CHAPTER 4 DIFFERENCES BETWEEN PROPERTY AND LIABILITY POLICIES

• Jurisdiction: United States

A. Property

1. All Insurance Is Not the Same

Insurance policies are contracts between an insurer and an insured that are designed to provide indemnity from the insurer to the insured. The language of insurance contracts is published in multiple formats with almost an infinite variety of terms and conditions. The Insurance Services Office (ISO) publishes thousands of different forms of insurance policy terms and conditions. Modifications continue as case law in different states requires modification of insurance policy wording to fulfill the intent of the drafters.

An insurance contract can be written to contain nearly any terms that the parties choose. In the absence of any general declaration of public policy mandating coverage, the court will not interfere with the parties' full freedom to contract for coverage on any terms not specifically prohibited by statute.¹ "‘In the absence of statutory inhibition, an insurer may impose any terms and conditions consistent with public policy which it may see fit.'" There is no reason to interfere with an insured or insurer's full freedom to contract for coverage on any terms not specifically prohibited by statute.²

In addition, the California Court of Appeal stated:

An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. ³

People who own property face the risk of losing that property to perils like fire, lightning, windstorm, hail, earthquake, or vandalism. Insurers spread this risk of loss between their customers and make it affordable for individuals to take particular risks.

Before the California Supreme Court decided Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (1989), insurers and insureds litigated thousands of lawsuits claiming that when a cause of loss not excluded concurred with an excluded cause to bring about a loss, the insured would be able to obtain indemnity under a first-party property policy. In those cases, if one percent of the cause was covered and 99 percent was excluded, courts would find coverage. The California Supreme Court put the issue to rest and gave insurers immediate resolution to many pending lawsuits by applying traditional rules of insurance interpretation.

The California Supreme Court noted that in the years leading up to its 1989 decision, some courts misinterpreted the holdings in Sabella v. Wisler, 27 Cal. Rptr. 689, 377 P.2d 889, 59 Cal. 2d 21 (1963), and State Farm Mut. Auto. Ins. Co. v. Partridge, 109 Cal. Rptr. 811, 514 P.2d 123, 10 Cal. 3d 94 (1973). In so doing, they had allowed coverage in first-party property damage cases under the holding in Partridge by inappropriately using the Partridge concurrent causation approach as an alternative to Sabella's efficient proximate cause analysis.

The extension of the analysis in Partridge, a third-party liability case, allowed coverage under a first-party property insurance policy whenever a covered peril was a concurrent proximate cause of the loss, without regard to the application of specific policy exclusion clauses. Such reasoning ignored the criteria set forth in Insurance Code sections that supported the relevant analysis in Sabella and the important distinction between property loss coverage under a first-party property policy and tort liability coverage under a third-party liability insurance policy.

The Garvey court wrote:

In August 1978, plaintiffs noticed that a house addition, built in the early 1960s, had begun to pull away from the main structure. They also discovered damage to a deck and garden wall.

California courts have long struggled to enunciate principles that determine whether coverage exists when excluded and covered perils interact to cause a loss. Initially, the courts attempted to reconcile Insurance Code § 530 (which provides for coverage when a peril insured against was the "proximate cause" of loss) with § 532 (which provides that "If a peril is specifically excepted in a contract of insurance, and there is a loss which would not have occurred but for such peril, such loss is thereby excepted [from coverage] even though the immediate cause of the loss was a peril which was not excepted").

The court of appeal replaced the Sabella term "efficient proximate cause" with the term "moving cause." Sabella defined "efficient proximate cause" alternatively as the "one that sets others in motion" and as "the predominating or moving efficient cause." The supreme court used the term "efficient proximate cause" (meaning predominating cause) when referring to the Sabella analysis because the supreme court believed the phrase "moving cause" could be misconstrued to deny coverage erroneously, particularly when it was understood literally to mean the "triggering" cause.

