AETNA CASUALTY AND SURETY COMPANY v. VELASCO (1987)

In this case an insurance company seeks a declaratory judgment it need not defend nor indemnify a store owner who is being sued for allegedly having served alcoholic beverages to a minor who then caused personal injuries and death.   The appeal turns entirely on a legal issue:  Is a “liquor liability exclusion” in the body of the insurance policy enough by itself to relieve the insurance company of its responsibilities under the policy?   We hold it is not where, as here, the insurance company's agents knew the insured sold alcoholic beverages and thus was exposed to a special risk of liability yet did not point out the existence of this exclusion to the insured in any way.   As a result, we reverse the summary judgment the trial court rendered in favor of the insurer and instruct the trial court instead to grant summary judgment in favor of the insured.

FACTS AND PROCEEDINGS BELOW

According to allegations in a complaint, on or about October 2, 1982, Ronald Edmondson bought some beer or wine at the Monte Vista Alta Dena Dairy.   Edmondson was eighteen at the time.   The Dairy is a “drive-in” convenience store and gasoline station owned by appellant Joe Velasco.   Edmondson allegedly drank the alcoholic beverage purchased at Velasco's store, became intoxicated, and drove his 1969 Datsun across the center line of a highway striking a motorcycle carrying two people.   The motorcycle operator, Roland Gray, suffered serious injuries and the rider, Kim Ahlf, died.

Gray and Ahlf's heir filed suit against Edmondson, the driver of the automobile which caused the injuries and death.   They also sued two stores on grounds these establishments sold alcoholic beverages to a minor which caused injury and did so in violation of Business and Professions Code section 25602.1.¹  One of these stores was Monte Vista Alta Dena Dairy.

When served with the complaint, appellant Velasco went next door to the office of Vinsa Insurance Associates.   This agency represents Aetna Casualty and Surety Company (“Aetna”) which carried the insurance on the dairy.   Velasco took the papers to Fred Stuart, the agent he had dealt with when he purchased the Dairy a few months earlier.   At the time, Stuart had assured him the policy fully protected him against any liability in the operation of the Dairy.   So Velasco had decided to continue the same policy the previous owners had taken out with Aetna.   Stuart accepted the complaint and forwarded it to Aetna, assuring Velasco he would be protected by the policy.

In February 1983, Aetna wrote Velasco it was handling his case under a full reservation of rights.   The letter recited Edmondson's cause of action against Velasco was based solely on his alleged sale of liquor to a minor and pointed out Aetna's policy contained a “liquor liability exclusion.”   The letter continued:  “We must advise you that coverage probably is not afforded due to this exclusion․  Please advise me if you have liquor liability coverage with any other insurance carrier.”

Aetna nevertheless continued to represent Velasco until November, 1983, when it filed a declaratory relief action.   In this lawsuit, the insurance company claimed it was not obligated to defend or to indemnify Velasco in the Gray v. Edmondson action because of certain language at page 11 of its standard 23 page “Business Owners Policy.”

“A. Exclusions:

“This insurance does not apply:

“․

“8. to bodily injury or property damage for which the insured or his indemnitee may be held liable, by reason of the selling, serving or giving of any alcoholic beverage;

“(a) in violation of any statute, ordinance or regulation,

“(b) to a minor.

“(c) to a person under the influence of alcohol, or

“(d) which causes or contributes to the intoxication of any person;  provided the named insured:

“(i) is a person or organization engaged in the business of manufacturing, distributing, selling or serving alcoholic beverages, or

“(ii) if not so engaged, is an owner or lessor of premises used for such purposes if liability is imposed by, or because of the violation of, any statute, or ordinance or regulation pertaining to the sale, gift, distribution or use of any alcoholic beverages;

but parts (b), (c), and (d) of this exclusion do not apply with respect to liability of the insured or his indemnitee as an owner or lessor described in (ii) above;”

In November 1985, Aetna moved for summary judgment and Velasco filed a counter motion for summary judgment.   The trial court heard these motions and granted Aetna's motion on February 2, 1986.   In doing so, the judge explained:  “This is a matter of law that whatever expectations [Velasco] had it was not reasonable as a matter of law in light of this very clear and unambiguous exclusion in the policy.”   Velasco filed a timely appeal from this summary judgment.

