Gray v. Zurich Ins. Co.

• Decision Date: 25 October 1966
• Citation: Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P2d 168 (Cal. 1966)
• Court: California Supreme Court
• Parties: , 419 P.2d 168 Vernon Dartmouth GRAY, Plaintiff and Appellant, v. ZURICH INSURANCE COMPANY, Defendant and Respondent. L.A. 28897. In Bank

Page 104

54 Cal.Rptr. 104

65 Cal.2d 263, 419 P.2d 168

Vernon Dartmouth GRAY, Plaintiff and Appellant, v.ZURICH INSURANCE COMPANY, Defendant and Respondent.

L.A. 28897.

Supreme Court of California,

In Bank.

Oct. 25, 1966.

Robert L. Brock, Beverly Hills, Edwin S. Saul and Brock & Fleishman, Hollywood, for plaintiff and appellant.

William J. Currer, Jr., Los Angeles, amicus curiae on behalf of plaintiff and appellant.

Moss, Lyon & Dunn, Gerold C. Dunn and Henry F. Walker, Los Angeles, for defendant and respondent.

TOBRINER, Justice.

This is an action by an insured against his insurer for failure to defend an action filed against him which stemmed from a complaint alleging that he had committed an assault.The main issue turns on the argument of the insurer that an exclusionary clause of the policy excuses its defense of an action in which a plaintiff alleges that the insured intentionally caused the bodily injury.Yet the language of the policy does not clearly define the application of the exclusionary clause to the duty to defend.Since in that event we test the meaning of the policy according to the insured's reasonable expectation of coverage and since the language of the policy would lead the insured here to expect defense of the third party suit, we cannot exonerate the carrier from the rendition of such protection.

Plaintiff, Dr. Vernon D. Gray, is the named insured under an insurance policy issued by defendant.A 'Comprehensive Personal Liability Endorsement' in the policy states, under a paragraph designated 'Coverage L,' that the insurer agrees '(T)o pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage, and the company shall defend any suit against the insured alleging such bodily injury or property damage and seeking damages which are payable under the terms of this endorsement, even if any of the allegations are groundless, false or fraudulent; but the company may make such investigation and settlement of any claim or suit as it deems expedient.'The policy contains a provision that '(T)his endorsement does not apply' to a series of specified exclusions set forth under separate headings, including a paragraph (c) which reads, 'under coverages L and M, to bodily injury or property damages caused intentionally by or at the direction of the insured.'

The suit which Dr. Gray contends Zurich should have defended arose out of an altercation between him and a Mr. John R. Jones.¹Jones filed a complaint in Missouri alleging that Dr. Gray 'wilfully, maliciously, brutally and intentionally assaulted' him; he prayed for actual damages of $50,000 and punitive damages of $50,000.Dr. Gray notified defendant of the suit, stating that he had acted in self-defense, and requested that the company defend.Defendant refused on the ground that the complaint alleged an intentional tort which fell outside the coverage of the policy.Dr. Gray thereafter unsuccessfully defended on the theory of self-defense; he suffered a judgment of $6,000 actual damages although the jury refused to award punitive damages.

Dr. Gray then filed the instant action charging defendant with breach of its duty to defend.Defendant answered, admitting the execution of the policy but denying any such obligation.The record on appeal has been augmented to include an offer of proof, presented by plaintiff and rejected by the trial court, which detailed the circumstances surrounding the altercation.The augmented record also includes exhibits introduced at the trial, consisting of copies of the pleadings and verdict in the Missouri suit and a copy of the subject insurance policy.The parties waived written findings of fact and conclusions of law; the court rendered judgment in favor of defendant.We must decide whether or not defendant bore the obligation to defend plaintiff in the Missouri action.

Defendant argues that it need not defend an action in which the complaint reveals on its face that the claimed bodily injury does not fall within the indemnification coverage; ² that here the Jones complaint alleged that the insured committed an assault, which fell outside such coverage.Defendant urges, as a second answer to plaintiff's contention, that the contract, if construed to require defense of the insured, would violate the public policy of the state and that, indeed, the judgment in the third party suit upholding the claim of an intentional bodily injury operates to estop the insured from recovery.Defendant thirdly contends that any requirement that it defend the Jones suit would embroil it in a hopeless conflict of interest.Finally it submits that, even if it should have defended the third party suit, the damages against it should encompass only the insured's expenses of defense and not the judgment against him.

