Looking back: Key insurance decisions from 2018

2018 once again saw courts addressing key insurance issues. In Albert v. Truck Insurance Exchange, 23 Cal. App. 5th 367 (2018), the court began by observing, "Good fences make good neighbors. Unless they obstruct an easement." The insured had been sued for abatement of private nuisance because he had erected a fence that partially blocked a road leading to the plaintiff's undeveloped property. The insurer denied coverage. The insured sued, arguing that the policy's "personal injury" coverage for "injury arising out of ... wrongful entry ... or invasion of the right of private occupancy" applied. The trial court disagreed. The court of appeal reversed, holding that the insurer had a duty to defend its insured.

It pointed out that "invasion of the right of private occupancy" is "a phrase 'insurance companies have consistently refused to define,'" and one that "has 'generated literally hundreds of lawsuits, with wildly varying results.'" It then noted its agreement with other courts that "'invasion of the right of private occupancy' is ambiguous and may include non-physical invasions of rights in real property." The court specifically rejected the insurer's argument that there must be a physical invasion to trigger the personal injury coverage. It also stressed that the term "personal" in "personal injury" "does not mean physical damage to a person; rather it means injury arising out of one or more specified offenses."

In Thee Sombrero, Inc. v. Scottsdale Insurance Co., 28 Cal. App. 5th 729 (2018) (pet. for review pending), a property owner sued the security company for a nightclub on its property. The owner claimed that because of the security company's negligence, it could no longer operate the night club because it lost a conditional use permit. After obtaining a default judgment, the owner then sued the security company's insurer. It argued that its claim alleged "property damage," defined in the policy to include a "loss of use of tangible property that is not physically insured." The court agreed, saying that the alleged loss of the ability to use the property as a nightclub is "by definition, a 'loss of use' of 'tangible property.'" As the court stated: "It defies common sense to argue otherwise."

The court emphasized that "the appropriate focus is not on the loss of the entitlement, but rather on the loss of use of tangible property that results from the loss of the entitlement." It then pointed out that "the reasonable expectations of the insured would be that 'loss of use' means the loss of any significant use of the premises, not the total loss of all uses." The court then offered a straight-forward example: "If your leased apartment was rendered uninhabitable by some noxious stench, you would conclude that you had lost the use of tangible property; and if a lawyer said no, actually you had merely lost the use of your intangible lease, you would goggle in disbelief."

The court then held: "The correct principle, then, is not that economic losses, by definition, do not constitute property damage. ... [T]he correct principle is that losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage."

In Liberty Surplus Insurance Corp. v. Ledesma & Meyer Construction Co., 5 Cal. 5th 216 (2018), the California Supreme Court considered whether a general liability policy covered a lawsuit alleging that an employer negligently hired, retained, and supervised an employee who sexually assaulted a student. The insurer argued that the insured's intentional acts of hiring, supervising, and retaining were not "accidents."

The court disagreed. It rejected the argument that the intentional nature of the employee's acts precluded coverage: "It is important to keep in mind that a cause of action for negligent hiring, retention, or supervision seeks to impose liability on the employer, not the employee." It pointed out that the employee's "acts were neither intended nor expected from its perspective," rejecting the notion that "negligent hiring cannot be an 'accident.'"

In AIG Property Casualty Co. v. Cosby, 892 F.3d 25 (1st Cir. 2018), the 1st U.S. Circuit Court of Appeals addressed insurance for claims alleging defamation when an insured denied allegations of sexual assault. AIG Property Casualty Company sued its insured, Bill Cosby, in several courts, arguing that it need not defend him in lawsuits alleging defamation based on denials of allegations of sexual assault. AIG relied on an exclusion in its policies for claims "arising out of any actual, alleged[,] or threatened ... [s]exual molestation, misconduct or harassment" barred coverage. It had litigated and lost this issue in California. See AIG Prop. Cas. Co. v. Cosby, 2015 WL 9700994 (C.D. Cal. Nov. 13, 2015). It the pursued its argument in Massachusetts. It fared no better.

The court, in an opinion authored by former Supreme Court Justice David Souter, observed: "It is no surprise that AIG would prefer to avoid the application of California law. ... Interpreting the same policy provisions at issue here, the California court applied California law and held that AIG had a duty to defend Cosby, given the ambiguity of the sexual-misconduct exclusions."

Justice Souter then held that AIG had a duty to defend Cosby, noting that the sexual misconduct exclusion was not as broad as another inclusion in an AIG policy. This fact, Justice Souter concluded, "tips the scales in favor of finding ambiguity." He also stated, "Notably, the same result would obtain under California law."

Finally, in PacifiCare Life & Health Insurance Co. v. Jones, 27 Cal. App. 5th 391 (2018), the court addressed an insurer's challenge to the validity of regulations promulgated by the California Insurance Commissioner to implement the Unfair Insurance Practices Act. The thrust of the insurer's argument was that California Insurance Code section 790.03(h) and the Unfair Claims Practices Settlement regulations promulgated thereunder should not apply to an insurer's single commission of prohibited conduct. The court rejected this contention outright. It held that "an 'unfair claims settlement practice' must refer to an insurer's pattern of conduct, rather than to any individual act." "An insurer engages in such a prohibited 'practice' by committing the described act once or more than once. Applying the [Act's] language literally, once is enough to invoke its provisions." And, it held, there are "penalties for even inadvertent wrongs committed in the context of settling claims."

This decision has implications much broader than simply enforcement actions by the Insurance Commissioner. This is so because a violation of the Fair Claims Settlement Practices regulations can evidence an insurer's bad faith, subjecting the insurer to tort and punitive damage liability. See, e.g., Jordan v. Allstate Ins. Co., 148 Cal. App. 4th 1062, 1078 (2007) (it is proper for insured to use "evidence of an insurer's violations of the statute and the corresponding regulations" in support of bad faith claim).