PREMIER INSURANCE COMPANY v. MacDONALD KRIEGER BOWYER INC (1985)

In this action for declaratory relief, reformation and indemnification, plaintiff Premier Insurance Company (Premier) seeks validation, or in the alternative, modification of a limitation on coverage contained in a policy of automobile liability insurance issued by it to its insured Sierra Leasing Company (Sierra) in the amount of $300,000.   Defendants are MacDonald Kreiger & Bower, Inc., et al. (MKB), who leased an automobile from Sierra and who, under circumstances which we will describe, infra, claim to be covered by the above mentioned policy.

The trial court sustained, without leave to amend, MKB's demurrer to Premier's complaint.   A judgment of dismissal was thereupon entered.   Premier appealed.   We reverse.

Simply stated, the original policy issued by Premier to Sierra, and renewed from year to year, contained a provision which excluded from liability coverage any of Sierra's lessees who were covered by other valid and collectible insurance equal to or exceeding the requirements of the Financial Responsibility Law.¹  Sierra's leasing agreements required the lessee to provide such minimum coverage.   If for some reason a lessee had no such coverage, Premier's policy would provide that minimum coverage.

In the case at bench MKB in fact had its own coverage in the amount of $100,000 under a policy written by Farmers Insurance.   Hence it is clear that MKB was not an insured under the terms of the policy and did not rely on or expect coverage by Premier when it executed the leasing agreement.

In 1978, an agent of MKB, while negligently operating the car leased from Sierra, struck and injured one Stanley Handleman.   The extent of Handleman's injuries were such that MKB's liability apparently exceeded the $100,000 limits of the Farmers policy.

When Handleman offered to settle his claim against MKB for $350,000, Farmers offered up its $100,000 policy limits and MKB made demand on Premier to supply the difference—a demand which, if successful, would provide a clear windfall to MKB.

Premier, in order to avoid the possibility, of being charged with bad faith in refusing to settle, effected a settlement with Handleman for $140,000 which, when added to Farmers $100,000, afforded Handleman an aggregate of $240,000.   Handleman then dismissed his action.

In connection with the settlement, MKB and Premier executed a non-waiver and settlement agreement, permitting Premier to test its position that its policy provided no coverage to MKB.   This litigation ensued.

 Since a demurrer admits all material facts that are properly pleaded, the court in ruling on a demurrer must accept the allegations of the complaint and attached exhibits as true.  (Loehr v. Ventura County Community College Dist. (1983) 147 Cal.App.3d 1071, 1076, 195 Cal.Rptr. 576;  Baldwin v. Zoradi (1981) 123 Cal.App.3d 275, 279, 176 Cal.Rptr. 809.)   Unless clear error or abuse of discretion is demonstrated, however, the judgment of dismissal must be affirmed.  (Owens v. Foundation for Ocean Research (1980) 107 Cal.App.3d 179, 182, 165 Cal.Rptr. 571.)   The fundamental question for this court is whether any cause of action is framed by the facts alleged in the complaint.  (Wilson v. Household Finance Corp. (1982) 131 Cal.App.3d 649, 655, 182 Cal.Rptr. 590.)

The issues presented are legal in nature and their resolution does not depend on any factual determination.   Those issues are whether the controlling law at the relevant times permitted Premier to limit its coverage as it attempted to do and if not whether the policy can now be retroactively reformed to provide the minimum coverage that would have been required.

The development of the law governing the liability and insurance coverage of automobile owners who permit their vehicles to be driven by others has produced some anomalies.

In order to provide a source of recovery to persons injured by negligent automobile drivers, the Legislature early decreed that if the automobile was being driven with permission of the owner, the owner would incur liability to the injured third party solely by virtue of his ownership of the vehicle.   That liability, however, was limited to $15,000 per person and $30,000 per occurrence.  (Veh.Code, §§ 17150 and 17151.)   Presumptively the owner of a vehicle could have insured himself against that liability separately from insuring himself against liability incurred as a driver of a vehicle.

When later in 1963, the Legislature enacted Insurance Code section 11580.1 to require that all policies of automobile liability insurance provide coverage to the permissive user, as an additional insured under the policy, to the same extent as the named insured, the owner of a vehicle was in effect required to insure all permissive users to the same extent that he insured himself as a driver even though his liability as an owner was still limited to $15,000 and $30,000.

Thus a party injured by the negligent driver of a borrowed automobile could recover only $15,000 from the owner of a vehicle who carried no insurance, but could recover from an insured owner the limits of the policy covering the owner's own driving.

