Introduction

The language of insurance policies is interpreted like other contracts as required by the Civil Code. However, ambiguities are generally resolved against the insurer regardless of the bargaining power of the policyholder. The rules of contract interpretation should not be overridden by public policy considerations.

Rules of Contract Interpretation – Summary

“While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply. The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract. If contractual language is clear and explicit, it governs. ¶ A policy provision will be considered ambiguous when it is capable of two or more constructions, both of which are reasonable. The fact that a term is not defined in the policies does not make it ambiguous. Nor does [d]isagreement concerning the meaning of a phrase, or the fact that a word or phrase isolated from its context is susceptible of more than one meaning. [L]anguage in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract. If an asserted ambiguity is not eliminated by the language and context of the policy, courts then invoke the principle that ambiguities are generally construed against the party who caused the uncertainty to exist (i.e., the insurer) in order to protect the insured’s reasonable expectation of coverage.[1]

Mutual Intention

“Under statutory rules of contract interpretation, the mutual intention of the parties at the time the contract is formed governs interpretation. (§1636.)[2] Such intent is to be inferred, if possible, solely from the written provisions of the contract. (§1639.) The clear and explicit meaning of these provisions, interpreted in their ordinary and popular sense, unless used by the parties in a technical sense or a special meaning is given to them by usage (§1644), controls judicial interpretation. (§1638.) Thus, if the meaning a lay person would ascribe to contract language is not ambiguous, we apply that meaning.”[3]

Ambiguity

“If there is ambiguity, however, it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee understood them at the time of formation. (§1649.) If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist. (§1654.) In the insurance context, we generally resolve ambiguities in favor of coverage. Similarly, we generally interpret the coverage clauses of insurance policies broadly, protecting the objectively reasonable expectations of the insured. These rules stem from the fact that the insurer typically drafts policy language, leaving the insured little or no meaningful opportunity or ability to bargain for modifications. Because the insurer writes the policy, it is held responsible for ambiguous policy language, which is therefore construed in favor of coverage.”[4]

“However, the predicate to interpreting ambiguities in favor of coverage is that the policy be reasonably susceptible to more than one interpretation. Where a policy clearly excludes coverage, we will not indulge in tortured constructions to divine some theoretical ambiguity in order to find coverage. An insurer is entitled to limit its coverage to defined risks, and if it does so in clear language, we will not impose coverage where none was intended. ¶ The determination of whether a contract is ambiguous is subject to independent review by [the Court of Appeal]. Whether a clause is ambiguous and whether an insured has an objectively reasonable expectation of coverage in light of the insuring language are questions of law.”[5]

Bargaining Power

“In the absence of evidence that the parties, at the time they entered into the policies, intended the provisions to carry technical meanings and implemented this intention by specially crafting policy language, we see little reason to depart from ordinary principles of interpretation. Similarly, in the absence of evidence that the insurers had cause to believe, at the time of formation, that [the policyholder] understood policy language in any technical or restrictive manner, we decline to depart from the settled rule that ambiguities are resolved against the party responsible for their inclusion in the policies.”[6]

Equity – Law Distinction

“The mere characterization of relief is not dispositive of the proper construction of insurance policies. Because California has generally abandoned the traditional distinction between courts of equity and courts of law, [a] policyholder might not anticipate that the term ‘legally obligated’ precludes coverage of equitably compelled expenses. Because the relief is ordered by a court of law, as that term is used in the modern sense, [the policyholder] could reasonably believe that its obligation to pay is legal. Thus, as a matter of plain meaning, the term ‘legally obligated’ covers injunctive relief and recovery of [certain] costs. Moreover, even if this phrase raises doubts in the minds of legally trained observers about whether a law – equity distinction was intended, it would be unreasonable to conclude that it unambiguously incorporates this sophisticated distinction into the policies. In this respect, whatever ambiguity it possesses in light of a party’s legal knowledge is resolved in favor of coverage. Whether the term ‘legally obligated’ is ambiguous or not, therefore, we conclude that it encompasses the types of relief sought in the third party suits.”[7] “Whatever technical distinctions we and other courts have drawn between restitution and compensatory damages in other contexts, in ordinary terms both concepts are within the definition of “damages.” For the purposes of interpretation, this fact is dispositive.”[8]

Undefined Terms – Damages

“Because the CGL policies do not define the word ‘damages,’ for interpretation purposes we look to its ‘ordinary and popular’ definition. (§ 1644.) Section 3281 of the Civil Code provides: ‘Every person who suffers detriment from the unlawful act or omission of another, may recover from the person in fault a compensation therefor in money, which is called damages.’ As our cases have pointed out, this provision is intended to represent the plain and ordinary meaning of the word ‘damages.’ Other lay and legal definitions are similar. The courts have generally applied similar definitions for insurance purposes.”[9]