In 1973, the California Supreme Court in Partridge was faced with a third-party tort liability situation that presented a "novel question of insurance coverage," which did not fit the Sabella analysis because no single peril could be labeled the predominant cause of the loss. In Partridge, the insured was covered under both an automobile liability policy and a homeowner's liability policy with comprehensive personal liability coverage. The insured, after filing the trigger mechanism of his pistol to create a "hair trigger" action (such negligence was a covered risk under the homeowner's property policy), hunted jackrabbits at night from his vehicle. As he drove over rough terrain while waving the gun in his hand (negligent driving was an excluded risk under homeowner's liability policy), the gun fired and injured a passenger.

First-party property coverage issues were not involved. The Partridge court concluded by stating:

Although there may be some question whether either of the two causes in the Garvey case can be properly characterized as the "prime," "moving" or "efficient" cause of the accident we believe that coverage under a liability insurance policy is equally available to an insured whenever an insured risk constitutes simply a concurrent proximate cause of the injuries.

Because Partridge dealt with causation in the context of third party liability insurance, the court did not address, nor did it contemplate, the application of its decision to the determination of coverage in the first-party property insurance context. Indeed, Partridge asserted only that the "concurrent cause" standard was "consistent with Insurance Code §§ 530 and 532, as authoritatively construed in Sabella v. Wisler. . . ."

2. The Concurrent Cause Doctrine

The California Supreme Court created the concurrent cause doctrine in State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, supra, a third-party liability case. For many years, until Garvey, it was applied to first-party property cases.

The decision in Partridge first stated that the concurrent cause doctrine resolved a question of insurance coverage:

[W]hen two negligent acts of an insured—one auto related and the other not auto related—constitute concurrent causes of an accident, is the insured covered under both his homeowner's policy and his automobile liability policy?

The fact that an accident has been found to arise out of the use of a vehicle for purposes of an automobile policy is not necessarily determinative of the question of whether that same accident falls within a similarly worded exclusionary clause of a homeowner's policy.

In issuing the homeowner's policy to Partridge, State Farm agreed to protect the insured against liability accruing from non-auto-related risks. The insurer did not deny that Partridge's negligence in filing the trigger mechanism of his gun was a risk covered by the homeowner's policy; thus, if the gun had accidentally fired while the insured was walking down the street or running through the woods, the insurer admitted that any resultant damage would clearly be covered by the policy.

If, for example, after negligently modifying the gun, Partridge had lent it to a friend who had then driven his own insured car negligently, resulting in the firing of the gun and injuring of a passenger, both Partridge and his friend under traditional joint tortfeasor principles would be liable for the injury.

Therefore, the court found that both policies applied to the loss:

The case of Hughes v. Potomac Ins. Co., 199 Cal. App. 2d 239, 18 Cal. Rptr. 650 (1962), supports this conclusion. In Hughes, the trial court found that a landslide was caused by ground water from rainfall, a covered risk, rather than by overflow from a river, an excluded risk. The Court of Appeal affirmed, declaring that even if the trial court had erred in finding the ground water to be the sole source of the landslide, the insurer would still be liable; for it has been held that when two causes join in causing an injury, one of which is insured against, the insured is covered by the policy. Zimmerman v. Continental Life Ins. Co., 99 Cal. App. 723, 726, 279 P. 464 (Cal. Ct. App. 1929).

In sum, in purchasing two separate insurance policies from State Farm, the insured obtained coverage for liabilities arising from different sources. Under the homeowner's policy, the insurer agreed to protect the insured against liability arising generally from non auto related risks; under the automobile policy, the insurer guaranteed indemnity arising from auto related risks. Since the injury and the insured's liability in the instant case resulted from both auto-related and non-auto-related causes, the insurer is liable under both policies. The trial court properly concluded that coverage was available under both the automobile policy and the homeowner's policy.

Insurance companies sought to avoid the effect of the concurrent cause cases by rewriting their policies with anti-concurrent cause language. In...