One Policy Term, May Have Two Meanings

A California Court of Appeal held in Transport Ins. Co. v. Superior Ct. (R.R. Street & Co.) that a named insured’s reasonable expectations of coverage can be different from those of an additional insured’s. This ruling leaves open the possibility that the same policy language can be interpreted differently in the same lawsuit, depending upon whether the named insured or an additional insured is seeking coverage.

Transport issued an excess and umbrella commercial general liability policy to Legacy Vulcan Corp. R.R. Street & Co. was named as an additional insured by endorsement. These two companies were named as defendants in lawsuits alleging that they distributed and sold dry cleaning products that caused environmental contamination. 

A dispute arose between Transport and Legacy about the duty to defend. The dispute turned on whether the term “underlying insurance” included only the specifically scheduled policies identified in the Transport or all potentially applicable primary policies. 

In a previously published opinion, the Court of Appeal held that the term “underlying insurance” was ambiguous in the context of the Transport policy and should be construed in accordance with Legacy’s objectively reasonable expectations.

The court ultimately concluded that the umbrella coverage would drop down and act as primary insurance if it provided broader coverage than the specifically scheduled policies – meaning umbrella coverage could be triggered even if other unscheduled primary policies applied to the risk.  See Legacy Vulcan Corp. v. Sup. Ct., 185 Cal. App. 4th 677 (2010). 

In subsequent proceedings, the additional insured Street sought a declaration that it also was entitled to a defense under the Transport policy. The Court of Appeal held that the result could be different for Street. 

When dealing with an allegedly ambiguous term and the entity seeking coverage is an additional insured,

it is the additional insured’s objectively reasonable expectations of coverage that are relevant, and not the objectively reasonable expectations of the named insured.” 

An additional insured’s expectations, in turn, may vary depending upon the contract requiring the named insured to request coverage for the additional insured. It is arguable that Street would not reasonably expect the Transport policy to move into “first position” before Street’s own commercial general liability policies.

Transport highlights two important issues. First, application of the reasonable expectations doctrine will not always result in broader coverage for the insured. In some instances, the doctrine will limit coverage or eliminate it altogether. Second, whether an insured’s expectations are reasonable must be analyzed in context and under the particular circumstances applying to that insured.

Liability Insurers May Have Duty to Defend Against Federal Prosecutions, California Court of Appeal Holds

By James Hazlehurst

The Second Appellate District of California held on May 1 in Mt. Hawley Ins. Co. v. Lopez that California Insurance Code section 533.5(b) does not eliminate a liability insurer’s duty to defend against a federal prosecution where the policy provides for a defense against criminal proceedings. 

Section 533.5(b) precludes an insurer from defending against “any claim in any criminal action or proceeding or in any action or proceeding brought pursuant to” California’s unfair competition law under Business and Profession Code section 17200 et seq. “in which the recovery of a fine, penalty, or restitution is sought by the Attorney General, any district attorney, any city prosecutor or any county counsel.” 

Mt. Hawley involved Dr. Richard Lopez’s federal criminal prosecution for his role in a liver transplant. Dr. Lopez was a medical director of St. Vincent’s Medical Center. He allegedly diverted a liver designated for one patient to another patient who was much farther down the transplant wait list in violation of regulations promulgated under the National Organ Transplant Act. Dr. Lopez then allegedly covered up his actions by conspiring with others, making false statements and falsifying records. 

Dr. Lopez was indicted by a grand jury and tendered his defense to Mt. Hawley, which declined to defend him on the basis that Section 533.5(b) precludes an insurer from providing a defense to a criminal prosecution. Mt. Hawley filed a declaratory relief action against Dr. Lopez and prevailed on summary judgment. 

