AMERICAN STATES INSURANCE COMPANY v. TERRY (1994)

Petitioner American States Insurance Company (American States) seeks a writ of mandate pursuant to Code of Civil Procedure section 437c, subdivision (l ), commanding respondent trial court to vacate its order granting summary adjudication in favor of American States' insureds, real parties in interest Dr. Howard R. Terry and Mrs. Doreen L. Terry, and to enter an order granting summary judgment in favor of American States.   At issue is whether the trial court correctly determined there was an ambiguity in a deductible provision of the homeowner's policy issued by American States to real parties in interest.   As we shall explain, by construing the policy language under the rules of contract interpretation set forth in AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253, Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 10 Cal.Rptr.2d 538, 833 P.2d 545, and Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 21 Cal.Rptr.2d 691, 855 P.2d 1263, the policy provisions are not ambiguous.   Therefore, no construction in favor of the insured is called for.   Accordingly, we shall issue the writ.

FACTS

On July 28, 1989, American States issued a homeowner's policy to the Terrys for the period July 28, 1989, to July 28, 1990.   Section I of the policy provided for a $340,300 limit of liability on the Terrys' dwelling (coverage A), a $34,030 limit of liability on “other structures” on the property (coverage B), and a $170,150 limit of liability on personal property (coverage C).   With respect to the personal property, certain additional special limits of liability applied.   For example, the policy would pay a maximum of $1,000 for loss of all jewelry, furs, watches and precious stones;  it would pay a maximum of $2,500 for loss of silverware;  and it would pay no more than $200 for loss of cash, bank notes, coins and medals.   Similar limits applied to firearms, securities, boats, and other specified property.

Because the basic homeowner's policy excluded damage resulting from “Earth Movement, meaning earthquake including shock waves or tremors before, during or after a volcanic eruption;  landslide;  mudflow;  earth sinking, rising or shifting,” the Terrys purchased a special earthquake endorsement that would give them this coverage.   That endorsement provides, in pertinent part:  “For an additional premium, we insure for direct physical loss to property covered under Section I caused by earthquake including land shock waves or tremors before, during or after a volcanic eruption․  [¶] We will pay only that part of the loss which exceeds 10% of the amount of insurance that applies to the destroyed or damaged property.   This deductible(s) will apply separately to loss under the various Section I Property Coverages.   If the limit of liability on certain property is increased by endorsement, and that property is destroyed or damaged, the total limit of liability will be used in calculating and applying the deductible.  [¶] However, the total deductible amount will not be less than $250.”

On October 17, 1989, while the policy was in force and effect, the Terrys' house was damaged in the Loma Prieta earthquake.   The Terrys notified American States that they sustained damage to their dwelling in the amount of $156,571.77 and damage to other structures on their property in the amount of $20,493.81.   American States paid them the total amount claimed less a deductible of 10 percent of the limit of liability for the dwelling and 10 percent of the limit of liability for other structures.

The Terrys contended that American States incorrectly interpreted the deductible applicable to earthquake coverage.   On October 17, 1990, they filed a complaint for declaratory relief and damages against American States in the superior court, arguing “that the applicable deductible is [10%] of the amount of the loss, not [10% of] the limit of liability.” ¹  The suit was brought on behalf of the Terrys and of others similarly situated (i.e., all American States' insureds who had Loma Prieta earthquake claims adjusted subject to the same policy language).

As the facts were undisputed and only questions of law were at issue, the Terrys filed a motion for summary adjudication of issues.   American States then filed a cross-motion for summary judgment.   At the hearing on the two motions, the court indicated that both American States' interpretation and the Terrys' interpretation of the deductible were reasonable and that this meant the policy language was ambiguous.   The court at that point resolved the ambiguity in favor of the insured.

American States petitioned this court for extraordinary relief.   It argued that the trial court's order should be vacated because the court's finding that the policy language was ambiguous was contrary to established California law.

DISCUSSION

The sole issue before the trial court was the meaning of the deductible clause in the earthquake endorsement.   As noted earlier, the trial court found the policy language (“[w]e will pay only that part of the loss which exceeds 10% of the amount of insurance that applies to the destroyed or damaged property”) to be ambiguous because it was susceptible to both American State's interpretation and the Terrys' interpretation.   Because the Terrys' interpretation was a reasonable one, the court held they were entitled to prevail on their motion as a matter of law.  (See e.g., Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 269, 54 Cal.Rptr. 104, 419 P.2d 168.)

In this writ petition, American States contends the trial court “ ‘invoked th [e] rule of construction [that ambiguous provisions in insurance contracts must be resolved in favor of the insured] too early in the interpretive process.’ ”   As we shall explain, we agree.

In AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253, the California Supreme Court repudiated the rule followed by the trial court here that the existence of two reasonable interpretations constitutes an ambiguity that automatically must be resolved in favor of the insured.   The court explained that an additional step is required:  “If there is ambiguity, ․ it is resolved by interpreting the ambiguous provisions in the sense the promisor (i.e., the insurer) believed the promisee [i.e., the insured] understood them at the time of formation.  (Civ.Code, § 1649.)”   (Id. at p. 822, 274 Cal.Rptr. 820, 799 P.2d 1253.)

Two years later, the Supreme Court applied the AIU analysis in Bank of the West v. Superior Court, supra.   In that case, the bank's insurer refused to reimburse the bank for sums it expended in settling a consumer class action that alleged the bank's automobile insurance financing program violated a number of federal and state statutes, including the California Unfair Business Practices Act (Bus. & Prof.Code, § 17203).   The insurer had issued the bank a broad form comprehensive general liability (CGL) policy, which included “advertising injury” coverage by endorsement.   Under the policy, the insurer was obligated to “ ‘pay on behalf of the insured ․ all sums which the insured shall become legally obligated to pay as damages because of ․ advertising injury,’ ” which were defined as “ ‘injury arising out of an offense committed during the policy period occurring in the course of the named insured's advertising activities, if such injury arises out of [inter alia] unfair competition․’ ”  (2 Cal.4th at p. 1262, 10 Cal.Rptr.2d 538, 833 P.2d 545, emphasis omitted.)

The insurer filed a declaratory relief action against the bank, and the bank cross-complained for breach of the insurance contract.   The trial court granted summary adjudication in favor of the insurer, finding the policies “ ‘do not cover claims for equitable or restitutionary relief such as provided for in Business and Professions Code Section 17203․’ ”  (Bank of the West v. Superior Court 2 Cal.4th at p. 1261, 10 Cal.Rptr.2d 538, 833 P.2d 545.)   The bank petitioned the Court of Appeal for a writ of mandate on the ground the term “unfair competition” was ambiguous and could refer either to common law claims or to conduct prohibited by the Unfair Business Practices Act.   The Court of Appeal resolved the ambiguity against the insurer and vacated the trial court's order.

The Supreme Court reversed the Court of Appeal, finding that unfair competition does not include claims arising under the Unfair Business Practices Act, as that act provides its own remedies.   Pertinent to the resolution of the instant writ petition, the court embarked on an analysis of the allegedly ambiguous policy language by applying the rules of interpretation set forth in AIU Ins. Co. v. Superior Court, supra, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253.

The court stated, “Because the CGL policy does not define ‘unfair competition,’ that term, according to the Bank, is ambiguous and must be construed against the insurer.  [Citation.]  [¶] The Bank has invoked this rule of construction too early in the interpretive process.   While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.  [Citation.]   The fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties.  (Civ.Code, § 1636.)   If contractual language is clear and explicit, it governs.  (Civ.Code, § 1638.)   On the other hand, ‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.’  [Citation.]   This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer, but, rather, ‘the objectively reasonable expectations of the insured.’  [Citation.]   Only if this rule does not resolve the ambiguity do we then resolve it against the insurer.  [Citation.]  [¶] In summary, a court that is faced with an argument for coverage based on assertedly ambiguous policy language must first attempt to determine whether coverage is consistent with the insured's objectively reasonable expectations.   In so doing, the court must interpret the language in context, with regard to its intended function in the policy.  [Citation.]   This is because ‘language in a contract must be construed in the context of that instrument as a whole, and in the circumstances of that case, and cannot be found to be ambiguous in the abstract.’  [Citation.]”  (Bank of the West v. Superior Court, supra, 2 Cal.4th at pp. 1264–1265, 10 Cal.Rptr.2d 538, 833 P.2d 545;  some emphasis in original, other emphasis added.)

In 1993, the Supreme Court again applied the rules of contract interpretation set forth in AIU, this time to resolve an alleged ambiguity in a legal malpractice insurance policy.  (Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co., supra, 5 Cal.4th 854, 21 Cal.Rptr.2d 691, 855 P.2d 1263.)   The policy contained a provision limiting coverage to a maximum of $250,000 “ ‘for each claim’ ” and also specified that two or more claims arising out of a single act or series of “related” acts were to be treated as a single claim.   The word “related,” however, was not defined.   In Bay Cities Paving & Grading, Inc., the client, a general contractor, had sued his attorney for two omissions the attorney had made in connection with a single debt collection matter.  (Id., at p. 857, 21 Cal.Rptr.2d 691, 855 P.2d 1263.)

