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Court of Appeal, Fifth District, California.

CALIFORNIA MUTUAL INSURANCE COMPANY, Plaintiff and Appellant, v. Brock S. ROBERTSON et al., Defendants and Respondents.

No. F009899.*

Decided: September 06, 1989

McCormick, Barstow, Sheppard, Wayte & Carruth and James H. Wilkins, Fresno, for plaintiff and appellant. Kahn, Soares & Conway and Leonard Herr, Hanford, for defendants and respondents.



This is an appeal from a judgment after a court trial in a declaratory relief action filed by appellant, California Mutual Insurance Company (Cal Mutual).   The court determined Cal Mutual had an obligation under two homeowners' insurance policies to defend a third party lawsuit brought against the insureds, respondents, Brock S. Robertson and Amy L. Robertson (the Robertsons).1  Helen and Eugene Gradillas (the Gradillases) brought the third party action as the result of a transaction between them and the Robertsons' real estate agent, John Brock (Brock).


In or about 1979–1980 the Robertsons engaged the services of Brock as their agent for the sale of their residence and the purchase of a new residence.   In 1982 the Robertsons purchased still another home, this time without the assistance of Brock.   Sometime thereafter, Brock contacted Mr. Robertson about investing in rental property in Avenal.   The Robertsons purchased the Avenal property with Brock as their agent.   Brock again contacted Mr. Robertson in late 1984 about investing in rental property.2  Brock told Mr. Robertson that for a $10,000 investment the Robertsons could expect to receive a $5,000 profit in 90 days.   Robertson gave Brock $10,000 in December 1984 for investment in the property.   The Robertsons never realized a return on the investment, never received their $10,000 back, and never saw Brock again.

About the same time that Mr. Robertson and Brock were negotiating the Robertsons' investment, Brock was negotiating, purportedly on behalf of the Robertsons, for the purchase of property located in Fresno from the Gradillases.   The transaction was consummated and was financed in part with a promissory note secured by two second deeds of trust on property purportedly owned by the Robertsons.   Unbeknownst to either the Robertsons or the Gradillases, the Robertsons' names had been forged on all of the documents, including those relating to the properties to which the deeds of trust applied.   When the Gradillases contacted the Robertsons regarding nonpayment on the promissory note, they were informed by Mr. Robertson that he knew nothing about the property and that they should contact his agent, Brock.   When the Robertsons received the notice of default on the deeds of trust on property securing the Gradillases' note, Mr. Robertson called Brock, who told him that there had been some confusion and that the Robertsons should not worry.

Thereafter, the Gradillases filed actions in both Madera County and Fresno County against the Robertsons, Brock and others.   Both actions are entitled, “COMPLAINT FOR FORECLOSURE OF DEED OF TRUST, FOR SPECIFIC PERFORMANCE OF RENTS AND PROFITS CLAUSE, FOR APPOINTMENT OF RECEIVER, FOR DAMAGES BASED UPON FRAUD, NEGLIGENCE, BREACH OF FIDUCIARY DUTY, PUNITIVE DAMAGES, AND FOR ATTORNEY'S FEES.”   Against the Robertsons, both complaints seek to foreclose on the deeds of trust securing payment of the promissory note and request appointment of a receiver.   The Gradillases do not seek damages for fraud, negligence or breach of fiduciary duty from the Robertsons.   Neither complaint refers to a forgery of the Robertsons' signatures, but each appears to assume that the Robertsons did in fact purchase the Gradillases' property.

The Robertsons tendered their defense in the Gradillas litigation to their homeowners' insurance carrier, Cal Mutual.   Cal Mutual refused their defense on the basis that the occurrence giving rise to the litigation was not a covered risk under the Robertsons' homeowners' policy.   Cal Mutual initiated this action for declaratory relief for a determination of its duties under the policies.3

The policies in question provide that Cal Mutual will defend and indemnify “for damages because of bodily injury or property damage to which this coverage applies․”  “Bodily injury” is defined as “bodily harm, sickness or disease, including required care, loss of services and death resulting therefrom.”   “Property damage” is defined as “physical injury to or destruction of tangible property, including loss of use of this property.   Theft or conversion of property by any insured is not considered to be property damage.”   The policies exclude from coverage “․ bodily injury or property damage arising out of business pursuits of any insured․”  “Business” is defined as “․ a trade, profession or occupation, including farming.”