In reversing the trial court, the appellate court examined in great detail the legislative history of section 533.5, as well as several maxims of construction of statutes, ultimately reasoning that the legislative purpose behind Section 533.5(b) was to preclude insurers from providing a defense only to civil and criminal actions brought under California’s unfair competition laws and false advertising laws, which could only be brought by state and local – not federal – agencies. The court therefore concluded that Section 533.5(b) did not apply to federal prosecutions. The court also relied on the Ninth Circuit’s decision in Bodell v. Walbrook Ins. Co. which reached the same conclusion regarding the applicability of Section 533.5(b) to federal prosecutions.

The court of appeal stated that its interpretation “allows insurers to contract to provide a defense to certain kind of criminal charges, as the Legislature has said insurers can do in the cases of corporate agents and government employees charged with crimes.” The court further noted that its interpretation was consistent with the goal of encouraging individuals to serve on the boards of directors of corporations or as trustees of charitable trusts, observing that “unless directors can rely on the protections given by D & O policies, good and competent men and women will be reluctant to serve on corporate boards.”


David McMahon to Present at ACI 2013 Bad Faith Conference`

San Francisco partner David McMahon will speak on Understanding the Scope and Limits of Duty to Defend, Duty to Settle, and Initiating Settlement Negotiations at the upcoming ACI Bad Faith Litigation Forum (April 29-30, 2013 | Union League, PA).

Joining Mr. McMahon on the panel are Daniel W. Maguire, Partner, Burke, Williams & Sorensen; Mark S. Shapiro, Shareholder, Akerman Senterfitt; Robert N. Kelly, Director and Shareholder, Jackson & Campbell; and, David B. Drummy, Partner, Kightlinger & Gray.

For more information on the conference, click here.

Will Liability Insurers Have a Duty to Defend the NFL in Concussion Litigation?

The recent expanse of litigation against the National Football League for concussions and other brain injury related claims contains hall of fame names and headline worthy accusations of failed safety measures. The bigger fight, however, may be between the NFL and its liability insurers to determine what, if any, coverage and indemnity will be provided to the NFL.   

In fact, several coverage cases have already begun. Helmet manufacturer Riddell filed the first suit seeking declaratory relief against 13 insurers on April 12, 2012, in California Superior Court, Riddell v. Ace American Ins. Co.. On August 13, 2012, Alterra America Insurance Company filed suit against the NFL in New York Supreme Court seeking a declaration of its duty to defend the NFL in approximately 93 underlying concussion related claims, Alterra America Ins. Co. v. NFL

The NFL responded two days later with its own complaint in the California Superior Court against 32 insurers (dating back to the 1960s) seeking a declaration of the insurers’ duty to defend the NFL and indemnify it for damages in at least 143 concussion related suits, NFL v. Fireman’s Fund Ins. Co., Case No. BC490342. And finally, on August 22, 2012, subsidiaries of Travelers Companies Inc. filed an insurer-commenced declaratory judgment action against the NFL in New York Supreme Court, Discovery Prop. & Cas. Co. v. NFL, Case No. 652933/2013.      

Due to procedural motions, these cases are progressing slower than an NFL replay.

The Riddell and NFL cases filed in California were deemed related and stayed on forum non conveniens grounds after the insurers argued that New York was a more appropriate forum. 

The NFL has appealed that ruling and the insurers’ briefs were just filed March 6, 2013. Ironically, the Alterra action was stayed based on a motion brought by the NFL that argued the California action was more comprehensive, and hence, a better forum. That motion was heard on March 15, 2013, but no ruling has been issued yet. Meanwhile, a separate motion to dismiss in the Travelers case has been briefed and is awaiting decision. 

Once the procedural aspects of these cases are ironed out, the courts and the parties will face complex coverage issues due to the number of insurers potentially on the risk and the nature of the alleged brain injury related claims.

Indeed, one of the main issues is likely to be the fact that the alleged injuries took years to develop and manifest. In this regard, the concussion litigation may be similar to tobacco or asbestos litigation. 

For example, football players voluntarily chose to play a violent sport and put themselves in danger of physical harm, though adverse health effects may only manifest themselves several years after the player retires and which now are claimed to be traceable to football injuries based on advancements in modern medicine. 