Public Policy Considerations

“[T]he issue before this court is not whether CGL policies may provide the coverage sought, but whether they do provide it according to their terms. The answer is to be found solely in the language of the policies, not in public policy considerations.”[10]

Particular Policy Terms

Willful

Standard CGL policies have an exclusion for damage “expected or intended from the standpoint of the insured.” Insurance Code §533 states in part: “An insurer is not liable for the loss caused by the wilful act of the insured, but he is not exonerated by the negligence of the insured.” Civil Code §1668 states in part: “All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”

“We conclude that section 533 prohibits indemnification of more than just intentional acts that are subjectively desired to cause harm and acts that are intentional, wrongful, and necessarily harmful regardless of subjective intent. A ‘wilful act’ under section 533 must also include a deliberate, liability-producing act that the individual, before acting, expected to cause harm. Conduct for which the law imposes liability, and which is expected or intended to result in damage, must be considered wrongful and willful. Therefore, section 533 precludes indemnification for liability arising from deliberate conduct that the insured expected or intended to cause damage.”[11] “Section 533 is an implied exclusionary clause in every insurance contract. The statute reflects a fundamental public policy of denying coverage for willful wrongs and discouraging willful torts.”[12] “The existence of a preconceived design to injure is relevant only when mental capacity is an issue or the insured’s intent or motive might justify an otherwise wrongful act.”[13] “[I]t is now clear that section 533 does not prohibit coverage for reckless conduct.”[14] “[A] ‘wilful act’ under section 533 must mean an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probable or substantially certain to result. [T]hat degree of foreknowledge or belief that a result will occur means the result is expected.”[15]

Expected or Intended

“The appropriate test for ‘expected’ damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage.”[16] After a review of precedence discussing alternative objective and subjective tests, “[w]e believe . . . [i]ntent and knowledge can be proved without an insured’s admission; circumstantial evidence can establish them in civil cases as surely as in criminal prosecutions. Claims of ignorance are unlikely to succeed when circumstantial evidence shows the insured expected damage or avoided confirming such a belief in hopes of denying awareness of the risk.”[17] “The ordinary and popular meaning of ‘expect’ connotes subjective knowledge of or belief in an event’s probability. We see no material difference if the degree of that probability is expressed as substantially certain, practically certain, highly likely, or highly probable; the terms are minor shadings of the same idea. All convey the ordinary and popular sense that we do not think of events we ‘expect’ as absolute certainties. Accordingly, we cannot adopt the  more restrictive interpretation of some courts that ‘the phrase “neither expected nor intended” should be read only to exclude those damages that the insured knew would flow directly and immediately from its intentional act.’”[18]

It is error for a jury instruction defining “expect” to focus upon what the policyholder “should have known instead of limiting consideration to what [the policyholder] actually knew or believed. . . . The appropriate test for ‘expected’ damage is whether the insured knew or believed its conduct was substantially certain or highly likely to result in that kind of damage.”[19]

Occurrence and Accident

Current standard CGL policies state: “This insurance applies . . . only if: . . . the [damage] is caused by an ‘occurrence’.” “Occurrence” is typically defined as: “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Older policies substitute “or” for “including.”

“‘[I]ncluding’ is a word of enlargement. . . . [I]t enlarges the meaning of ‘accident’ to add exposure to damaging conditions; gradual events can then be ‘accidents’ and ‘occurrences’ under the policies. This change broadened the scope of covered events.”[20] “[U]nder this ‘occurrence’ definition, the term ‘accident’ does not apply to an act’s consequences, but instead applies to the act itself. When ‘occurrence’ is defined as an ‘accident,’ we concluded that injury caused by expected or intended actions is not covered. . . . ¶ However, we should not be misunderstood as suggesting that an expected or intended act at any point in the causal chain of events means that any resulting damage was not caused by accident. Instead, we hold only that where damage is the direct and immediate result of an intended or expected event, there is no accident.”[21] “[A]ccident” is not an isolated term in the policies; rather, it is an integral part of the ‘occurrence’ definition. . . . A covered ‘occurrence’ could include events that are not abrupt because the ‘occurrence’ definitions enlarged the concept of ‘accident’ to encompass events that happen gradually.”[22]

Sudden

There is a “temporal connotation inherent in the ordinary meaning of ‘sudden.’”[23] “We cannot reasonably call ‘sudden’ a process that occurs slowly and incrementally over a relatively long time, no matter how unexpected or unintended the process.”[24] “‘[S]udden does not require that the event terminate quickly or have only a brief duration.”[25]