American States Ins. Co. v. Borbor by Borbor

• Decision Date: 22 October 1987
• Docket Number: No. 86-5914,86-5914
• Parties: AMERICAN STATES INSURANCE COMPANY, Plaintiff-Appellee, v. Alexis BORBOR, by her Guardian ad Litem Jose BORBOR; Jose Borbor; Carmen Santiago; Hannah Chen, by her Guardian ad Litem Benjamin Chen; Benjamin Chen; Ruth Chen; Jenelle Mullen, by her Guardian ad Litem Judith Mullen; Judith Mullen; Aaron Taylor, by his Guardian ad Litem Cynthia Taylor; Cynthia Taylor; Dionn Walker, by her Guardian ad Litem Rita Walker; Rita Walker; Amy Aulenta, by her Guardian ad Litem Frank Aulenta; Leslie Aulenta; Kimberly Deal, by her Guardian ad Litem Linda Deal; Linda Deal; Rocky Deal; Amber Lee Thompson, by her Guardian ad Litem Bruce Thompson; Bruce Thompson; Marcele Teschler; Tara Vallee, by her Guardian ad Litem Donna Vallee; Donna Vallee; Steven Vallee; Michelle Lautarevsky, by her Guardian ad Litem Carroll Lautarevsky; Carroll Lautarevsky; Alexander Lautarevsky; Jason Herrera; Yvonne Herrera; Rudy Herrera; Dina Jones and Victor Jones, by their Guardian ad Litem Victor Jones; Victor Jones; Dely Jones; Ronald Walker; Mellissa Gary Jiminez, by her Guardian ad Litem Javier Jiminez; Javier Jiminez; Christine Jiminez; Misha Suksnguan, by her Guardian ad Litem L. Suksnguan; L. Suksnguan; Winai Suksnguan; Carl and Paul Fessler, by their Guardian ad Litem Janet Fessler; Doug Fessler; Liza Betancourt, by her Guardian ad Litem Jock Betancourt; Jock Betancourt; Elizabeth Betancourt; Anthony Langford by his Guardian ad Litem Wiley Langford; Wiley Langford; Michele Langford; Erica Kochner, by her Guardian ad Litem Ralph Kochner; Ralph Kochner; Dianna Kochner; Robbie Hernandez, by his Guardian ad Litem Sherry Hernandez; Sherry Hernandez; Rain and Joshua Jacobs, by their Guardian ad Litem Darryl Jacobs; Darryl Jacobs; Diane Jacobs; E. James Meacham and E. James Meacham and S. Isabel Meacham, dba Isabel's Nursery School; Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 888

826 F.2d 888

AMERICAN STATES INSURANCE COMPANY, Plaintiff-Appellee, v. Alexis BORBOR, by her Guardian ad Litem Jose BORBOR; Jose Borbor; Carmen Santiago; Hannah Chen, by her Guardian ad Litem Benjamin Chen; Benjamin Chen; Ruth Chen; Jenelle Mullen, by her Guardian ad Litem Judith Mullen; Judith Mullen; Aaron Taylor, by his Guardian ad Litem Cynthia Taylor; Cynthia Taylor; Dionn Walker, by her Guardian ad Litem Rita Walker; Rita Walker; Amy Aulenta, by her Guardian ad Litem Frank Aulenta; Leslie Aulenta; Kimberly Deal, by her Guardian ad Litem Linda Deal; Linda Deal Rocky Deal; Amber Lee Thompson, by her Guardian ad Litem Bruce Thompson; Bruce Thompson; Marcele Teschler; Tara Vallee, by her Guardian ad Litem Donna Vallee; Donna Vallee; Steven Vallee; Michelle Lautarevsky, by her Guardian ad Litem Carroll Lautarevsky; Carroll Lautarevsky Alexander Lautarevsky; Jason Herrera; Yvonne Herrera Rudy Herrera; Dina Jones and Victor Jones, by their Guardian ad Litem Victor Jones; Victor Jones; Dely Jones Ronald Walker; Mellissa Gary Jiminez, by her Guardian ad Litem Javier Jiminez; Javier Jiminez; Christine Jiminez; Misha Suksnguan, by her Guardian ad Litem L. Suksnguan; L. Suksnguan; Winai Suksnguan; Carl and Paul Fessler, by their Guardian ad Litem Janet Fessler; Doug Fessler; Liza Betancourt, by her Guardian ad Litem Jock Betancourt; Jock Betancourt; Elizabeth Betancourt; Anthony Langford by his Guardian ad Litem Wiley Langford; Wiley Langford; Michele Langford; Erica Kochner, by her Guardian ad Litem Ralph Kochner; Ralph Kochner; Dianna Kochner; Robbie Hernandez, by his Guardian ad Litem Sherry Hernandez; Sherry Hernandez; Rain and Joshua Jacobs, by their Guardian ad Litem Darryl Jacobs; Darryl Jacobs; Diane Jacobs; E. James Meacham and E. James Meacham and S. Isabel Meacham, dba Isabel's Nursery School; Defendants-Appellants.

