An auto insurer could not validly exclude coverage for an insured’s liability for bodily injury suffered by a non-relative resident of the insured’s household. ( Mercury Casualty Co. v. Chu (2014) 229 Cal.App.4th 1432)
Facts
Mercury Casualty Company issued an auto policy to Hung Chu, who had a roommate named Tu Pham. While Chu was driving his car with Pham riding as a passenger, Chu caused an accident in which Pham was injured.
Pham subsequently filed a personal injury action against Chu, who sought defense and indemnity from Mercury. The Mercury auto policy excluded coverage for bodily injury suffered by an “insured,” and defined an “insured” so as to include Chu as named insured as well as any “resident … who inhabits the same dwelling as the named insured .” Mercury agreed to defend Chu against Pham’s lawsuit. However, Mercury reserved its right to assert that it had no duty to indemnify Chu on the ground that Pham was a “resident” of the same dwelling as Chu, and hence Pham was an “insured” under Chu’s policy. Eventually, Pham obtained a $330,000 judgment against Chu in the personal injury action.
Mercury filed a declaratory relief action seeking a determination that it had no duty to indemnify Chu for any liability to Pham in the underlying personal injury action. The trial court ruled that the Mercury policy excluded coverage for Chu’s liability to Pham and entered judgment for Mercury. Pham appealed.
Holding
The California Court of Appeal reversed, and held that in these circumstances the exclusion in Mercury’s auto policy was not enforceable.
The appellate court acknowledged that California Insurance Code section 11580.1(c)(5) allows an auto insurer to exclude coverage for bodily injury to an “insured.” However, the appellate court held that for purposes of the statutorily-authorized exclusion, there are limits as to how an insurer can define the term “insured.” The appellate court observed that historically, the exclusion was intended to bar coverage when an insured is sued by a relative residing in the same household. That is because in that situation there is a high potential for collusion between family members. Here, by contrast, Mercury’s exclusion purported to bar coverage when the insured was sued by a non-relative residing in the same household. According to the appellate court, in this latter situation there is not the same potential for collusion, and thus the exclusion should not apply.
In short, the court held that Mercury’s non-relative resident exclusion was “an overbroad expansion” of the statutorily-allowed exclusion and “contrary to public policy.” As such, the exclusion did not bar coverage for Chu’s liability to Pham.
Comment
In Farmers Insurance Exchange v. Cocking (1981) 29 Cal.3d 383, the California Supreme Court upheld a traditional “resident relative ” exclusion, explaining that the public policy behind the exclusion was to prevent the insurer from being subjected to “suspect inter-family legal actions which may not be truly adversary and over which the insurer has little or no control.”
However, in this case, the appellate court concluded that the broader “resident” exclusion which was at issue did not further the goal of avoiding collusive lawsuits. Indeed, the appellate court noted that cohabitation in the same residence is often temporary and can involve complete strangers. Thus, there was no basis to assume that in this situation insurers face the same risk of fraudulent lawsuits.