 After Cal Mutual initiated the declaratory relief action, during the course of discovery in the Gradillas suit, the depositions of the Gradillases were taken.   According to their testimony, both suffered anxiety, nervousness, worry and concern over the loss of their property.4  Thereafter, the Robertsons proceeded in the declaratory relief action on the theory that the circumstances known to the insurer gave rise to a potential claim against them for damages for emotional distress as a result of their negligent supervision of their agent, Brock.

Cal Mutual's position was that the action against the Robertsons did not allege claims for either bodily injury or property damage as those terms are used in the policies and that, even assuming the Gradillases' claims amounted to damages within the general coverage provisions of the policy, they were excluded from coverage under the business pursuits clause.

In its statement of decision the court found (1) the Robertsons were “potentially liable for the tortious conduct of their agent ․” (emphasis in original);  (2) the Gradillases' claim of emotional distress was a potential basis for recovery under the Cal Mutual policies as bodily injury;  and (3) the circumstances surrounding the Gradillases' loss of their property could amount to theft or conversion by the Robertsons' agent which the Robertsons' could reasonably expect to be covered by their homeowners' policies.   With respect to the business pursuits exclusion clause the court found as follows:

“Under the totality of the facts and background of this case, this Court finds that Mr. Robertson's agreement and $10,000.00 investment delivered to Brock does not constitute a business pursuit, nor does the subsequent conduct or misconduct of Brock work to elevate same to a business pursuit within the terms of the policy.

“This Court feels that it would be manifestly unfair to apply a business exclusion to an insured who did not enter into a business agreement by executing notes, deeds of trust and other purchase and escrow documents, who did not have knowledge of such an escrow and sale, who did not consent to or in any manner participate in or ratify such a sale, who did not authorize the specific business transaction, who had not directed his agent to purchase this specific property and who had no knowledge about the transaction until contacted by the seller about one month after the sale.   In short, the Court finds, as above stated, that Mr. Robertson's act of delivering $10,000.00 to Brock upon Brock's said representations does not constitute a business pursuit in the light of all the circumstances herein.

“Further, the Court finds the business pursuit exclusion as contained in the policy is ambiguous.  ‘Business' is defined in the policy as a ‘trade, profession or occupation, including farming’.

“Does this include only investments and business activities directly related to or within the insured's own particular calling or how the insured specifically makes his living?   Does it include casual or occasional investments for profit, or only those which the insured makes regularly and frequently?   Can an insured be involved or participate in a specific business pursuit without having knowledge of same?   Or without consenting, authorizing or ratifying same?

“The language of the exclusion in this case raises many unanswered questions and such ambiguities are construed against the insurer.  (Gray v. Zurich Ins. Co., 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168] )”


Cal Mutual contends the trial court misinterpreted the language of the Robertsons' policies and, contrary to the court's ruling, the nature and kind of acts involved in the Gradillas action are not covered.

We are not bound by the trial court's interpretation of the meaning of the language of the policy if it is erroneous.  (McKee v. State Farm Fire & Cas. Co. (1983) 145 Cal.App.3d 772, 775, 193 Cal.Rptr. 745.)   Since no extrinsic evidence was presented at trial on the issue of the meaning of the language of the policies, our function is the same as that of the trial court, to arrive at a reasonable interpretation of the language in keeping with applicable rules of construction.  (Ibid.)

In construing the language of an insurance policy, a court should give the words used their plain and ordinary meaning, unless the policy clearly indicates a contrary meaning.  (Giddings v. Industrial Indemnity Co. (1980) 112 Cal.App.3d 213, 218, 169 Cal.Rptr. 278.)   When the language is clear, a court should not give it a strained construction to impose on the insurer a liability which it has not assumed.  (Ibid.)  On the other hand, language which is unclear must be construed against the insurer and in favor of coverage if semantically possible.  (Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807, 180 Cal.Rptr. 628, 640 P.2d 764.)   General coverage clauses are interpreted broadly to afford the greatest possible protection to the insured, while exclusionary clauses are construed narrowly against the insurer.  (Cal–Farm Ins. Co. v. TAC Exterminators, Inc. (1985) 172 Cal.App.3d 564, 577, 218 Cal.Rptr. 407.)   The purpose of these canons of construction is to protect the insured's reasonable expectation of coverage in a situation in which the insurer controls the language of the policy.   (Reserve Insurance Co. v. Pisciotta, supra, 30 Cal.3d at p. 808, 180 Cal.Rptr. 628, 640 P.2d 764.)