DISCUSSION

In this case we confront an issue this division had occasion to address once before—in Underwriters Ins. Co. v. Purdie (1983) 145 Cal.App.3d 57, 193 Cal.Rptr. 248.   That issue is whether an insurance company has a duty to point out important exclusions which eliminate protection which an insured could reasonably expect to be a part of his policy.   Last time our opinion discussed this question only in dictum.   Today we turn mere dictum into a firm holding which, in turn, requires reversal of the judgment in this appeal.

In Purdie, as in the instant case, the body of the policy contained a relatively unambiguous exclusion from coverage.   In that case it was a “firearm exclusion,” while here it is a “liquor liability exclusion.”   There as here the exclusion was buried in a lengthy form contract—26 printed pages in Purdie, 23 in this case.  (In the instant case, most pages of the insurance contract contain 700 to 1,100 printed words—the equivalent of three or four double-spaced typed pages each.   It would require the average reader at least two hours to read a document of this length and complexity with any measure of comprehension.)

In Purdie as in this case the insurance company argued the exclusion was effective, even if it disappointed the insured's reasonable expectations about coverage under the policy, because it was “conspicuous, plain and clear” to anyone who read the entire policy.   Moreover, in both cases to support this position the insurance companies relied heavily on the following language in Aetna Casualty & Surety Co. v. Richmond (1977) 76 Cal.App.3d 645, 143 Cal.Rptr. 75:  “ ‘It is a general rule that the receipt of a policy and its acceptance by the insured without an objection binds the insured as well as the insurer and he cannot thereafter complain that he did not read it or know its terms.   It is a duty of the insured to read his policy.’  (Taff v. Atlas Assur. Co. (1943) 58 Cal.App.2d 696, 703 [137 P.2d 483].)”  However, in Purdie, Justice Thompson writing for a unanimous panel of this division expressly refused to accept this language as an accurate statement of the current law of California.  “We can only observe that the Richmond court's reliance on a 1943 authority is questionable, and not in harmony with today's law governing exclusions in insurance contracts.  (See e.g., Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 807–808 [180 Cal.Rptr. 628, 640 P.2d 764].)”  (Underwriters Ins. Co. v. Purdie, supra, 145 Cal.App.3d 57, 65, 193 Cal.Rptr. 248.)

Justice Thompson instead turned to a line of California Supreme Court cases which emphasizes the “reasonable expectations” of the insured and found these decisions impose a duty on insurance companies to call to the insured's attention any exclusions which might eliminate coverage the insured could reasonably expect to be part of his policy.  “[I]n Logan v. John Hancock Mut. Life Ins. Co. (1974) 41 Cal.App.3d 988 [116 Cal.Rptr. 528] ․ the court made a review of three leading cases, namely, Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862 [27 Cal.Rptr. 172, 377 P.2d 284] ․;  Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263 [54 Cal.Rptr. 104, 419 P.2d 168] ․, and Young v. Metropolitan Life Ins. Co. (1969) 272 Cal.App.2d 453 [77 Cal.Rptr. 382]․  In applying the principles of the Steven, Gray and Young cases to an accidental death policy, the court said:  ‘We glean from Steven and its progeny a general principle of public policy․:  In the case of standardized insurance contracts, exceptions and limitations on coverage that the insured could reasonably expect, must be called to his attention, clearly and plainly, before the exclusions will be interpreted to relieve the insurer of liability or performance.’  (Id., 41 Cal.App.3d at p. 995 [116 Cal.Rptr. 528];  italics in original.)”  (145 Cal.App.3d at 65, 193 Cal.Rptr. 248.)

Where this case and Purdie diverge—and the reason the above language endorsing imposition of this duty on insurance companies is only dictum in the Purdie opinion—is in the behavior of the insurance companies' agents in the two cases.   In Purdie, unlike the instant case, the agent expressly warned the insured about the exclusion involved.   Indeed he pointed out this “firearm exclusion” not once but several times.  (145 Cal.App.3d at 65, 193 Cal.Rptr. 248.)   Accordingly, we ruled in Purdie the insurance company had properly satisfied its duty to notify the insured about the “firearm exclusion.”   We further found that once alerted to the existence of this exclusion, the insured could easily interpret it because the exclusionary clause was “conspicuous, plain, and clear” within the body of the contract.   Accordingly, we upheld the “firearms exclusion” as valid to exempt the insurance company from responsibility.