In holding that the attorney's two omissions constituted a single claim, the court reaffirmed three basic principles of contract interpretation.   First, the Court rejected the rule that the absence of a policy definition “by itself ” rendered a term ambiguous.  (Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co., supra, 5 Cal.4th at p. 866, 21 Cal.Rptr.2d 691, 855 P.2d 1263;  emphasis in original.)   Second, the court reiterated that, except in those situations where policy language is “ ‘ “used by the parties in a technical sense or [has] a special meaning [ ] given to [it] by usage” [citation],’ ” it is “ ‘[t]he “clear and explicit” meaning of these provisions, interpreted in their “ordinary and popular sense,” [that] controls judicial interpretation.’ ”  (Id., at p. 867, 21 Cal.Rptr.2d 691, 855 P.2d 1263;  emphasis added.)   Hence, “reliance on common understanding of language is bedrock.”  (Ibid.)  Finally, the court repeated its admonition in Bank of the West that “ ‘[L]anguage in a contract must be construed in the context of that instrument as a whole, and in the circumstance of that case, and cannot be found to be ambiguous in the abstract.’ ”  (Ibid., citing Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265, 10 Cal.Rptr.2d 538, 833 P.2d 545;  emphasis in original.)   The proper question, the court explained, “is whether the word is ambiguous in the context of this policy and the circumstances of this case.”  (Id. 5 Cal.4th at p. 868, 21 Cal.Rptr.2d 691, 855 P.2d 1263.)   Applying those principles of contract interpretation to the language in the legal malpractice policy, the court determined that the contractor's construction of the term “related” was not reasonable “as used in this policy and in these circumstances․”  (Id., at p. 873, 21 Cal.Rptr.2d 691, 855 P.2d 1263.)  “ ‘An insurance policy provision is ambiguous,’ ” the court explained, only “ ‘when it is capable of two or more constructions both of which are reasonable.’ ”  (Id., at p. 867, 21 Cal.Rptr.2d 691, 855 P.2d 1263, citing Suarez v. Life Ins. Co. of North America (1988) 206 Cal.App.3d 1396, 1402, 254 Cal.Rptr. 377;  emphasis added by Supreme Court.)

 We now apply the AIU/Bank of the West/Bay Cities Paving & Grading, Inc. analysis to the policy language at issue here.   Our task is to discern whether a reasonable interpretation can be given to the language that is consistent with applicable rules of contract construction.   Such rules include construing the document as a whole, and interpreting the language in context in order to protect the reasonable expectations of the insured.

The pertinent deductible provision in the earthquake endorsement begins:  “We will pay only that part of the loss which exceeds 10% of the amount of insurance that applies to the destroyed or damaged property. ”  (Emphasis added, highlighting the language the trial court found to be ambiguous.)   To help us determine what amount of insurance “ ‘the promisor believed at the time of making it, that the promisee understood’ ” (Bank of the West v. Superior Court, supra, 2 Cal.4th at pp. 1264–1265, 10 Cal.Rptr.2d 538, 833 P.2d 545) would apply to the destroyed or damaged property, a logical place to look is the very next sentence in the deductible clause.

That sentence refers us to Section I of the basic homeowner's policy:  “This deductible(s) will apply separately to loss under the various Section I Property Coverages.”   The various Section I property coverages are, as noted previously:  (1) for injury to the dwelling, $340,300 (coverage A), (2) for injury to other structures, $34,030 (coverage B), and for injury to personal property, $170,150, with certain additional limitations on specified types of personal property (coverage C).   This sentence tells us that if the damaged or destroyed property is in more than one coverage category, then more than one deductible could apply.   For example, if valuable art work (personal property) fell off a wall during an earthquake and was destroyed at the same time a chimney (dwelling) crumbled and an outdoor storage shed (other structure) collapsed, all three deductibles would apply.

The next two sentences read:  “If the limit of liability on certain property is increased by endorsement, and that property is destroyed or damaged, the total limit of liability will be used in calculating and applying the deductible.  [¶] However, the total deductible amount will not be less than $250.”   The Terrys argue that this sentence indicates that American States knew how to use the term “limit of liability” when it meant limit of liability, and that, accordingly, something else must have been meant when it used the term “amount of insurance” in the first sentence of this paragraph.   We disagree.

These two sentences merely provide an insured with extra protection if he or she has purchased higher limits of liability than those set forth in Section I.   For example, if an insured had a valuable stamp collection worth considerably more than the $1,000 special limit of liability available under coverage C, the insured could, for an additional premium, increase the limit of liability by endorsement.   In that case, if the stamp collection were destroyed or damaged in an earthquake, the Section I limit of liability would not apply;  instead, the higher limit of liability set forth in the endorsement would be used, but in no case would the deductible be less than $250.

Thus, when one analyzes the phrase, “the amount of insurance that applies to the destroyed or damaged property,” in the context of the entire deductible paragraph, it seems clear and unambiguous that the phrase refers to the Section I limits of liability unless higher coverage has been obtained by endorsement.