 Because of the difficulty in determining whether claims in a third party suit fall within the coverage provisions of a policy, the duty to defend is much broader than the duty to indemnify.  (Nichols v. Great American Ins. Companies (1985) 169 Cal.App.3d 766, 772, 215 Cal.Rptr. 416.)   An insurer has a duty to defend the insured in an action if potential liability of the insured exists, even though that potential liability may be remote.   (California Union Ins. Co. v. Club Aquarius, Inc. (1980) 113 Cal.App.3d 243, 247, 169 Cal.Rptr. 685;  Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 275–276, 54 Cal.Rptr. 104, 419 P.2d 168;  CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 605, 222 Cal.Rptr. 276;  Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co. (1977) 76 Cal.App.3d 272, 278, 142 Cal.Rptr. 681.)   The duty to defend is not fixed by the theory of recovery alleged in the third party complaint;  the insurer must defend when it learns of facts from any source that create the potential for liability under its policy.  (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 275–276, 54 Cal.Rptr. 104, 419 P.2d 168;  CNA Casualty of California v. Seaboard Surety Co., supra, 176 Cal.App.3d at p. 606, 222 Cal.Rptr. 276;  Giddings v. Industrial Indemnity Co., supra, 112 Cal.App.3d at p. 217, 169 Cal.Rptr. 278.)

 However, the duty to defend is not unlimited;  it is measured by the nature and kind of risk covered by the policy.  (Giddings v. Industrial Indemnity Co., supra, 112 Cal.App.3d at p. 218, 169 Cal.Rptr. 278.)   When the third party action involves acts the nature of which either are clearly not covered by the insuring language of the policy or are clearly excluded by exclusion provisions, the insurer has no duty to defend.  (Ohio Casualty Ins. Co. v. Hubbard (1984) 162 Cal.App.3d 939, 947, 208 Cal.Rptr. 806;  Royal Globe Ins. Co. v. Whitaker (1986) 181 Cal.App.3d 532, 226 Cal.Rptr. 435.)

 In a declaratory relief action to determine the insurer's obligations under the policy, the burden initially is on the insured to prove that an event is a claim within the scope of the basic coverage.  (Royal Globe Ins. Co. v. Whitaker, supra, 181 Cal.App.3d at p. 537, 226 Cal.Rptr. 435.)   The burden then shifts to the insurer to prove the claim falls within an exclusion.   (Clemmer v. Hartford Insurance Co. (1978) 22 Cal.3d 865, 880, 151 Cal.Rptr. 285, 587 P.2d 1098;  Royal Globe Ins. Co. v. Whitaker, supra, 181 Cal.App.3d at p. 537, 226 Cal.Rptr. 435.)

I. The Nature and Kind of Claim.

It is well established that standard liability policies, such as those we now examine, cover only tort liabilities and not those arising from contract.   (Fireman's Fund Ins. Co. v. City of Turlock (1985) 170 Cal.App.3d 988, 995, 216 Cal.Rptr. 796;  International Surplus Lines Ins. Co. v. Devonshire Coverage Corp. (1979) 93 Cal.App.3d 601, 611, 155 Cal.Rptr. 870.)   Thus, the Robertsons carry the burden of proving that there is some tort theory of liability under these circumstances upon which the Gradillases could potentially hold the Robertsons liable for their losses that does not arise purely out of the contractual obligations found in the promissory note and deeds of trust.   The theory advanced by the Robertsons is that they had a duty to exercise reasonable care in supervising their real estate agent, and that their failure to do so resulted in the Gradillases' losses.

 In addition to demonstrating that the Gradillases have a viable tort theory of liability, the Robertsons have the additional burden of proving that any losses incurred by the Gradillases as a result of the Robertsons' conduct would potentially come within the general coverage provisions of the policies.

The trial court found that the losses incurred by the Gradillases could potentially be construed as either property damage or bodily injury as those terms are used in the policies.   Since the court had alternative theories for coverage, we need only determine whether one of the theories is correct.   (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 19, 112 Cal.Rptr. 786, 520 P.2d 10.)

