STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY v. LEE (1981)

This appeal involves the interpretation of a form policy of automobile insurance issued by plaintiff State Farm Mutual Insurance Company, and presents the following issue:  where a clause in an automobile insurance policy effectively (i.e., legally) excludes liability coverage to a husband when his wife seeks to recover personal injury damages directly from him, does it also exclude coverage to the husband where a party who has been named by the wife as a defendant seeks comparative indemnity from the husband by way of a cross-complaint.   In the court below State Farm sought a judicial determination that it owed no duty to defend or indemnify its insured, Gary Lee, in an action brought against Lee by Nissan Motor Corporation (Nissan).   The trial court found against State Farm.   It appeals.   As explained below, we affirm.

I

The stipulated set of facts, recounted briefly, demonstrate that on May 29, 1978, Gary and Lois Lee, husband and wife, were injured in an automobile accident when their 1978 Datsun automobile, driven by Gary, left the roadway and struck a tree.   Both Gary and Lois filed suit against, among others, Nissan, based on theories of breach of warranty, negligence and products liability.   In turn, Nissan cross-complained against Gary, seeking indemnity from him for any sums which Nissan might have to pay to Lois.¹  State Farm, the Lees' insurance carrier, then filed the instant action for declaratory relief.   The insurance policy in question names Gary and Lois as named insureds.   Importantly, the policy excludes liability for bodily injury to a named insured;  thus, were Lois suing Gary for injuries suffered in the accident, State Farm would have no obligation to either defend or indemnify Gary in the action.

The basis of this action for declaratory relief is State Farm's claim that there is no difference in principle between the situation where, as here, wife sues husband directly and the situation where cross-claimants are indemnified by husband for damages cross-claimants owe to wife.   The trial court disagreed;  State Farm, it ruled, has a duty to both defend and indemnify Gary in the related cross-complaint.

II

We set forth the relevant insurance policy provisions contained within the policy.   Section I, entitled “Liability and Medical Payments Insuring Agreements,” provides State Farm will “pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of (A) bodily injury sustained by other persons ․ caused by accident arising out of the ownership, maintenance or use, ․ of the owned motor vehicle ․ and to defend ․ any suit against the insured alleging such bodily injury ․ and seeking damages which are payable hereunder ․”  (Emphasis in original.)   In turn, the policy lists five classes of person who are insured for purposes of section I, and includes therein “the named insured” and “if the named insured is a person or persons, also includes the spouse(s) ․”  (Emphasis in original.)   Finally, section I contains a list of exclusions, including the so-called “family exclusion:”  “THIS INSURANCE DOES NOT APPLY ․ [¶] ․ TO BODILY INJURY TO:  (1) ANY NAMED INSURED, (2) ANY OTHER INSURED UNDER THE POLICY, OR (3) ANY MEMBER OF THE FAMILY OF ANY NAMED INSURED OR OTHER INSURED PERSONS RESIDING IN THE SAME HOUSEHOLD WITH SUCH NAMED INSURED OR OTHER INSURED : ․”  (Capitals and emphasis in original.)

The family exclusion clause is authorized under Insurance Code section 11580.1, subdivision (c), if it excludes only persons who are insured under the policy.  (California State Auto. Assn. Inter-Ins. Bureau v. Warwick (1976) 17 Cal.3d 190, 193–194, 130 Cal.Rptr. 520, 550 P.2d 1056;  Phelps v. Allstate Ins. Co. (1980) 106 Cal.App.3d 752, 165 Cal.Rptr. 263.)   The California Supreme Court has upheld such a clause against attacks based upon grounds of both public policy and equal protection, holding it to be rationally related to its purpose of preventing suspect intra-family actions which may not be truly adversary and over which the insurer has little or no control.  (Farmers Ins. Exchange v. Cocking (1981) 29 Cal.3d 383, 387–389, 173 Cal.Rptr. 846, 628 P.2d 1.) ²

Lois, however, has not brought suit against Gary.   Instead, Lois had limited her legal action to one solely against Nissan, and it is Nissan who has cross-complained against Gary, seeking indemnity for any sums it might have to pay for injuries suffered by Lois.   State Farm contends that to have to defend and indemnify Gary in the cross-complaint asserted by Nissan would nonetheless place State Farm in the position of paying for Lois' injuries.   State Farm thus asserts “Nissan should not be permitted to do indirectly that which cannot be done directly, i.e., to receive the benefit of insurance coverage from husband to indemnify against the wife's injuries.”

This argument misses its mark.   The issue is not whether Nissan may look to the State Farm for indemnity, but whether Gary could reasonably have expected to be covered under the policy for any liability incurred to a third party who is not excluded under the policy.  (See California State Auto. Assn. Inter-Ins. Bureau v. Warwick, supra, 17 Cal.3d at p. 194, 130 Cal.Rptr. 520, 550 P.2d 1056.)

