ins. Center, Inc., 1 Cal. App. 4th 1437, 1447 (1991) (“A broker’s failure to obtain the type of insurance requested by an insured may constitute actionable negligence and the proximate cause of injury.”)