Royal Globe Ins. Co. v. Whitaker

• Decision Date: 23 May 1986
• Court: California Court of Appeals Court of Appeals
• Parties: ROYAL GLOBE INSURANCE CO., Plaintiff and Respondent, v. Susan E. WHITAKER and Larry Elder, Defendants and Appellants. Civ. 24491.

Page 435

226 Cal.Rptr. 435

181 Cal.App.3d 532

ROYAL GLOBE INSURANCE CO., Plaintiff and Respondent, v. Susan E. WHITAKER and Larry Elder, Defendants and Appellants.

Civ. 24491.

Court of Appeal, Third District, California.

May 23, 1986.

[181 Cal.App.3d 534] Howard L. Welch, Redding, for defendants and appellants.

Weintraub, Genshlea, Hardy, Erich & Brown and William A. Wilson, Sacramento, for plaintiff and respondent.

BACKUS, Associate Justice. ^*

This is an appeal from a trial court's ruling in a declaratory judgment that the respondent, Royal Globe Insurance Company, owed no duty to defend its insured in an underlying action for fraudulent inducement and breach of contract. We shall affirm.

FACTS

The lower court's description of the "abbreviated and skeletal nature of the trial in this case" may be something of an understatement. It was submitted on the following stipulated facts.

Royal Globe issued a comprehensive business insurance policy to Jerry L. Knighten Construction Co. ("Knighten") in 1979. In the general liability schedule of the policy, the basic coverage was described as "[t]he company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of [p ] A. bodily injury or [p ] B. property damage [p ] to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such bodily injury or property damages, even if the allegations are groundless, false, or fraudulent...." (Emphasis added.) In the general provisions applying to the general liability schedule, "occurrence" was defined as meaning "an accident ... which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured, ..."

In 1980, Knighten contracted with the appellants. Knighten promised to build a house, sell it to the appellants and to close escrow on a particular date. Instead, escrow closing was delayed by Knighton

                three weeks to appellants' detriment.  Appellants filed suit against Knighten alleging two causes of action;  the first was for breach of contract;  the second was for fraud, i.e., that when Knighten promised to close escrow on the stated date he had no intention of performing that promise.  The complaint alleged that as a proximate result of Knighten's "fraud and deceit and the facts herein alleged, [appellants] have suffered great mental anguish, nervousness, anxiety, worry and disappointment all to [their] damage in the sum of $20,000." 1  Knighten was served with the complaint and requested Royal Globe to defend him.  Royal Globe declined to defend.  Knighten and the appellants entered into a stipulation for the entry of a judgment in favor of appellants and against Knighten "... in the sum of $6,850.00 with respect to the first cause of action on file herein for breach of contract and in the sum of $10,000.00 with respect to the second cause of action for alleged intentional misrepresentations and mental and emotional distress in the sum of $10,000 for a total sum of $16,850, ..." In return for a covenant not to execute, Knighten assigned to the appellants his rights for defense and indemnity from Royal Globe.  Royal Globe filed a declaratory action, claiming it was not obligated to indemnify or defend.  The appellants cross-complained for money.  The case was tried on stipulated facts and documents including the judicially noticed underlying action.  The trial court in its statement of decision after noting the high potential for collusion in this situation ruled for Royal Globe on the ground there was no reasonable expectation on the part [181 Cal.App.3d 536] of the appellants' assignor for a defense in this suit.  A motion for a new trial was denied
                

DISCUSSION

The construction of the policy before us is one of law because it is based on stipulated evidence and the terms of the insurance contract. We thus are not bound by the trial court's interpretation and it is our duty ultimately to resolve the question under the applicable principles of law. (Economy Lumber Co. v. Insurance Co. of North America (1984) 157 Cal.App.3d 641, 645, 204 Cal.Rptr. 135.)

In Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, the basic coverage in the contract before the court made "two wide promises:" to pay for all damages for bodily injury for which the insured was liable, and to defend any suit in which bodily injury damages were alleged. (Id. at p. 272, 54 Cal.Rptr. 104, 419 P.2d 168.) It excluded from these broad promises any coverage for bodily injury damages " '... caused intentionally by or at the direction of the insured.' " (Id. at p. 267, 54 Cal.Rptr. 104, 419 P.2d 168.) Looking to "the nature and the kind of risk covered by the policy as a limitation upon the duty to defend," (id. at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168), the court held that since the complaint filed in the underlying action alleged bodily injury, and since the exclusion for intentional acts was unclear because an act can be intentional but cause unintentional harm (id. at pp. 269-275, 54 Cal.Rptr. 104, 419 P.2d 168), "the insurer bore the obligation to defend because the policy led plaintiff reasonably to expect such defense, and because the insurer's exclusionary clause did not exonerate it, ..." (Id. at p. 275, 54 Cal.Rptr. 104, 419 P.2d 168.) ² As an alternative holding, the court pointed out "the carrier must defend a suit which potentially seeks damages within the coverage of the policy...." An insurer, therefore, bears a duty to defend its insured whenever it ascertains facts which give rise to the potential of liability under the policy. (Id. at pp. 275, 276-277, 54 Cal.Rptr. 104, 419 P.2d 168 [emphasis deleted].) The appellants seek to invoke these doctrines in the present case.