In attempting to force all drivers to insure themselves against liability, the Legislature enacted the Financial Responsibility Law which threatens license suspension or revocation for the failure to be able to respond in damages resulting from the driving of an automobile.   As noted, however, that law requires only $15,000 and $30,000 coverage.

The Legislature, in the development of this scheme, soon recognized that the permissive user insurance requirement would be extremely onerous to business enterprises that involved the ownership and control of large numbers of vehicles and the driving of those vehicles by a wide variety of persons.

Thus Insurance Code section 11580.1(d)(2) was enacted in 1970 to provide that where the named insured was engaged in the business of selling, repairing, delivery, etc. of automobiles, a policy of automobile liability insurance could exclude from coverage the permissive user who had valid collectible insurance in the minimum amounts required by the Financial Responsibility Law.

That latter provision was adopted at a time when the long term leasing of automobiles was not as prevelant as it is today.   It seems clear to us, however, that the same considerations which led to the exclusion for sellers of automobiles would apply with equal force to those in the business of leasing automobiles and that the spirit and purpose of the law would have been well served by permitting insurers of leasing companies to avail themselves of the statutory exclusion.

Be that as it may, in Metz v. Universal Underwriters Ins. Co. (1973) 10 Cal.3d 45, 109 Cal.Rptr. 698, 513 P.2d 922, the Supreme Court held that a policy provision similar to the one at issue here could not exclude coverage for the driver of an automobile leased from the name insured.   The court took the position that since leasing was not one of the activities listed in the statute, the exclusion was invalid.   The court also rejected the argument that the terms of the lease were equivalent to a conditional sales contract.

In the case of Powell v. Premier Ins. Co. (1981) 118 Cal.App.3d 336, 173 Cal.Rptr. 383, the Court of Appeal for the Fourth District, followed Metz and rejected the argument of Premier that its named insured, in that case Cenval Leasing, was engaged in the selling of cars in addition to its leasing activities and that the policy exclusion identical to the one here was enforceable.   The Powell court held that subdivision (d)(2) was only applicable in the case of businesses “primarily” engaged in selling.

Close on the heels of the Powell decision, the Legislature amended subdivision (d)(2) to include persons engaged in the business of long term leasing of automobiles.   This suggests to us that the Legislature intended that result all along.   We are, however, compelled by the decision in Metz to hold that Premier's policy exclusion was not authorized by subdivision (d)(2) at the time of issuing the policy in question.   That result would be unaffected by the extent, if any, to which Sierra was also engaged in selling cars.

In 1973, the Legislature had also moved to correct the earlier noted anomaly by amending Insurance Code section 11580.1 to provide that henceforth liability policies need provide coverage for permissive users only in the amounts required by the Financial Responsibility Law, i.e., $15,000–$30,000 regardless of the amount of coverage provided to the named insured.   Thus when Premier issued its policy to Sierra in 1978, it could have limited coverage for permissive users to the statutory minimum.

In National Indemnity Co. v. Manley (1975) 53 Cal.App.3d 126, 125 Cal.Rptr. 513, decided after the 1973 amendment, the Court of Appeal in a case where an insurer had attempted, invalidly, to exclude permissive users from any coverage whatsoever, and failed to provide for a valid differentiation in coverage as permitted by the amendment, that the insurer was required to provide the same coverage for the permissive user as provided to the named insured.   There the insured and insurer had not attempted to reform the policy, and the court refused to reform it for them.

We view the approach of National Indemnity v. Manley to be Draconian and unnecessarily punitive.   In Manley, as well as here, the parties to the contract sought total exclusion of permissive coverage believing it to be lawfully achievable.   It seems clear that had the parties known that total exclusion was not possible they would have opted for the minimum coverage.

After the decision in Powell v. Premier, supra, Premier and Sierra, by mutual agreement, modified the contract of insurance retroactively to its inception to provide that permissive users, i.e., the lessees of Sierra would be covered under the Premier policy up to the $15,000 and $30,000 minimum whether or not there was other collectible insurance available.

 It is well settled that the parties to a contract by mutual agreement, express or implied, may modify its terms, and the contract so modified governs the executory duties of the parties thereafter.  (Civ.Code, §§ 1697–1698;  1 Witkin, Summary of Cal.Law (8th ed. 1973) Contracts, §§ 715–721, pp. 600–605.)   Modification of a contract of insurance is governed by the same general rules which are applicable to contracts generally, and the same elements essential to the validity of the original contract are essential to a modification, including (1) parties capable of contracting, (2) their consent, (3) a lawful object, and (4) sufficient cause or consideration.  (American B.M. Co. v. Indemnity Ins. Co. (1932) 214 Cal. 608, 615, 7 P.2d 305.)