Thus, the age old question of how to define an occurrence will be especially difficult in this situation and will be a vital component to this litigation. For example, should each game in which the player participated be an occurrence? Perhaps each season? If so, policy limits on several policies could be triggered and complex allocation issues lay ahead.

While we wait for the coverage decisions in these cases, other entities that operate sports leagues and their insurers should do their due diligence. 

With annual revenues of about $9 billion, the NFL is uniquely positioned to defend itself in the concussion litigation regardless of the outcome of the coverage cases. However, the impact of the coverage decisions will be far reaching. Lawsuits against other professional leagues, colleges, high schools and even pee-wee leagues are not far off. 

These institutions/leagues and their insurers would be well advised to revisit their liability policies and consider possible exposure not just for liability but also the costs associated with defending these claims. 

Winning Insurers Gain Clarity on Defense Duty During Appeals

Larry Golub was quoted in a Feb. 13, 2013, article by Law360, Winning Insurers Gain Clarity on Defense Duty During Appeals (subscription req.), about a recent federal court decision that found an insurer had not violated its contract when it ceased defending a policyholder after a trial court win on coverage, despite the fact that the victory was later overturned. The case is National Union Fire Insurance Co. of Pittsburgh, Pa., et al. v. Seagate Technology Inc.

Golub told the publication that carriers will sometimes continue to defend their policyholders after winning at the trial court level if a coverage win doesn't appear to be strong enough to survive an appeal. The reason is that they could end up paying high interest on defense costs they might ultimately owe, he said.

Maybe they should play it safe and just keep defending under a reservation of rights and ensure that they don't have ultimate exposure,” Golub said.

Golub also noted that if other courts agree with the decision, insurers who have won temporary victories will not have to face bad faith claims or punitive damages.


Courts Take Divergent Positions on "Disparagement" Under Advertising Injury Coverage

Within the last four months, two divisions of the California Court of Appeal’s Second Appellate District have taken different positions on the requirements for “disparage,” as that term is used in commercial liability insurance policies that provide coverage for “advertising injury.”

On June 21, 2012, Division One of the Second Appellate District decided Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. In that case, Travelers issued a commercial liability policy that promised to defend Charlotte Russe, a retailer, against any suit that sought damages for advertising injury claims. The policy provided that it covered claims alleging injury arising out of the publication of material that disparages a person’s goods, products or services.

Charlotte Russe had a contract to become the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel. Displays in Charlotte Russe stores announced the sale of People’s Liberation jeans at 70% to 85% price markdowns. Versatile sued Charlotte Russe, alleging that the retailer’s pricing practices would result in significant and irreparable damage to the People’s Liberation brand. Charlotte Russe asked Travelers to defend the lawsuit. Travelers refused. The insurer maintained that coverage was not available because reduction of the price of a product is not a disparagement of the product.

The trial court granted Travelers’ motion for summary judgment, but Division One reversed the trial court’s ruling. (While initially unpublished, the appellate court’s decision was certified for publication on July 13, 2012.) The decision concluded that an allegation of disparagement may be implied. The Division One court held that the key issue is not whether Versatile expressly alleged that Charlotte Russe disparaged Versatile’s products, but instead whether Charlotte Russe’s statements and conduct could be understood to disparage Versatile’s products.

The Second Appellate District’s Division Three took an opposite view in its October 29, 2012, decision in Hartford Casualty Insurance Co. v. Swift Distribution, Inc.,which also involved a claim for coverage under a policy’s advertising injury coverage. The Division Three court ruled that the insurer in that case had no duty to defend because the lawsuit against the insured did not allege that the insured published an injurious falsehood directed at the plaintiff’s products. The court expressed disagreement “with the theory of disparagement apparently recognized in Charlotte Russe.” The court explained,

Charlotte Russe held that this reduced pricing was enough to constitute disparagement, which triggered the duty to defend. We fail to see how a reduction in price—even a steep reduction in price—constitutes disparagement.”