 State Farm's exclusionary clause—which excludes from coverage an insured's bodily injury liability to any person insured under the policy—fails to meet the exacting standards of clarity required in insurance contracts.   (See Harris v. Glen Falls Ins. Co. (1972) 6 Cal.3d 699, 701, 100 Cal.Rptr. 133, 493 P.2d 861;  Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 878–883, 27 Cal.Rptr. 172, 377 P.2d 284.)   Indeed, this provision is subject to at least two different interpretations.   First, it may be confined to those actions illustrated by Cocking, supra—i.e., where a named insured attempts to sue another insured under the policy.   If so, then it would not preclude coverage where the action is brought by a third party.   In turn, the provision could be construed to mean that there is no duty to defend or indemnify an insured whenever the ultimate benefits of such indemnification, whether directly or indirectly, accrue to another person insured under the same policy.   In order to resolve the issue at hand, however, this court is not required to determine the “correct” interpretation of the exclusion in question.  (See State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 202, 110 Cal.Rptr. 1, 514 P.2d 953.)   The law is clear that any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer, and “[i]f semantically permissible, the [insurance] contract will be given such construction as will fairly achieve its object of securing indemnity to the insured for losses to which the insurance relates.”  (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 437, 296 P.2d 801.)   We must thus affirm the trial court's finding of coverage since there is a reasonable interpretation under which coverage would be permitted in this case.

 State Farm has failed expressly and specifically to exclude liability coverage to a husband where liability arises indirectly to a third party seeking indemnity by way of a cross-complaint.³  “An exclusionary clause must be conspicuous, plain and clear [citation] and must be construed strictly against the insurer and liberally in favor of the insured [citations].”  (Crane v. State Farm Fire & Cas. Co. (1971) 5 Cal.3d 112, 115–116, 95 Cal.Rptr. 513, 485 P.2d 1129.)

 While the policy at issue is specific concerning other exclusions, it fails to make any mention of liability exclusion arising out of a cross-complaint by a third party.   Thus, even if a “third-party” exclusion may be construed as a logical extension of the “family exclusion” as expressed in the policy, it would be inequitable to enforce such exclusion against Gary where he had not been informed of this intended exclusion and where he was thus precluded from bargaining for the same.

More importantly, because Lois has not brought suit against Gary, there can be no claim that State Farm is being required to defend its insured (Gary) in an action brought by another person insured under the policy.   Rather, it is a third party, one which is not an insured under the policy, which seeks indemnity, and, from Gary's point of view, the third party is one against whom Gary may reasonably expect and claim protection.  (Cf. State Farm Mut. Auto. Ins. Co. v. Jacober, supra, 10 Cal.3d at p. 196, 110 Cal.Rptr. 1, 514 P.2d 953.)

We conclude State Farm has failed expressly and unambiguously to exclude liability coverage so as to permit it to deny its duties of defense and indemnification under the facts of this case.

The judgment is affirmed.

FOOTNOTES

1.   The cross-complaint is authorized under the principles delineated in American Motorcycle Assn. v. Superior Court (1978) 20 Cal.3d 578, 591–606, 146 Cal.Rptr. 182, 578 P.2d 899.   Absent the cross-complaint we would not face the issue at bench.

2.   If Lois had been excluded by virtue of clause (3) of the State Farm policy she would be able to claim the invalidity of the clause;  it contains the same defect found invalid by this court in Phelps v. Allstate Ins. Co., supra, 106 Cal.App.3d 752, 165 Cal.Rptr. 263, for it excludes the relatives of insureds (e.g., a permissive users case) who are not themselves insureds.   However, Lois is clearly an insured person pursuant to clause (2), as a spouse of the named insured, a clause which is severable from the invalid clause (3).   Thus, there is no question that if Lois had brought an action against Gary for injuries she suffered in the accident, State Farm would have no obligation to defend or indemnify Gary in that action.  (Id., 29 Cal.3d at pp. 386–390, 173 Cal.Rptr. 846, 628 P.2d 1.)

3.   Such an exclusion, if permitted by statute, need be narrowly and carefully drawn.   Under the stipulated facts of the case at bar it is possible that Gary may be found not liable (thus no indemnity);  if found partially liable, and Nissan also partially liable, presumably the indemnity would be partial.   Such are the complexities visited on litigants by American Motorcycle.It is not clear to us that such an exclusion is permitted by statute.   Exclusions are permitted exclusively by Insurance Code section 11580.1, subdivision (c).  (Phelps v. Allstate Ins. Co., supra, 106 Cal.App.3d 752, 756, 165 Cal.Rptr. 263.)   We express no opinion as to whether such an exclusion is permitted.   It may be that the contract and statutory provisions need be updated to take into account the relationships created by American Motorcycle.

REYNOSO, Acting Presiding Justice.

BLEASE, J., concur.