Sometimes Reading the Policy Is Not Enough

February 11, 2015

Insurance LawThe contents of insurance policies that consumers are required to purchase are more highly regulated than nonmandatory types of insurance policies. This always has been true of automobile liability insurance policies, the contents of which are prescribed by statue.  Mercury Casualty Co. v. Chu, 229 Cal.App.4th 1432 (4th Dist. 2014), a recent California appellate decision, shows that sometimes adjusters must pay as much attention to these statues as to the unambiguous language of the policy in adjusting claims.

Legal Background

California Insurance Code § 11580.1(c)(5) authorizes insurers to exclude coverage for bodily injury to insureds. Policies typically define the term insured to include resident relatives of the named insured. Mercury Insurance Company attempted to expand the universe of persons to whom liability was excluded by defining insured broadly to include non-relative residents such as roommates. The question in Chu was whether expanding the reach of the exclusion to preclude coverage for liability to non-relatives who reside with the named insured violates Insurance Code § 11580.1(c)(5), which contains no language limiting who can qualify as an insured within the meaning of the exclusion.

Factual Background

While driving his car, the named insured collided with another car. His passenger suffered injuries in the accident.  The passenger, who lived with, but was unrelated to, the named insured, sued the named insured.  The named insured’s auto insurer, Mercury, defended subject to a reservation of rights to deny coverage based on its policy’s exclusion for liability to an insured, which the policy defined to include anyone who resides with the insured, whether related or not. After the roommate obtained a judgment against the named insured, Mercury sought a declaratory judgment that the policy’s “resident exclusion” precluded coverage.

Unambiguous Exclusion Declared Unenforceable

The trial court ruled for Mercury on the ground that the exclusion was unambiguous. But the court of appeal reversed, holding that the exclusion violated the Insurance Code provision. The court reasoned that the provision authorizing the exclusion for liability to “an insured” had to be read together with Insurance Code § 280, which prohibits insurance for those who lack an insurable interest.   The court held that the injured passenger did not have an insurable interest in either the named insured’s vehicle or the named insured’s driving because, in contrast to a parent/child or other familial relationship, or a business partnership, there was no basis to hold mere roommates liable for the other’s negligence. The court pointed out that allowing an insurer to define “an insured” to include those without an insurable interest, such as all persons inhabiting a large apartment complex, would defeat the public policy underlying the financial responsibility laws.