In September, the California Supreme Court denied review of the Charlotte Russe decision; the time to seek review in the Hartford Casualty has not yet run.

Court of Appeal Affirms Buss Reimbursement of Non-Covered Settlement to Insurer

By Larry Golub and Sam Sorich

On August 3, 2012, the California Court of Appeal, Second Appellate District, after affirming a trial court’s ruling that a liability policy did not provide coverage for tenants’ claims against apartment owners for unsafe and unsanitary conditions at the apartments, further affirmed that the insurer was entitled to be reimbursed by the insureds for the full amount the insurer had paid in settlement of the tenants’ action.  The decision is Axis Surplus Ins. Co. v. Reinoso.

In so doing, the Court found that, having timely reserved its rights and having notified the insureds of the intent to accept a proposed settlement offer and affording the insureds the opportunity to assume the defense if the insureds did not agree to the proposed settlement offer, the insurer was entitled to be reimbursed by the insureds for the indemnity payment once it established the claim against the insureds was not covered. This is the procedure first provided for under the California Supreme Court’s decision in Buss v. Superior Court, 16 Cal. 4th 35, 50-51 (1997).

However, since the insurer was not able to meet its burden to show that there was never a “potential” for coverage, it was not able to recoup the defense costs it incurred in defending the claims against the insureds, again a procedure permitted under the Buss decision.

Edgar and Linda Reinoso were co-owners and managers of a number apartment buildings in Southern California. Tenants of one of these apartment building sued the Reinosos for alleged habitability deficiencies at the apartments.  The Reinosos sought coverage under their commercial general liability policies issued by Axis Surplus Lines Insurance Company. Axis agreed to represent the Reinosos under a reservation of rights.

The tenants’ lawsuit settled for $3 million, with Axis paying the majority of the settlement. Axis then sued the insured for the recovery of its settlement contribution and the defense costs it incurred. The trial court concluded that the Axis policy did not cover the tenants’ claims (since the policy and California law did not allow coverage for intentional and willful acts), and it ordered the Reinosos to pay back to Axis the insurer’s settlement contribution jointly and severally.  The couple appealed.  Edgar’s appeal was dismissed, but Linda’s claims went forward.

In her appeal, Linda argued that the trial court erred when it found that she was not an innocent insured entitled to benefits under the policy because the trial court wrongly applied the objective rather than the subjective standard in determining whether she knew about the conditions in the apartments. The Court of Appeal acknowledged that whether an injury is expected or intended under an insurance policy is determined by the insured’s subjective mental state. The appellate court concluded, however, that the trial court, in fact, did apply the subjective standard and found that there was substantial evidence that Linda knew about the conditions at the apartments and how the apartments were being managed.

Linda also challenged the trial court’s determination that she was jointly and severally liable with her husband for the repayment to Axis. The Court of Appeal rejected this argument as well, noting that, as co-owner of the apartments and as a participant in the management of the property, Linda had sufficient benefit from the settlement such that not to allocate to her joint and several liability to the insurer for the full amount paid by the insurer to settle the tenants’ lawsuit would amount to unjust enrichment.

The lesson for insurers is that reimbursement of liability policy proceeds may be possible with the issuance of a timely and comprehensive reservation of rights letter in those cases in which the claims can be shown not actually to be covered and/or a portion of the defense costs can be shown to have not even presented a potential for coverage.

Insurers Can Only Seek to Pay "Cumis" Rates if They are Actually Defending the Insured

In a decision issued March 25, 2011, The Housing Group v. PMA Capital Insurance Co., the California Court of Appeal held that an insurer who is not actually defending its insured cannot pursue its rights under California Civil Code section 2860, and specifically the right to arbitrate the issue as to the hourly rate for “independent counsel” chosen by the insured when there is a conflict of interest between the insured and the insurer.

