Court split 'arising out of' insurance policy exclusions

Liability insurance policies of every stripe - e.g., commercial general liability, directors and officers, professional liability - use the connective phrase "arising out of," both in insuring and exclusionary clauses, to connote the degree of causation necessary either to trigger coverage or to exclude coverage. Since "arising out of" plays such an integral role in defining those risks an insurance policy will cover or exclude, it is critical that the phrase be interpreted in a manner faithful to California's rules of policy construction.

When "arising out of" is used in an insuring clause, there is full agreement among California courts that it should be broadly construed. See, e.g., Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal. App. 4th 321, 328 (1999) ("It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.").

On the other hand, when "arising out of" is used in an exclusion, courts have reached differing conclusions with respect to the meaning of the phrase. Cases have divided along a line between those stating that the phrase has the same broad meaning as when used in an insuring clause, and those that apply a narrower construction.

The cases construing the phrase "arising out of" broadly when used in an exclusion overlook the cardinal rule that "an entirely different rule of construction applies to exclusionary clauses as distinguished from coverage clauses." See State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, 101 (1973).

Courts Divided Over "Arising out of" in a Policy Exclusion

Several California cases have stated that "arising out of" should be interpreted broadly both in insuring clauses and exclusions. See, e.g., Jon Davler, Inc. v. Arch Ins. Co., 229 Cal. App. 4th 1025, 1035 (2014) ("[C]ourts generally have 'interpreted the phrase 'arising out of' very broadly,' even where the phrase appears in an exclusion."); Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins., 106 Cal. App. 4th 293, 301 (2003) (noting that "arising out of" is generally equated with "origination, growth or flow from the event"). It has been stated, for example, that "arising out of" is a broad concept that does not import any particular standard of causation. Jon Davler; see also Continental Cas. Co. v. City of Richmond, 763 F.2d 1076, 1081 (9th Cir. 1985) (stating in dictum that "[t]he claim need bear only an incidental relationship to the injury to come within the exclusionary clause of the [insurer's] policy").

However, other California cases holding to the contrary have reasoned that the phrase "arising out of" must be more narrowly construed in an exclusion, and have rejected insurers' efforts to deny coverage for a claim simply because it has some connection with, or incidental relationship to, an excluded risk. See, e.g., Charles E. Thomas Co. v. Transamerica Ins. Grp., 62 Cal. App. 4th 379, 383-84 (1998).

The 9th U.S. Circuit Court of Appeals, for example, has held that to "arise out of" the excluded risk, the claim "must have been a part of or directly and proximately resulted from" that risk. HS Services, Inc. v. Nationwide Mut. Ins. Co., 109 F.3d 642, 647 (9th Cir. 1997) (interpreting an "Employment-Related Practices Exclusion").

Similarly, the California Supreme Court has suggested that a "non-ambiguous causal relationship" would be required to bring into play an exclusion for injury "arising out of" the use of a motor vehicle." See Partridge, 10 Cal. 3d at 101-102. This narrower construction of "arising out of" is, of course, a far cry from a broader interpretation that some insurers contend supports a denial of coverage whenever a claim bears some remote or incidental relationship to an excluded risk.

Narrow Interpretation Accords with Canons of Construction

A bedrock principle of insurance policy interpretation is the narrow-construction rule applicable to policy exclusions. See Partridge, 10 Cal. 3d at 101-02 (explaining that "[w]hereas coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured ... exclusionary clauses are interpreted narrowly against the insurer") (citations omitted); Church Mut. Ins. Co. v. United States Liab. Ins. Co., 347 F. Supp. 2d 880, 885 n.4 (S.D. Cal. 2004) ("Cases interpreting 'arising out of' as used in ... coverage provisions are not on point because coverage provisions are liberally construed in favor of coverage, while exclusion provisions are narrowly construed against the insurer."

In view of this rule of construction, the California Supreme Court has indicated that "arising out of" should carry a narrower meaning when used in an exclusion. See Partridge, 10 Cal. 3d at 102 ("[T]he fact that an accident has been found to 'arise out of the use' of a vehicle for purposes of an automobile policy is not necessarily determinative of the question of whether that same accident falls within a similarly worded exclusionary clause of a homeowner's policy."); see also Hon. H. Walter Croskey, et al., "California Practice Guide: Insurance Litigation" Section 4:120.5 (The Rutter Group 2016) ("When the phrase 'arising out of' is used in an exclusion, rather than a coverage provision, it is interpreted narrowly against the insurer.").

Therefore, when a policyholder is confronted with an insurer denying coverage on the ground that an excluded risk bears some remote or incidental relationship to a claim, it would be well advised to remember the "narrow-construction" rule that applies to all exclusions, including those which contain the phrase "arising out of." It is, on its face, anathema to the narrow construction rule to "very broadly" construe the terms of an exclusion, including the phrase "arising out of." Cases such as Partridge, Thomas and HS Services, which narrowly interpret "arising out of" in an exclusion, were decided in accordance with this rule.