 The finding that the Gradillases may have a claim for property damage under the terms of the policies because they “lost” their property as a result of Brock's theft or conversion of the property has no basis in authority.   By its very nature, real property cannot be stolen or converted.   What is lost in circumstances such as these is the interest in the property and the anticipated benefit of the bargained exchange.   These losses are purely pecuniary or economic in character and do not amount to “physical injury to or destruction of tangible property” as property damage is defined in the policies.  (Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 562–563, 91 Cal.Rptr. 153, 476 P.2d 825;  Nichols v. Great American Ins. Companies, supra, 169 Cal.App.3d at p. 772, 215 Cal.Rptr. 416;  Giddings v. Industrial Indemnity Co., supra, 112 Cal.App.3d at p. 219, 169 Cal.Rptr. 278;  Fresno Economy Import Used Cars, Inc. v. United States Fid. & Guar. Co., supra, 76 Cal.App.3d at p. 279, 142 Cal.Rptr. 681.)

 The next question is whether any emotional distress suffered by the Gradillases may constitute “bodily injury” as that term is defined in the policies.   Although Cal Mutual cites numerous out-of-state authorities for the proposition that emotional distress does not constitute bodily injury for the purposes of liability insurance coverage, in California it is settled that “bodily injury,” as that term is used in insurance policies, can result from emotional distress and the injury so sustained may be compensable.  (Abellon v. Hartford Ins. Co. (1985) 167 Cal.App.3d 21, 27–28, 212 Cal.Rptr. 852;  Employers Cas. Ins. Co. v. Foust (1972) 29 Cal.App.3d 382, 385–387, 105 Cal.Rptr. 505.)

 Pursuant to Civil Code section 3333, claims of tortious conduct entitle a claimant to compensation for all detriment proximately caused by the tortfeasor, including emotional distress.  (Rosener v. Sears, Roebuck & Co. (1980) 110 Cal.App.3d 740, 755, 168 Cal.Rptr. 237.)   Where the alleged negligent act of the tortfeasor results in substantial damage to the complainant's financial and property interests, damages for emotional or mental distress may be recoverable under a general liability insurance policy.   (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 579, 108 Cal.Rptr. 480, 510 P.2d 1032;  Jarchow v. Transamerica Title Ins. Co. (1975) 48 Cal.App.3d 917, 937–938, 122 Cal.Rptr. 470.)

The trial court correctly found under the circumstances the Gradillas claims potentially fall within the coverage provisions of the Cal Mutual policies.   The remaining question is whether the trial court properly found that the business exclusion clause had no application under the circumstances.

II. The Business Pursuits Exclusion Clause.

 The court based its finding that the business pursuits exclusion clause did not apply on three alternative theories.   First, that by its language the clause excluded claims arising out of the business pursuits of the insured.   Accordingly, since it was undisputed that the Robertsons knew nothing about the business transaction giving rise to the Gradillases' claims, the clause had no application.   Second, the court found that the Robertsons' involvement in real estate investment activities was not sufficient to rise to the level of a business pursuit.   Third, the court found the clause to be ambiguous and therefore construed it in favor of coverage in order to satisfy the reasonable expectations of the insured.

Cal Mutual contends that the exclusion clause is applicable regardless of whether the Robertsons knew about the Gradillas transaction, since they had engaged Brock as their agent to purchase property for investment purposes in order to enhance their financial position.   Relying upon several cases which have defined more clearly the meaning of the business pursuits clause, it contends that the clause is not ambiguous and that under the accepted meaning of the exclusion, the potential claims of the Gradillases would be excluded from coverage under the policies.

The finding that the business pursuits exclusion clause is inapplicable because the Robertsons knew nothing about their agent's activities is inconsistent with the finding in the first instance that there is a potential for coverage on a theory of negligent supervision.   The potential for coverage is based on a concept of principal and agent.   Under this theory of recovery, if Brock was the Robertsons' agent, they were necessarily engaged in whatever business activities he engaged in on their behalf.   They cannot insulate themselves from liability merely because they engaged an agent to do their bidding.   They cannot on the one hand invoke the duty to defend on the theory of Brock's agency and on the other hand isolate themselves from the exclusionary clause on the theory of lack of agency.