Under section 2860(c), an insurer’s obligation to pay such independent counsel “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” 

Since substantial evidence supports the trial court’s finding that the insurer failed to provide a defense in the underlying litigation, the insurer was precluded from invoking the arbitration remedy for Cumis fee disputes in section 2860(c).

This recent decision was discussed in more length in a blog posted by David McMahon in Barger & Wolen’s Litigation Management & Attorney Fee Analysis blog.

California Court Determines No Coverage Based on Unambiguous Motor Vehicle Exclusion

The California Court of Appeal recently held that an insurer properly denied coverage and had no duty to defend its insured where the policy unambiguously excluded coverage for claims arising from the operation of a motor vehicle by an insured. 

In Sprinkles v. Associated Indemnity Corporation (published September 1, 2010), Plaintiffs were the heirs of a motorcyclist who died in an accident caused by an employee, Juan Bibinz (“Bibinz”), of Sinco Co., Inc. (“Sinco”). Plaintiffs sued Sinco and Bibinz (the “Sinco action”) alleging that Sinco negligently hired Bibinz, an uninsured and undocumented alien with a lengthy criminal record, who negligently drove his vehicle causing the death of Plaintiffs’ heir. Plaintiffs also alleged that Bibinz was an employee acting within the scope of his authority.

At the time of the accident, Sinco had a commercial automobile policy, an excess and umbrella policy, and a commercial general liability (“CGL”) policy, the latter issued by Fireman’s Fund Insurance Company.  While the auto policy and excess policy paid their limits toward settlement of the claim, Fireman’s Fund denied coverage and a duty to defend under the CGL policy. 

After an arbitrator awarded Plaintiffs more than $27 million in the underlying action, Plaintiffs took an assignment from Sinco and brought claims against Fireman’s Fund for bad faith, wrongful refusal to settle, wrongful failure to defend, and breach of contract, as well as a direct judgment creditor claim under Insurance Code section 11580

On demurrer, Fireman’s Fund contended that no coverage existed for Sinco because Bibinz was an insured under the CGL policy, and therefore the exclusion in the policy for claims arising out of the use of an automobile applied. 

Plaintiffs alleged that Bibinz was not an insured under the policy because, at the time of the accident, Bibinz was not performing duties related to the conduct of Sinco’s business and there was a potential for a finding that Bibinz was not acting in the scope of his employment with Sinco. 

The trial court sustained the demurrer without leave to amend, holding that the CGL policy provided no coverage for the automobile accident that caused Plaintiffs’ damages. 

The appellate court held that as an insured under the policy, Bibinz’s acts were not covered due to an exclusion for bodily injury or property damage “arising out of the . . . use . . . of any . . . acts by any insured.” The court deemed Bibnz’s use of the vehicle as “related to” the conduct of business, in that he was required to use his vehicle to reach various locations for maintenance work. 

The court accordingly upheld the dismissal of all claims against the insurer.

Imprecise Policy Language Results in Umbrella Policy Becoming Primary for Duty to Defend Purposes

On June 11, 2010, the California Court of Appeal for the Second Appellate District reissued its decision (following rehearing) in Legacy Vulcan v. Superior Court (Transport Insurance Company), and held that an umbrella insurer became a “primary umbrella” insurer and was obligated to defend its insured since no scheduled underlying insurance applied, and the $100,000 self-insured retention under the umbrella policy was applicable only to the insurer’s indemnity obligation. 

The decision, while providing a detailed analysis of the umbrella/excess policy issued by Transport, presents more of an isolated instance of an insurer not carefully limiting the scope of its defense obligation under a policy issued nearly 30 years ago, rather than an opinion providing any broad pronouncement that umbrella insurers are to provide a duty to defend from dollar one.

