Interinsurance Exchange of Auto. Club of Southern Cal. v. Ohio Cas. Ins. Co.

• Decision Date: 19 July 1962
• Citation: 23 Cal.Rptr. 592,58 Cal.2d 142
• Court: California Supreme Court
• Parties: , 373 P.2d 640 INTERINSURANCE EXCHANGE OF the AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA, Plaintiff and Appellant, v. OHIO CASUALTY INSURANCE COMPANY, Defendant and Respondent. L. A. 26328.

Page 592

23 Cal.Rptr. 592

58 Cal.2d 142, 373 P.2d 640

INTERINSURANCE EXCHANGE OF the AUTOMOBILE CLUB OF SOUTHERN CALIFORNIA, Plaintiff and Appellant, v. OHIO CASUALTY INSURANCE COMPANY, Defendant and Respondent.

L. A. 26328.

Supreme Court of California, In Bank.

July 19, 1962.

Rehearing Denied Aug. 15, 1962.

William J. Mansell and H. Thomas Ellerby, Los Angeles, for plaintiff and appellant.

Boccardo, Blum, Lull, Niland 3 Teerlink and Edward J. Niland, San Jose, amici curiae on behalf of plaintiff and appellant.

Parker, Stanbury, McGee, Peckham & Garrett and Raymond G. Stanbury, Los Angeles, for defendant and respondent.

Sidney L. Weinstock and Weinstock, Anderson, Maloney & Chase, San Francisco, amici curiae on behalf of defendant and respondent.

PETERS, Justice.

In this action between two insurance companies, the plaintiff, Interinsurance Exchange of the Automobile Club of Southern California (referred to hereafter as 'Exchange'), appeals from a judgment on the pleadings in favor of defendant, Ohio Casualty Insurance Company (referred to hereafter as 'Ohio').

The facts involved are as follows: Effective April 1, 1957, Ohio issued a one-year public liability automobile policy to Helms Pontiac-Cadillac, Inc., covering a certain 1951 Pontiac automobile. To this policy was attached an endorsement, entitled 'GARAGE LIABILITY (Limited Additional Interest)' which, in defining an 'insured' under the policy, contained this exclusion: 'The words 'any person or organization legally responsible for the use thereof by any such partner, employee, director, stockholder or family member', shall not be construed to mean, and the benefits of this policy shall not be extended to, any person or organization or the agent, servant or permittee of such person or organization, to which has been relinquished the use or possession of any automobile because such person or organization is a buyer or prospective buyer from the named insured or a customer or prospective customer of the named insured.' Thus, the policy as written, purported to exclude the designated permittees from coverage.

Effective January 28, 1957, Exchange issued a one-year policy of public liability automobile insurance to one Ross M. Evenstad covering his Cadillac.

On September 14, 1957, while both policies were in effect, Evenstad delivered his Cadillac to Helms for the purpose of having it repaired, and Helms loaned to Evenstad the 1951 Pontiac referred to above. On that date Evenstad became involved in an automobile accident while driving the 1951 Pontiac loan car.

Pursuant to an agreement with Ohio, Exchange settled all claims against Evenstad and Helms. Exchange then brought this action for declaratory relief to have determined the rights, liabilities and duties of the insurance companies under the two policies. Ohio's motion for judgment on the pleadings was granted on the theory that Evenstad was excluded from the coverage of the Ohio-Helms policy under the terms of the garage liability endorsement quoted above.

Had the accident here involved happened just a few days earlier than it did, the parties concede, as they must, that the exclusion in the Ohio policy would have been illegal as against public policy under our decision in Wildman v. Government Employees' Ins. Co., 48 Cal.2d 31, 307 P.2d 359. It was there held that every automobile liability policy, as a matter of law, covered permissive users, and that any provision in the policy excluding them was illegal. The Ohio-Helms policy, which became effective after the Wildman decision, expressly purported to exclude from its coverage certain permittees. This exclusionary clause, when the policy was written and first became effective, was contrary to the public policy of this state and was therefore invalid. Because of that public policy, permissive user coverage was written into the policy as a matter of law. (Exchange Cas. & Surety Co. v. Scott, 56 Cal.2d 613, 15 Cal.Rptr. 897, 364 P.2d 833; Royal Exchange Assur. v. Universal Underwriters Ins. Co., 188 Cal.App.2d 662, 10 Cal.Rptr. 686; Globe Indem. Co. v. Universal Underwriters Ins. Co., 201 A.C.A. 31, 20 Cal.Rptr. 73.)

The difficulty in the present case arises because section 415 of the Vehicle Code, ^* one of the sections upon which Wildman was partially predicated, was amended effective September 11, 1957. In American Automobile Ins. Co. v. Republic Indemnity Co., 52 Cal.2d 507, 341 P.2d 675, it was held that this amendment would not be applied retroactively to an accident which occurred before its effective date. Thus, in that case, this court found it unnecessary to determine the effect, if any, of the 1957 legislation, which is one of the two issues now before us.