Contrary to the trial court's conclusion, the business pursuits exclusion clause is not ambiguous.   The policy defines business as a “trade, profession or occupation.”  “Trade” is defined in case law as any business carried on for the purpose of profit or gain or livelihood.  (State Farm Fire & Casualty Co. v. Drasin (1984) 152 Cal.App.3d 864, 869–870, 199 Cal.Rptr. 749;  City of Los Angeles v. Rancho Homes, Inc. (1953) 40 Cal.2d 764, 767, 256 P.2d 305.)  “Occupation” is broadly defined as any business, trade, profession, pursuit, vocation, or calling.  (State Farm Fire & Casualty Co. v. Drasin, supra, 152 Cal.App.3d at p. 870, 199 Cal.Rptr. 749.)  “Business” is defined in Revenue and Taxation Code section 6013 as “any activity engaged in by any person or caused to be engaged in by him with the object of gain, benefit, or advantage, either direct or indirect.”   Pursuant to these definitions, the business activities engaged in by Brock on behalf of the Robertsons would be no less business pursuits than if the Robertsons had directly engaged in these activities.

 Aside from the meanings attached to the particular words used in the business pursuits exclusion clause, it is well settled that the exclusion applies whenever an insured's liability is causally related to a regular activity the insured is engaged in for profit.  (Fire Ins. Exchange v. Jiminez (1986) 184 Cal.App.3d 437, 442–443, 229 Cal.Rptr. 83;  Morris v. Atlas Assurance Co. (1984) 158 Cal.App.3d 8, 204 Cal.Rptr. 95;  State Farm Fire & Casualty Co. v. Drasin, supra, 152 Cal.App.3d at p. 870, 199 Cal.Rptr. 749.)   The business engaged in need not be the sole occupation;  part-time business activities are also included under a business pursuits exclusion.   (State Farm Fire & Casualty Co. v. Drasin, supra, 152 Cal.App.3d at p. 870, 199 Cal.Rptr. 749.)

It is undisputed that the Robertsons' real estate investments in recent years through Brock were motivated by their desire to enhance their financial position.   What appears to be in question is whether the Robertsons' real estate investment activities were sufficiently regular to constitute a business pursuit.   In Drasin, the insureds were engaged in a limited partnership agreement to acquire mining leases for “more than a year,” and the court concluded that they were engaged in a business pursuit.  Drasin gives greater weight to the presence of a profit motive than to the length of time the insureds were engaged in the partnership.   Here, although there was no ongoing partnership agreement, the Robertsons worked with Brock for approximately two years regarding two, perhaps three, investments in rental properties for profit.

We conclude the Robertsons' investment activities were sufficiently regular to constitute a part-time business pursuit.   Important to our consideration of whether the business pursuits exclusion should apply is an examination of whether the Robertsons could reasonably expect to have coverage for liabilities arising out of the activities in which they were engaged through their real estate agent.   We do not believe coverage could reasonably be expected under such circumstances.

We hold, therefore, that although the circumstances of this case give rise to a potential claim for damages for emotional distress within the meaning of bodily injuries as described in the general coverage provisions of the Cal Mutual policies on a theory of negligent supervision, Cal Mutual has no obligation to defend or indemnify since the claim is excluded as one arising out of the Robertsons' business pursuits.

The judgment is reversed.   Costs on appeal are awarded to appellant.


1.   The complaint named various other incidental defendants who stipulated to be bound by any settlement or judgment determining the rights and remedies between Cal Mutual and the Robertsons in the declaratory relief action.

2.   According to Mr. Robertson's trial testimony, he believed the rental property to be purchased was a triplex in Madera.   However, there is some confusion resulting from his previous deposition testimony from which it appeared the property may have been located in Fresno.   Cal Mutual contends there is a factual dispute whether the Robertsons believed they were investing in property in Madera or property in Fresno.

3.   Cal Mutual issued two homeowners' policies to the Robertsons, one for their home in Hanford and one for their home in Shaver.   The Robertsons tendered their defense under both policies.

4.   Neither of the complaints contains claims for emotional or mental distress.   The attorney for the Gradillases stated that he intended to “allege recovery of all damages which are permitted by law consistent with the evidence ․,” but was equivocal regarding whether claims for emotional distress would be appropriate.   As we will discuss, in order for the duty to defend to arise it is not necessary that the third party complaint allege claims which are covered under the insured's policy if the circumstances known to the insurer would potentially give rise to coverage.  (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 276, 54 Cal.Rptr. 104, 419 P.2d 168.)

STONE (Wm. A.), Associate Justice.

MARTIN, Acting P.J., and BAXTER, J., concur.