Vulcan was named in multiple lawsuits claiming environmental contamination and alleging damages occurring over a number of years, including when Transport’s Excess Catastrophe Liability Policy was in effect. Vulcan tendered the defense of the actions to several insurers, including Transport, but none of the insurers offered a defense. Vulcan paid for its own defense and settled the lawsuits. Transport filed a declaratory relief action against Vulcan to determine its rights and obligations under the policy.

The coverage action proceeded with the parties stipulating to resolve certain legal issues before trial, and many of the facts of the dispute (including the reasons why the underlying insurers did not provide a defense to Vulcan) did not make their way into the Court of Appeal’s decision. The trial court found that Transport had no duty to defend Vulcan until it established that the applicable underlying insurance had been exhausted and upon a showing that the claims were actually covered.  

In analyzing coverage under the Transport policy, the appellate court went into great detail examining the language used by Transport in its insuring agreements, limits of liability section, definitions, and conditions. The court held that the Transport policy provided both excess and umbrella coverage. With respect to the umbrella coverage portion, and based on the ambiguity of the policy’s use of the unqualified term “underlying insurance” in the insuring agreement, the court held that, under the facts of this case (where no primary or underlying insurer defended Vulcan), Transport’s umbrella coverage was primary umbrella defense coverage. 

Finding the umbrella coverage to be primary, the ordinary rules regarding a primary insurer’s duty to defend applied. As such, Transport was obligated to defend Vulcan regardless of the exhaustion of any underlying insurance and regardless of the provision for a $100,000 retained limit (which, in this case, was found to only apply to the duty to indemnify). Moreover, Vulcan did not need to establish that the claims were actually covered under the Transport policy to trigger the duty to defend, but merely show a potential for coverage. 

In its analysis, the court made clear that the result here was based on the policy language at issue. For example, the court observed that “the impact of a policy reference to a ‘self-insured retention’ or ‘retained limit’ on the duty to defend will depend on the language of a particular policy,” and it referenced cases where policy language expressly stated there was no duty to defend unless the retained limit was exhausted. 

This case therefore stands as another warning to insurers to be careful in drafting policy language, and this is especially true when it come to the duty to defend.

Staying an Insurer's Declaratory Relief Action - the Rules Clarified

A recent decision issued by the California Court of Appeal, Second Appellate District, analyzed under what circumstances a liability insurer’s declaratory relief action seeking to withdraw from the duty to defend an underlying lawsuit may be stayed – or allowed to proceed. 

In Great American Insurance Company v. Superior Court (Angeles Chemical Company, Inc.), issued October 9, 2009, the appellate court remanded the case back down to the trial court to re-evaluate whether the trial court had properly stayed the insurer’s declaratory relief action. In so doing, and in a case where there was no overlapping factual issues between the underlying action and the declaratory relief coverage action, the trial court was directed to exercise its discretion and balance the potential prejudice to both the insured and the insurer.

The underlying case involved a complex environmental claim against a number of insureds covered under a general liability policy issued by Great American. After settling a portion of the case and claiming that its $500,000 policy limits were exhausted, Great American sought to extricate itself from any further obligation to defend the insureds by bringing a declaratory relief action. The insureds moved to stay the declaratory relief action, claiming that there were factual issues that overlapped between the underlying action and the declaratory relief coverage action, such that trying the declaratory relief action would prejudice the insured’s rights in the underlying action. The trial court found the potential for some overlap and therefore issued a stay.

Great American filed a writ petition and the appellate court requested briefing on the propriety of the stay order. In analyzing three claims of “overlapping factual issues” asserted by the insureds, the appellate court found that two of those issues would not overlap between the underlying and declaratory relief actions, and that the third issue, involving some as-of-yet-unfiled bad faith claim, was premature, and thus the trial court had erred in staying the coverage action due to “overlapping factual issues.”