It is first contended by Ohio that the September 1957 amendment to section 415 repealed the rule of public policy announced in Wildman, and that the effect of such repeal was to reinstate and validate the exclusion of permittees clause in its policy with Helms. The assumed repeal had no such effect.

If it be assumed, contrary to the fact, that the 1957 amendment did, as Ohio contends, change the public policy of the state as announced in Wildman, such repeal would not have the effect of validating the exclusionary clause. Corbin states the proper rule as follows: '* * * a bargain that is illegal and void by reason of a statute existing at the time of making is not validated and made enforceable by the subsequent repeal of the statute. Such a rule as this is actually applied, and properly so, if the statute prohibited the making of such a bargain for reasons of public policy as conceived by the legislature.' (6 Corbin, Contracts (1951) p. 1043.) Other outstanding authorities agree (6 Williston, Contracts (rev. ed. 1938) pp. 4992-4993; Grismore, Contracts (1947) p. 524; 2 Elliott, Contracts (1913) p. 39; 2 Parsons, Contracts (9th ed. 1904) p. 828; Rest., Contracts, § 609; 13 C.J. 261; Annot., 126 A.L.R. 685; Annot., 28 Ann.Cas. 1398).

As illustrative of this principle, in Jaques v. Withy (1788) 126 Eng.Rep. 40, one of the first cases announcing the rule, it was held that a lottery insurance contract, illegal when made, was not validated by a subsequent repeal of the statute. In Hannay v. Eve, 3 Cranch 242, 7 U.S. 242, Mr. Chief Justice Marshall, speaking for the court, held that a contract, violative of war regulations when made, could not form the basis of an action brought after the repeal of those regulations. In Toll v. Friedman, 272 App.Div. 587, 74 N.Y.S.2d 176, and Government of the French Republic v. Cabot, Sup., 76 N.Y.S.2d 290, this rule was applied to contracts which violated OPA price regulations when entered into even though the regulations were repealed before the cases came to trial.

This general rule has been recognized in California. In Willcox v. Edwards, 162 Cal. 455, 123 P. 276, suit was brought to recover money paid under a contract involving the purchase of stock on margin. At the time the contract was made a constitutional provision prohibited such agreements. Before the action was initiated the Constitution had been amended to legalize such contracts. In denying the plaintiff recovery, Justice Shaw stated that 'The established rule is that, if a contract is void by the law in force at the time it is made, the subsequent repeal of the law will not validate such contract.' (162 Cal. at page 461, 123 P. page 278.)

In Schalow v. Schalow, 163 Cal.App.2d 448, 329 P.2d 592, an action was brought on a contract to purchase a house for $24,000. At the time the contract was made a provision of the Military and Veterans Code set a maximum price ceiling of $15,000 on purchases such as this. Before the action was filed the statutory maximum had been raised to $30,000. In reliance on the Willcox case the District Court of Appeal held that a contract, executed prior to the amendment, to pay an amount in excess of $15,000 was contrary to public policy and void.

While there is no unanimity of opinion as to the reasons for this rule, the authorities are in accord with its result. The reasons given by the courts differ depending upon the particular view taken as to whether an illegal contract is void or is simply unenforceable. If an illegal contract is regarded as being void, then there is nothing to enforce after the invalidating statute is repealed. (See Handy v. St. Paul Globe Publishing Co., 41 Minn. 188, 42 N.W. 872; 2 Chitty, Contracts (11th Am. ed. 1874) [58 Cal.2d 148] p. 982; 2 Parsons, Contracts (9th ed. 1904) p. 828.) Other authorities hold that an illegal contract is not void, but is simply unenforceable. Starting with the proposition that 'no polluted hand shall touch the pure fountains of justice.' (Collins v. Blantern (1767) 95 Eng.Rep. 850, 852), they reason that the repeal of a statute does not cleanse the stain from those hands. (Fitzsimons v. Eagle Brewing Co., 3 Cir., 107 F.2d 712; Grismore, Contracts (1947), p. 524.)

Whether it be the rule in this state that an unlawful contract is void (cf., Schalow v. Schalow, supra, 163 Cal.App.2d 448, 452, 329 P.2d 592) or only unenforceable (cf., Fewel & Dawes, Inc. v. Pratt, 17 Cal.2d 85, 90, 109 P.2d 650) the law here is, and should be, that a contract, or provision in a contract, which contravenes public policy when made is not validated by a later statutory change in that public policy.

The case of Fenton v. Markwell & Co., 11 CalApp.2d Supp. 755, 52 P.2d 297 and other cases cited to the same effect, are not contrary to the rule discussed above. Those cases involved the repeal of usury statutes. Cases relating to usury are generally recognized as an exception to the rule that a contract illegal when entered into is not validated by a subsequent repeal of a law. (11 Cal.App.2d Supp. at p. 764, 52 P.2d 297; Willcox v. Edwards, supra, 162 Cal. 455, 461-463, 123 P. 276.)

But, Ohio argues, even if it be conceded that the exclusionary provision of its policy was not validated by the 1957 amendm...