No. 86-5914.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 8, 1987.

Decided Sept. 1, 1987.

As Amended Oct. 22, 1987.

Erwin E. Adler and John A. Belcher, Los Angeles, Cal., for plaintiff-appellee.

Margaret M. Morrow, Quinn, Kully & Morrow, Robert S. Gianelli, Gianelli & Morris, John A. Girardi, Robert M. Keese, Girardi, Keese & Crane, Los Angeles, Cal., for defendants-appellants.

Appeal from the United States District Court for the Central District of California.

Before SNEED, BOOCHEVER and THOMPSON, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

I

FACTS AND PROCEEDINGS

American States Insurance Company ("American States") insured "James and Isabel Meacham D/B/A: Isabel's Nursery School" under a comprehensive liability policy. James Meacham was convicted of molesting children who attended the school. These acts were committed while the American States policy was in force. The acts included undressing, touching and photographing the children in various sexual poses. James, a pedophile, took over 2,000 photographs and stored, organized and catalogued the slides in a meticulous filing system. ¹

Following James' conviction, twenty-three of the children and their parents (collectively "the children") sued James and Isabel Meacham in Los Angeles Superior Court for intentional and negligent infliction of emotional distress, assault and battery, and fraud. The Meachams tendered the defense to American States and demanded indemnification. American States undertook the Meachams' defense under a reservation of rights. It then filed this diversity action for declaratory relief seeking a determination of its rights and duties under the Meachams' liability insurance policy. ² After a bench trial, the district court concluded that James and Isabel were partners in the nursery school business; that James' acts of child molestation were wilful and intentional; that Isabel was vicariously liable as a partner for James' acts; and that California Insurance Code Sec. 533 ³ precluded liability insurance coverage for either James or Isabel. Judgment was entered in favor of American States declaring that the policy did not afford coverage for the torts asserted in the state court action.

On appeal, the children and the Meachams (collectively "appellants") challenge that portion of the judgment declaring that Isabel Meacham has no insurance coverage under the policy. For purposes of this appeal, all parties agree that Isabel, as a partner in the nursery school, is liable for James' acts. Appellants contend, however, that Isabel is a person individually insured under the American States policy, and is entitled to liability insurance coverage. We have jurisdiction under 28 U.S.C. Sec. 1291. We affirm in part and reverse in part.

II

ANALYSIS

A. The Insurance Policy

We review de novo a district court's construction of an insurance policy. See, e.g., James B. Lansing Sound, Inc. v. National Union Fire Ins. Co., 801 F.2d 1560, 1564 (9th Cir.1986); Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G., 3 Cal.3d 434, 442, 91 Cal.Rptr. 6, 10, 476 P.2d 406, 410 (1970) (provisions of an insurance policy are construed under the same rules governing interpretation of other contracts).