That did not end the dispute, however, as the appellate court then explained that even if “there is no such factual overlap and the declaratory relief action can be resolved on legal issues or factual issues unrelated to the issues in the underlying action, the question as to whether to stay the declaratory relief action is a matter entrusted to the trial court’s discretion,” and in “exercising such discretion, however, the trial court should consider the possibility of prejudice to both parties.” (Emphasis by court.) The court then set forth the three possible types of potential prejudice that could exist for an insured in having to fight a “two-front” war and the possible prejudice to an insurer in having to continue to pay defense costs indefinitely in a case where it no longer has any defense obligation.

Since the trial court had only issued its stay order on the factual overlap issue and not made any determination as to the balancing of possible prejudice to the insured and insurer, the appellate court remanded the case back to the trial court to exercise its discretion and perform the requisite balancing of prejudices. The appellate court also provided the trial court with its observations as to certain undisputed facts that may assist the trial court in making its determination.

This case presents an excellent primer on the subject of when an insurer’s declaratory relief action is to be stayed pending the resolution of an underlying liability lawsuit and when an insurer is to be allowed to attempt to show when its declaratory relief claim may proceed to determine if any duty to defend still exists.

California Supreme Court Finds No Duty to Defend Insured for Assault and Battery Claim Where Injured Party Alleged Insured Acted Under an Unreasonable Belief in the Need for Self-Defense

In a long-anticipated decision, the California Supreme Court issued its August 3, 2009 decision in Delgado v. Interinsurance Exchange of the Automobile Club of Southern California, finding that the contention (by the injured party) that the insured acted in self-defense when sued for assault and battery did not constitute an “accident” within the meaning of a liability policy and thus the insurer had no duty to defend the action. The decision is also noteworthy as it distinguished a number of prior cases, including Supreme Court cases, that had touched on similar issues.

Delgado arose out of altercation where the insured under a homeowner’s policy issued by Interinsurance Exchange of the Automobile Club of Southern California “hit and kicked 17-year old Jonathan Delgado.” Delgado sued the insured, setting forth two causes of action, one for intentional tort and one alleging that the insured “‘negligently and unreasonably believed’ he was engaging in self-defense ‘and unreasonably acted in self-defense . . . .’” 

The insured tendered the suit to his insurer, which denied coverage, including any duty to defend, on the basis that the claim did not constitute an “occurrence” under the policy, which term was defined as “an accident.” Delgado then dismissed the intentional tort claim and settled the remaining “negligent belief in self-defense” claim with the insured, who stipulated to judgment and assigned his rights to Delgado. Delgado then sued the insurer as a judgment creditor and for bad faith. While the trial court dismissed the action on demurrer, the Court of Appeal reversed, finding that the allegations potentially were an “accident” under the policy.

On review the Supreme Court first addressed the issue as to what constitutes “an accident” under a liability policy, which substantial case law had found to be “an unexpected, unforeseen, or undersigned happening or consequence from either a known or unknown case.” The Court rejected Delgado’s reliance on prior decisions of the Court that Delgado had contended held that the term “accident” was to be determined from the perspective of the injured party. The Court observed that, under such reasoning, plainly intentional acts like child molestation, arson and premeditated murder, if contended to be based on an unreasonable belief in the need for self-defense, could be considered an “accident” within the policy coverage. 

The Court also took the occasion to dismiss Delgado’s attempt to claim that prior decisions of the Court, such as Gray v. Zurich Insurance Co., 65 Cal. 2d 263 (1966), supported a duty to defend. The Court explained that Gray and cases like it involved situations whether the claim fell within the broad insuring provisions of the policy and the insurer sought to avoid a duty to defend based on the policy’s exclusion for injury “caused intentionally by or at the direction of the insured.” This is in contrast to the present case, where there was no exclusion at issue and the insured had the burden to demonstrate “an accident” and thereby fall within the policy’s insuring provision. 

In conclusion, the Court stated that “an insured unreasonable belief in the need for self-defense does not turn the resulting purposeful and intentional act of assault and battery into ‘an accident’ within the policy’s coverage clause . . .[and thus the insurer] had no duty to defend its insured in the lawsuit brought against him by the injured party.”