However, as pointed out in Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 218, 169 Cal.Rptr. 278, "The present case is readily distinguishable from Gray and many of the cases following it, which have broadly interpreted the insurer's duty to defend. [Citing, inter alia, Mullen v. Glen Falls Ins. Co. (1977) 73 Cal.App.3d 163, 140 Cal.Rptr. 605.] In each of these cases, damages of the type covered by the policy had undisputably occurred, and the insurer relied on an unclear exclusionary clause in asserting it was not obligated to defend its insured.[ ³ Here, on the other hand, the question concerns the scope of the basic coverage itself...." (Emphasis added.) (Accord, St. Paul Fire & Marine Ins. Co. v. Superior Court (1984) 161 Cal.App.3d 1199, 1203 n. 1, 208 Cal.Rptr. 5 ["St. Paul" ].) The significance of this distinction lies in the burden of proof. While the burden is on the insurer to prove a claim covered falls within an exclusion (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 880, 151 Cal.Rptr. 285, 587 P.2d 1098), the burden is on the insured initially to prove that an event is a claim within the scope of the basic coverage. (California Union Ins. Co. v. Trinity River Lands Co. (1980) 105 Cal.App.3d 104, 111, 163 Cal.Rptr. 802; American Home Assurance Co. v. Essy (1960) 179 Cal.App.2d 19, 23, 3 Cal.Rptr. 586.)

The language of the basic coverage in this case is readily distinguishable as well from that used in Gray ⁴ and is indistinguishable from that used in St. Paul, supra, 161 Cal.App.3d at p. 1201, 208 Cal.Rptr. 5; Economy Lumber, supra, 157 Cal.App.3d at p. 646, 204 Cal.Rptr. 135; and Giddings, supra, 112 Cal.App.3d at p. 217, 169 Cal.Rptr. 278. In each of those cases and here, the insurer only promises to indemnify or defend actions involving bodily injury caused by an accident resulting in bodily injury neither expected nor intended by the insured. It was therefore the appellants' burden to show they came within this definition. All the evidence they have adduced shows the act by their assignor, Knighten, was intentional. An intentional act is not an "accident" ⁵ within the plain meaning of the word. (St. Paul, supra, 161 Cal.App.3d at pp. 1202-1203, 208 Cal.Rptr. 5; Economy Lumber, 157 Cal.App.3d at pp. 647-648, 204 Cal.Rptr. 135; cf. Giddings, supra, 122 Cal.App.3d at pp. 218-220, 169 Cal.Rptr. 278 [construing "property damage"].) The same roadblock at the definition of "accident" halts any argument claiming the appellants' assignor intended his act but not the resulting harm.

To the extent that Gray' § "alternative holding" ⁶ constitutes a separate analytic framework (Mullen, supra, 73 Cal.App.3d at p. 172, 140 Cal.Rptr. 605 [citing Gray, supra, 65 Cal.2d at pp. 275-277, 54 Cal.Rptr. 104, 419 P.2d 168] ), the present case is again distinguishable on the ground the appellants' have failed to satisfy their burden of proof. In Gray, the insured offered evidence he had made his insurer aware of the complaint and the facts of his defense which would negate intention; the same is true in Mullen. (73 Cal.App.3d at p. 170, 140 Cal.Rptr. 605.) Here, there is a total failure of proof of what facts were before Royal Globe when it made its decision not to defend. For all we know, it may have made an investigation uncovering facts which brought the claim outside the basic coverage. (Dillon v. Hartford Acc. & Indem Co. (1974) 38 Cal.App.3d 335, 344, 113 Cal.Rptr. 396 [as later harmonized by that court in Mullen, supra, 73 Cal.App.3d at p. 173, 140 Cal.Rptr. 605]; State Farm Mutual Auto Ins. Co. v. Flynt (1971) 17 Cal.App.3d 538, 548, 95 Cal.Rptr. 296.) Thus, the appellants have not shown facts known to Royal Globe that demonstrated potential liability under the policy. ⁷

In addition, although the trial court apparently agreed with appellant's assertion that the underlying complaint contained a potential claim for unintentionally caused--accidentally caused--bodily injury, ⁸ we do not. Appellant's claim against Knighten was based on an allegation that Knighten intentionally made a...