The American States policy provides that it "will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury" (Coverage A). The coverage provisions state:

Each of the following is an insured under this insurance to the extent set forth below:

(a) if the named insured is designated in the declarations as an individual, the person so designated but only with respect to the conduct of a business of which he is the sole proprietor, and the spouse of the named insured with respect to the conduct of such a business;

(b) if the named insured is designated in the declarations as a partnership or joint venture, the partnership or joint venture so designated and any partner or member thereof but only with respect to his liability as such.

The declarations do not designate the "named insured" as either an individual or a partnership. Under the "Insureds Name," the policy lists "E. James Meachan [sic] & S. Isabel Meachan [sic] D/B/A: Isabel's Nursery School." There is no indication on the face of the policy whether James and Isabel are insured as individuals, or as a partnership, or both.

To buttress their argument that James and Isabel were each individually insured, appellants rely in part on the Meachams' initial application for insurance. On this document, the American States insurance agent indicated that the applicants, "E. James Meacham and S. Isabel Meacham, D/B/A Isabel's Nursery School," were "individuals." ⁴ This application was not signed by the Meachams and was not attached to the policy which American States issued. The application was an "in-house" document created by American States for its own use. At trial, the American States agent who completed the application testified that he understood there were three separate insureds under the policy: James Meacham, Isabel Meacham, and Isabel's Nursery School. He also testified that he believed the partnership portions of the policy did not pertain to the Meachams. The district court, in its Judgment, noted that the policy was issued to "defendants E. James Meacham and S. Isabel Meacham individually and doing business as Isabel's Nursery School."

Where there is an uncertainty or ambiguity as to coverage, an insurance policy should be construed to favor coverage for the insured. See Arenson v. National Auto. & Casualty Ins. Co., 45 Cal.2d 81, 83, 286 P.2d 816, 818 (1955); see also California Compensation and Fire Co. v. Industrial Accident Comm'n, 62 Cal.2d 532, 534, 42 Cal.Rptr. 845, 847, 399 P.2d 381, 383 (1965) (any uncertainties in insurance policy liability to be resolved in favor of imposing liability). Doubts as to the meaning of a policy must be resolved against the insurer. Atlas Assurance Co., Ltd v. McCombs Corp., 146 Cal.App.3d 135, 143, 194 Cal.Rptr. 66, 69 (1983).

Considering the trial testimony, noting the application form as evidence of American States' intent when it entered the insurance contract, and construing the uncertainty in coverage against the insurer, we find that coverage extends under the policy to both James and Isabel individually, as well as to Isabel's Nursery School. Thus, we conclude that Isabel is a separate insured under the policy.

B. Application of Section 533

Under California Insurance Code Sec. 533, "[a]n insurer is not liable for a loss caused by the wilful act of the insured." In California, section 533 is incorporated into every insurance contract and operates as an exclusionary clause contained within the contract. Allstate Ins. Co. v. Kim W., 160 Cal.App.3d 326, 331, 206 Cal.Rptr. 609, 612 (1984).

James was convicted of nine counts of lewd or lascivious acts upon or with children who attended the nursery school, in violation of California Penal Code Sec. 288(a), and one count of lewd or lascivious acts upon or with a child by use of force, violence, duress, menace or threat of great bodily harm under California Penal Code Sec. 288(b). It is beyond cavil that James' violations of California Penal Code Sec. 288 are wilful acts within the ambit of section 533. Allstate, 160 Cal.App.3d at 333, 206 Cal.Rptr. at 613 (1984) (violations of Cal.Penal Code Sec. 288 are intentional and wilful and excluded from coverage under Cal.Ins.Code Sec. 533). Although the appellants do not explicitly challenge the district court's holding with respect to James, we affirm the district court's judgment that section 533 precludes coverage for James Meacham. We now consider whether insurance coverage is also precluded for Isabel.

Although American States argued at trial that Isabel had aided, abetted, participated in, or ratified James' criminal acts, the district court found she had not. The court stated: "I find that at most, she may have been a knowing bystander. More likely, she closed her eyes to certain facts to...