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June 2010

Minkler v. Safeco Insurance Company ? Intentional Acts Exclusion Does Not Preclude Coverage For Negligent Supervision Claim

California Supreme Court Holds Intentional Acts Exclusion Is Ambiguous In Light Of Severability-Of-Interests Clause

(June 17, 2010) __Cal.4th__; 10 C.D.O.S. 7612

In responding to a certified question from the Ninth Circuit Court of Appeals, the California Supreme Court held that an intentional acts exclusion is ambiguous in light of a policy's severability-of-interests clause that refers to "[t]his insurance."  Accordingly, coverage would exist for a cause of action asserted against the insured for negligent supervision even though the claim arises from the intentional acts of another insured under the policy. 

In 2003, Scott Minkler ("Minkler") sued Betty Schwartz ("Betty") and her son, David Schwartz ("David"), in California Superior Court.  Minkler's first amended complaint alleged David, Minkler's little league coach, had sexually molested him over a period of several years, beginning in 1987. Minkler asserted multiple causes of action against David, including sexual battery, intentional infliction of emotional distress, negligence, and negligence per se. Minkler also asserted a single cause of action for negligent supervision against Betty.  Minkler alleged David molested Minkler in Betty's home; Betty knew her son was molesting Minkler; but Betty nonetheless failed to take reasonable steps to stop her son from doing so.

From August 26, 1988 to August 26, 1995, Betty Schwartz held a series of homeowners insurance policies issued by Safeco Insurance Company ("Safeco").  The policies provided general liability coverage to each insured up to a limit of $300,000 for each occurrence. The policies defined "an insured" to include both the policyholder and any relative resident of the policyholder's household.

In the "Exclusions" sub-section, a provision of the policy contained an intentional acts exclusion that provided: "Personal Liability [coverage] ... do[es] not apply to bodily injury or property damage: (a) which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured... ." However, in the "Conditions" sub-section, the policy also contained a severability-of-interests clause that provided: "This insurance applies separately to each insured. This condition will not increase our limit of liability for any one occurrence."

The Minklers tendered the defense of the action to Safeco.  Safeco denied coverage citing to the policy's intentional acts exclusion.  Subsequently, Minkler entered into a settlement agreement with Betty. In exchange for a covenant not to execute the judgment, Betty assigned her claims against Safeco to Minkler.

On May 15, 2007, Minkler filed an action against Safeco.  Safeco removed the case to the United States District Court for the Central District of California on the basis of diversity of citizenship.  Safeco filed a Rule 12(b)(6) motion to dismiss on the ground the intentional acts exclusion barred coverage for Minkler's claims against Betty.  Minkler contended the severability-of-interests clause excepted Betty's coverage from the exclusion either expressly or under California rules for interpretation of ambiguity in insurance contracts.  The trial court granted Safeco's motion to dismiss and Minkler appealed.  On appeal, the Ninth Circuit Court of Appeals found that the California Supreme Court had never addressed whether a severability-of-interests clause renders an intentional acts exclusion ineffective when the claim is based on one insured's negligent supervision of another insured's intentional act.  The Ninth Circuit certified the following question to the California Supreme Court: 

Where a contract of liability insurance covering multiple insureds contains a severability-of-interests clause in the "Conditions" section of the policy, does an exclusion barring coverage for injuries arising out of the intentional acts of "an insured" bar coverage for claims that one insured negligently failed to prevent the intentional acts of another insured?

The California Supreme Court accepted the certified question and asked for briefing from both parties.  Safeco argued that the severability-of-interests clause did not impact the intentional acts exclusion because the severability-of-interests clause's sole purpose was to specify that each insured was specially entitled, if otherwise covered for a particular claim, to be indemnified up to the full policy limits.  In support of this contention, Safeco cited to drafting history which demonstrated the severability-of-interests clause was created in response to disputes over policy limits.  The California Supreme Court rejected this contention, noting the severability-of-interests clause at issue used the term "[t]his insurance."  The broad reference to "[t]his insurance" suggested that each person the policies covered would be treated as he or she was the sole person covered.  Moreover, if Safeco wanted to limit the impact of the severability-of-interests clause to the policy's limit of liability, it could have drafted the clause to solely refer to the policy's limit of liability as opposed to "this insurance."  However, it did not.

Based on the fact that the severability-of-interests clause applied to the entire policy and not just the limit of liability, the California Supreme Court found the intentional acts exclusion to be ambiguous.  Under California law, if the terms and conditions of a policy are ambiguous, then the ambiguity must be resolved in a way that preserves the insured's reasonable expectations.  Here, the California Supreme Court concluded Betty's reasonable expectation was that the policy would cover her separately for her independent acts or omissions as long as her own conduct did not fall within the intentional acts exclusion.  Therefore, coverage was not excluded by the intentional acts exclusion.  

 The Court noted the majority of opinions from other states conclude that similar severability-of-interests clauses apply only to policy limits.  The Court conceded that a provision excluding coverage for injury from the specified acts of "an" insured would normally exclude coverage for all insureds.  However, a policy provision stating that "[t]his insurance applies separately to each insured" (emphasis added by the Court) reasonably implies a contrary result. 

This opinion is not final.  It may be modified on rehearing  or review may be granted by the United States Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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