Narrowing the scope of ‘arising out of’ exclusions

Many insurance policies contain exclusions for claims "arising out of" certain behaviors or circumstances. For the most part, insurers will take advantage of any opportunity to deny coverage based on these exclusions. In doing so, they generally argue that the term "arising out of" should be given its broadest possible reading. They cite language from cases such as Acceptance Insurance Co. v. Syufy Enterprises, 69 Cal. App. 4th 321, 328 (1999), in which the 1st District of the California Court of Appeal stated: "California courts have consistently given a broad interpretation to the terms 'arising out of' or 'arising from' in various kinds of insurance provisions. 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." Id. at 328.

Insureds, however, should not simply accept such a denial. There are several principled arguments supporting the position that "arising out of" exclusions should be read more narrowly than insurers claim, and many instances in which insurers' denials based on these exclusions is, quite simply, wrong.

First, any argument that the phrase "arising out of" should be read broadly in interpreting an exclusion is contrary to established California law. The California Supreme Court has made clear on multiple occasions that "exclusionary clauses are interpreted narrowly, whereas clauses identifying coverage are interpreted broadly." Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406 (1989); see also State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, 101-02 (1973) ("Whereas coverage clauses are interpreted broadly so as to afford the greatest possible protection to the insured ... exclusionary clauses are interpreted narrowly against the insurer."). In fact, California courts have construed the phrase "arising out of" narrowly when used in a coverage exclusion. E.g., HS Servs., Inc. v. Nationwide Mut. Ins. Co., 109 F.3d 642, 647 (9th Cir. 1997) (refusing to construe "arising out of" exclusionary language broadly in the context of a defamation claim); Longs Drug Stores Cal., Inc. v. Fed. Ins. Co., 2005 WL 139175 at *7 (N.D. Cal. Jan. 21, 2005) (rejecting insurer's argument that "arising out of" should not be narrowly interpreted in an exclusion); Tower Ins. Co. v. Capurro Enters., Inc., 2012 WL 1109998 (N.D. Cal. April 2, 2012) (same). Tellingly, the Syufy court's statement that the term "arising out of" should be read broadly was in the context of a coverage grant, not an exclusion. Therefore, the case most often cited by insurers for their position that "arising out of" exclusions should be read broadly does not support this assertion.

Second, in light of this rule of insurance policy construction, courts have narrowly interpreted the term "arising out of" in determining the applicability of an exclusion. See, e.g., Ticketmaster, LLC v. Ill. Union Ins. Co., 524 F. App'x. 329, 330 (9th Cir. 2013) (exclusion for any claim "based on or arising out of ... any dispute involving fees" did not bar coverage for underlying lawsuit alleging that Ticketmaster had misrepresented fees, and finding that the "arising out of" exclusion was susceptible to at least two meanings); HS Servs., 109 F.3d at 647 ("arising out of" exclusionary language requires injury-causing statement to be "part of or directly and proximately resulted" from the excluded conduct"); Golden Eagle Ins. Corp. v. Rocky Cola Café, Inc., 94 Cal. App. 4th 120, 126-27 (2001) (finding that former supervisor's statements that former employee was a "sexually promiscuous and calculating bitch" did not come within exclusion for defamation arising out of employment-related acts; the fact that the statement arises out of the insured's business and is therefore with the policy's coverage grant "does not necessarily mean it is an employment-related act within the meaning of the exclusion.") Charles E. Thomas Co. v. Transamerica Ins. Grp., 62 Cal. App. 4th 379, 383 (1998), (rejecting the argument that "'[a]rising out of' [] is much broader than 'caused by' and requires only slight connection with, or incidental relationship between, the damages and the exclusion.").

Third, an analysis of the applicable policy as a whole might support the conclusion that an "arising out of" exclusion does not apply as broadly as the insurer claims. If other exclusions in the policy use broader causation language, the insured has a good argument that "arising out of" should be read narrowly. For example, other policy exclusions may bar coverage for claims "[a]rising out of, or in any way involving, directly or indirectly" specific conduct or circumstances or state that the policy does not "cover any loss, directly or indirectly, and regardless of any cause or event contributing concurrently or in any sequence to the loss, caused by" a specific event.

Under California law, an insurer's failure to use available language to exclude coverage gives rise to the inference that the parties did not intend to so limit coverage. See Safeco Ins. Co. v. Robert S., 26 Cal. 4th 758, 764 (2001) ("[W]e cannot read into the policy what [the insurer] has omitted. To do so would violate the fundamental principle that ... courts are not to insert what has been omitted."); Pension Tr. Fund for Operating Eng'rs v. Fed. Ins. Co., 307 F.3d 944, 953 (9th Cir. 2002) ("If [the insurer] desired to limit coverage ... , it could have expressly done so. ... Once again, [it] failed to communicate an asserted limitation conspicuously, plainly and clearly.") If the policy at issue contains more broadly stated exclusions, there is a strong argument that the insurer had available language to broaden the "arising out of" exclusion's scope. Because it chose not to use this language, the "arising out of" language should be read narrowly. This exact argument was accepted by two courts in actions brought by AIG Property Casualty Company against Bill Cosby. AIG argued that a policy exclusion barring coverage for claims "arising out of" sexual misconduct should be applied very broadly to defamation claims brought against Mr. Cosby. The 1st Circuit and the Central District of California held, however, because other exclusions in the policy barred coverage for claims "arising out of, or in any way involving, directly or indirectly" specific conduct, the "arising out of" exclusion could not be interpreted so broadly. AIG Prop. Cas. Co. v. Cosby, 892 F.3d 25, 28 (1st Cir. 2018) (when another exclusion in the policy "was drafted so closely to a but-for view, the umbrella policy's more laconic, generally applicable counterpart may most reasonably be read, in the circumstances of this case, as imposing a standard closer along the continuum to proximate causation than but-for, under that policy"); AIG Prop. Cas. Co. v. Cosby, 2015 WL 9700994, at *5 (C.D. Cal., Nov. 13, 2015) (if the insurer "wished to exclude a claim 'in any way involving' sexual misconduct, it could have included such language in the sexual misconduct exclusion.") Therefore, the language of the policy as a whole, and not just the exclusion at issue, may be relevant in determining how the exclusion should be interpreted. 