In our case, there is no doubt but that Premier and Sierra, both California corporations, were capable of entering into a valid agreement.   The modification was both consensual and had a lawful object, to wit, to afford coverage to omnibus insureds in compliance with the original intentions of the contracting parties.   Moreover, the modification was undertaken to conform the policy to the statutory and decisional law of this state.   In effect, the modified policy did nothing more than correct an error which would have given omnibus insureds significantly more than they were entitled to under law.   As between Premier and Sierra the modification had the legal effect of resolving a potential dispute by eliminating the possibility of an action for reformation by Premier against Sierra.   As such, there existed sufficient consideration for the mutually agreed upon change in the policy's coverage.

MKB argues, however, that the strong public policy underlying the omnibus clause of section 11580.1 prohibits the reformation or modification of an automobile insurance policy after an accident has occurred in order to limit coverage as to the permissive users of the named insured's vehicle.   There is no merit to this contention.

As previously noted, the public policy of this state allows the insurer and named insured to provide in the insurance policy that permissive users will be provided only with the minimum statutory coverage.   The mutual modification occurring here was in complete accord with this policy.   At no time did Premier or Sierra contemplate providing coverage for permissive users in excess of the statutory minimums.   The fact that both parties may have originally intended to exclude permissive users from coverage under the policy is legally irrelevant.   This comports with the established rule that an insurance policy may be reformed or modified to limit or exclude coverage if such was the intention of the parties, even where the rights of third party claimants who are not parties to the insurance contract are adversely affected.  (Truck Ins. Exch. v. Wilshire Ins. Co. (1970) 8 Cal.App.3d 553, 559, 87 Cal.Rptr. 604;  Utica Mut. Ins. Co. v. Monarch Ins. Co. (1967) 250 Cal.App.2d 538, 58 Cal.Rptr. 639.)

As earlier noted, neither MKB nor Handleman, prior to the accident, relied on any coverage from Premier.   Sierra's liability to Handleman as owner of the vehicle, was limited by statute to $15,000.   If MKB had no insurance of its own, Sierra's policy would have provided only $15,000 to Handleman.   MKB, although in compliance with the Financial Responsibility Law, was simply underinsured.   The settlement which was effected with the assistance of Premier served MKB beneficially in that it limited the latter's exposure for liability in excess of its policy limits.   We see no reason to reward MKB further for being underinsured by giving it more than the minimum coverage required by law.

 Based upon the foregoing, we conclude, as a matter of law, that the mutual modification of Sierra's policy was valid and that Premier's liability under the permissive user coverage was limited to $15,000.   We also must reject MKB's contention that the bringing of Premier's action was barred by the statute of limitations.

As we see it, the nature of the right upon which Premier instituted this action against MKB is contractual in nature, arising out of the liability insurance policy issued to Sierra.  Code of Civil Procedure section 337, subdivision (1), establishing a four year statute of limitations for actions upon a contract, obligation or liability founded upon an instrument in writing, is thus applicable here.

 The statute of limitations on a cause of action for declaratory relief commences running, of course, when the controversy develops.  (Phillis v. City of Santa Barbara (1964) 229 Cal.App.2d 45, 53, 40 Cal.Rptr. 27.)

 In the case at bench, the dispute between MKB and Premier as to Premier's rights, duties, and obligations under the policy issued to Sierra arose when MKB made demand upon Premier to pay $140,000 as part of the settlement agreement negotiated in the Handelman action.   Until such demand was made there existed no controversy between the parties that could give rise to a suit for declaratory relief and indemnification.   Although the record is unclear as to the exact date the demand was made, it appears that MKB first approached Premier after a tentative settlement agreement was reached in December 1981.   Premier therefore had four years from that date to initiate its suit against MKB.   The first complaint was filed in February 1983, well within the four year statute of limitations.   The action therefore was not time barred.

The judgment of dismissal is reversed and the cause is remanded to the trial court with directions to enter an order overruling the demurrer.

FOOTNOTES

1.   The financial responsibility law is codified in Vehicle Code sections 16000–16560.   Subdivision (a) of section 16056 provides in pertinent part:  “No policy ․ is subject, if the accident has resulted in bodily injury or death to a limit, exclusive of interest and costs, of not less than fifteen thousand dollars ($15,000) because of bodily injury to or death of one person in any one accident and ․ to a limit of not less than thirty thousand dollars ($30,000) because of bodily injury to or death of two or more persons in any one accident․”

COMPTON, Associate Justice.

ROTH, P.J., and GATES, J., concur.