This conclusion is buttressed by examining the phrase “amount of insurance” in the context of the entire policy.   The same phrase is used in the seventh paragraph of “SECTION I CONDITIONS,” which provides:  “7. Other insurance.   If a loss covered by this policy is also covered by other insurance, we will pay only the proportion of the loss that the limit of liability that applies under this policy bears to the total amount of insurance covering the loss.”  (Emphasis added.)   Here the term “total amount of insurance” clearly means the sum of the limits of liability of all insurance policies covering the loss.   For example, if a property was insured by American States for $500,000 and by insurer X for $250,000, then, ignoring deductibles, American States would pay $2 for every dollar insurer X had to pay.  (Cf. Apparel City Sewing Machine Co. v. Transamerica Ins. Group (1982) 129 Cal.App.3d 400, 408–409, 181 Cal.Rptr. 64.)   If the term “amount of insurance” meant, as the Terrys' urge, the amount of the loss or damage they suffered, this “other insurance” provision would be incomprehensible.

Civil Code section 1641 instructs that “[t]he whole of a contract is to be taken together, so as to give effect to every part, if reasonably practicable, each clause helping to interpret the other.”   Applying this rule of contract interpretation to the American States policy, it is evident that the term “amount of insurance” must mean “limit of liability” if it is to be construed consistently throughout the policy.

 While insurance contracts may have special features, as the Supreme Court noted in Bank of the West, they are still contracts to which ordinary rules of contractual interpretation apply.   By applying these ordinary rules of contractual interpretation, one “give[s] effect to the mutual intention of the parties.  (Civ.Code, § 1636.)”  (Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.)   Where the contractual language of the policy is clear and explicit, the Supreme Court observed, it will govern.  (Ibid., citing Civ.Code, § 1638.)  “On the other hand, ‘[i]f the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.’  [Citation.]   This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer, but, rather, ‘the objectively reasonable expectations of the insured.’  [Citation.]”  (Id. at pp. 1264–1265, 10 Cal.Rptr.2d 538, 833 P.2d 545.)   Surely, it would violate objectively reasonable contractual expectations for a promisor insurer, whose underwriters and actuaries calculate risks and set premiums based on potential exposure, to believe that a promisee insured would expect coverage for 90 percent of every loss, no matter how de minimis, subject only to the $250 minimum deductible.

Two arguments of the Terrys deserve mention.   First, they contend that their interpretation of the phrase “amount of insurance that applies to the destroyed or damaged property” is the only logical one because “petitioner's interpretation would have policy holders paying more and getting less.”  (Capitalization omitted.)   They posit the hypothetical of one insured purchasing a policy with $200,000 policy limits and another purchasing a $400,000 policy.   If each suffered a $100,000 loss, the insured with the lower limit, whose deductible would be $20,000, would receive $20,000 more than the insured with the higher limit, whose deductible would be $40,000.   While this indeed may be the case where the damage is slight, it is a very different story where the damage is catastrophic.   If a $400,000 property were totally destroyed, the insured who purchased the policy with the higher limits would receive twice the proceeds that an insured who had only a $200,000 policy would receive.   The higher deductible is the price that must be paid for substantially greater coverage.

The Terrys also assert that “the minimum deductible limit of $250 is meaningless under petitioner's interpretation of the policy language.”  (Capitalization omitted.)   They point out that “[u]nder petitioner's interpretation, ․ the deductible amount is a constant, 10% of the policy limit,” and ask, “When was the last time Petitioner insured a California residence for less than $2,500?”   However, the $250 minimum is entirely consistent with the property coverages under Section I of the homeowner's policy.   For example, under coverage C, there is a $1,000 special limit of liability “on watercraft, including their trailers, furnishings, equipment and outboard motors.”   If a garage ceiling collapsed during an earthquake, landing on a boat and totally destroying it, the $250 minimum deductible would apply rather than 10 percent of the policy limits, which would be $100.

In summary, the language of the deductible provision in the policy, when analyzed in accordance with the ordinary rules of contractual interpretation, is not ambiguous.   The only reasonable interpretation of the phrase “the amount of insurance that applies to the destroyed or damaged property” is the amount of the limit of liability for the particular type of property (i.e., dwelling, other structure, or personal property) that was destroyed or damaged.

DISPOSITION

Let a writ of mandate issue as prayed, directing respondent superior court to vacate its order granting summary adjudication in favor of real parties in interest and denying summary judgment to petitioner and to make a new and different order entering summary judgment in favor of petitioner as prayed.   As prevailing party, petitioner shall have costs in this proceeding.

FOOTNOTES

1.   Under the Terrys' interpretation, they were entitled to $19,726.62 more than the $139,632.58 they had already been paid.

COTTLE, Presiding Justice.

PREMO, and MIHARA, JJ., concur.