We shall explain our reasons for concluding that defendant was obligated to defend the Jones suit, and our grounds for rejecting defendant's remaining propositions.Since the policy sets forth the duty to defend as a primary one and since the insurer attempts to avoid it only by an unclear exclusionary clause, the insured would reasonably expect, and is legally entitled to, such protection.As an alternative but secondary ground for our ruling we accept, for purposes of argument, defendant's contention that the duty to defend arises only if the third party suit involves a liability for which the insurer would be required to indemnify the insured, and, even upon this basis, we find a duty to defend.

In interpreting an insurance policy we apply the general principle that doubts as to meaning must be resolved against the insurer and that any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.³

These principles of interpretation of insurance contracts have found new and vivid restatement in the doctrine of the adhesion contract.As this court has held, a contract entered into between two parties of unequal bargaining strength, expressed in the language of a standardized contract, written by the more powerful bargainer to meet its own needs, and offered to the weaker party on a 'take it or leave it basis' carries some consequences that extend beyond orthodox implications.Obligations arising from such a contract inure not alone from the consensual transaction but from the relationship of the parties.⁴

Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them, ⁵they have also applied the doctrine of the adhesion contract to insurance policies, holding that in view of the disparate bargaining status of the parties⁶we must ascertain that meaning of the contract which the insured would reasonably expect.⁷Thus as Kessler stated in his classic article on adhesion contracts: 'In dealing with standardized contracts courts have to determine what the weaker contracting party could legitimately expect by way of services according to the exterpriser's 'calling', and to what extent the stronger party disappointed reasonable expectations based on the typical life situation.'(Kessler, Contracts of Adhesion(1943)43 Colum.L.Rev. 629, 637.)

Professor Patterson, in describing one characteristic consequence of 'the conception of adhesion, whether that term is used or not,' writes: 'The court interprets the form contract to mean what a reasonable buyer would expect it to mean, and thus protects the weaker party's expectation at the expense of the stronger's.This process of interpretation was used many years ago in interpreting (or construing) insurance contracts. * * *'(Fn. omitted;Patterson, The Interpretation and Construction of Contracts(1964)64 Colum.L.Rev. 833, 858.)

Thus we held in Steven v. Fidelity & Casualty Co., supra, 58 Cal.2d 862, 27 Cal.Rptr. 172, 377 P.2d 284, that we would not enforce an exclusionary clause in an insurance contract which was unclear, saying: 'If (the insurer) deals with the public upon a mass basis, the notice of non-coverage of the policy, in a situation in which the public may reasonably expect coverage, must be conspicuous, plain and clear.'P. 878, 27 Cal.Rptr. p. 182, 377 P.2d p. 294.)⁸

When we test the instant policy by these principles we find that its provisions as to the obligation to defend are uncertain and undefined; in the light of the reasonable expectation of the insured, they require the performance of that duty.At the threshold we note that the nature of the obligation to defend is itself necessarily uncertain.⁹Although insurers have often insisted that the duty arises only if the insurer is bound to indemnify the insured, this very contention creates a dilemma.No one can determine whether the third party suit does or does not fall within the indemnification coverage of the policy until that suit is resolved; in the instant case, the determination of whether the insured engaged in intentional, negligent or even wrongful conduct depended upon the judgment in the Jones suit, and, indeed, even after that judgment, no one could be positive whether it rested upon a finding of plaintiff's negligent or his intentional conduct.The carrier's obligation to indemnify inevitably will not be defined until the adjudication of the very action which it should have defended.Hence the policy contains its own seeds of uncertainty; the insurer has held out a promise that by its very nature is ambiguous.

Although this uncertainty in the performance of the duty to defend could have been clarified by the language of the policy we find no such specificity here.¹⁰An examination of the policy discloses that the broadly stated promise to defend is not conspicuously or clearly conditioned solely on a nonintentional bodily injury; instead, the insured could reasonably expect such protection.

The policy...