CHAPTER 4 DIFFERENCES BETWEEN PROPERTY AND LIABILITY POLICIES

• Jurisdiction: United States

A. All Insurance Is Not the Same

1. Property

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. For example, in State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 313 (Ala. 1999), the court stated: "[I]nsurance companies and their insureds are free to agree to any terms in a contract so long as they do not offend some rule of law or contravene public policy."

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 the risk.

2. Liability

Like property insurance, liability insurance is protection provided to the insured against the risks of loss faced in everyday living. Unlike the risks taken by property insurers, the risks of loss taken by liability insurers are those that are the result of acts or omissions of the person insured that will cause him or her to be sued or pay damages to third persons for bodily injury, property damage, or other tort damages incurred by others.

The first party is the insured. The second party is the insurer. The third party is the person making a claim against an insured. Third-party or liability insurance is insurance against risks faced by the individual insured for damages he or she may be required to pay as a result of an accident caused by his or her failure to act.

The California Insurance Code defines liability insurance as follows:

Liability insurance includes:

Insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person, or resulting from liability for damage to property, or property interests of others but does not include worker's compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

. . .

(c) Insurance covering injuries sustained by an insured resulting from a tort committed by a third party against which such third party is not himself covered by liability insurance;
(d) Insurance coverage against the legal liability of the insured, and against loss, damage, or expense incident to a claim arising out of the death or injury of any person as the result of negligence or malpractice in rendering professional services by any person who holds a certificate or license. (California Insurance Code § 108.)

This legislation is a rather detailed summary of years of common law defining the purpose and types of liability insurance that have evolved since the 13th century. It fits definitions that would apply in those states that have not codified a definition of liability insurance, as has California.

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), thousands of lawsuits were pursued claiming that when a cause of loss not excluded concurred with excluded causes 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 supreme court noted that in the years leading up to its 1989 decision, some courts have misinterpreted and misapplied its decisions in Sabella v. Wisler, 59 Cal. 2d 21, 27 Cal. Rptr. 689, 377 P.2d 889 (1963), and State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal. 3d 94, 109 Cal. Rptr. 811, 514 P.2d 123 (1973). In so doing, they have 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. This extension of the analysis in Partridge, a third-party liability case, allows 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 ignores the criteria set forth in the California Insurance Code, 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 § 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 here 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 California Supreme Court used the term "efficient proximate cause" (meaning predominating cause) when referring to the Sabella analysis because it 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 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 Supreme Court, in Partridge, concluded by stating, "Although there may be some question whether either of the two causes in the instant 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 sections 530 and 532, as authoritatively construed in Sabella v. Wisler. . . ." (Partridge, supra, 10 Cal. 3d at p. 105, fn. 11.)

B. The Distinction Between Liability and Property Insurance

The Garvey court reasoned:

The decision of the Court of Appeal, in applying the Partridge concurrent causation analysis to property damage cases, like other recent insurance cases involving all-risk homeowner's policies, failed to differentiate between property loss coverage under a first party policy and tort liability coverage under a third-party policy of insurance. The scope of coverage and the operation of the exclusion clauses, however, are different in the separate policy portions and should be treated as such.

The Supreme Court noted that it is important to separate the causation analysis necessary in a first party property loss case from that which must be undertaken in a third-party tort liability case. The term "perils" in traditional property insurance parlance refers to fortuitous, active, physical forces such as lightning, wind, and explosion, which bring about the loss. Thus, the "cause" of loss in the context of a property insurance contract is totally different from that in a liability policy...