Here, on the other hand, the insurance company does not even allege Visna Insurance Associates or any other agent or employee brought the “liquor liability exclusion” to the attention of Velasco.   Nor does Aetna claim anyone brought this exclusion to the attention of the former owner of the store who initially purchased this policy from Aetna's agent, Visna Insurance Associates.   The only evidence in the record before the trial judge hearing the summary judgment motion was to the effect the agent failed to mention any exclusions to Velasco and indeed assured him the policy fully covered him in the operation of his new business.   The evidence likewise reflects the agent failed to mention the “liquor liability exclusion” to the former owner and the latter was left with the impression he was covered for any problems arising from the operation of the alcoholic beverage facet of this enterprise.

If our dictum in Purdie and the Supreme Court's rationale in Stevens and its progeny are ever to be applied to require an insurance company to expressly notify an insured about an exclusion, this is the appropriate case.   This policy contained several types of exclusions.   Some would apply to all or nearly all businesses.   Others would apply to other kinds of businesses, but not to Velasco's convenience store.   The “liquor liability exclusion”, however, had three characteristics which, in our view, are enough to create a duty to warn the insured the policy he was buying did not cover this particular risk.   First, it was an exclusion the insured could not reasonably have expected to be a part of his policy.   Secondly, given the nature of his business, the exclusion was in an area in which this insured was subject to a special risk of liability most other businesses purchasing this “Business Owners Policy” would not experience.   Thirdly, this special exposure was well known to the insurer's agent.

The uncontroverted evidence demonstrates the insurance company's agent was located next door to the insured's business.   Indeed the agency's employees shopped in this store.   It defies reason to believe they were unaware the insured was selling alcoholic beverages at this establishment.   Indeed at no point in the record do they deny knowledge of this fact.   The sale of alcoholic beverages, in turn, involves a special exposure to liability—the possibility the insured will sell beer or wine to a minor who then causes an accident.   Yet knowing of this special exposure to liability the insurance company's agents sold the insured a policy which failed to protect him against this special risk without mentioning the exclusion was contained in the policy.   It is as if an insurer knowing a young soldier was about to be sent to the front lines sold him a life insurance policy without mentioning it contained an exclusion for death during combat.   Or an insurer knowing an insured had cancer selling him a policy without mentioning it excluded coverage for death caused by cancer.   Or an insurer selling a fire insurance policy to a person owning a house with a shake roof where the policy excluded coverage for houses with shake roofs without informing the homeowner of this exclusion.   In these circumstances, exclusionary language contained in the body of an insurance policy is not enough by itself to fairly notify the insured his special areas of exposure are excluded from coverage.   This is especially true where, as here, the exclusion of a special risk fails the traditional requirement that any exclusion must be “conspicuous.”   In the instant case, the “liquor liability exclusion” is inconspicuous not because it is hidden in some out of the way corner of the policy or is mislabeled as something other than an exclusion, but rather because it enjoys the anonymity of being but one tree in a veritable forest of exclusions.   This forest, in turn, occupies most of a nearly twenty three page policy which would take the average policy holder over two hours to read.   It is a case of not being able to see the trees for the forest.   Unless the agent or some cover page to the policy or something else highlights the fact this exclusion exists and is especially relevant to a business selling alcoholic beverages it will remain inconspicuous to those insureds, such as Mr. Velasco, who are susceptible to this special risk of liability.

Although not essential to our decision we find another factor present in the instant case which makes it even more compelling.   Here the evidence before the trial court demonstrated the insurance company's agent not only failed to mention the exclusion, he actually reassured the insured the policy fully protected him against liability in the operation of his business.²  This is as if an insurer told our hypothetical soldier not to worry because he was fully covered while he marched off to war, or reassured the cancer victim his family was all taken care of as he entered the hospice, or informed the homeowner the policy protected him in case of any fire as they stood under the owner's shake roof.³

The usual standard of review when considering appeal of summary judgment calls for the reviewing court to construe all evidence against the party making the motion.  (Gomez v. Ticor (1983) 145 Cal.App.3d 622, 193 Cal.Rptr. 600, and authorities cited therein.)   We have not mentioned or relied on this standard of review because there is little conflict in the evidence.   The insurance company argued and prevailed in the trial court on a contention about the state of the law—essentially the position that if the “liquor liability exclusion” in the body of its policy was “conspicuous, plain and clear” then the exclusion was effective to relieve the company of liability no matter what its agents said or failed to say to Velasco.   We have rejected this legal position and thus deny Aetna's summary judgment motion.

At the same time the trial court heard Aetna's summary judgment motion it considered a like motion Velasco had filed.   Appellant requested in his appeal that we examine the evidence before the trial court at the hearing on both these motions.   In doing so, we find no triable issues remaining as to the essential elements of Velasco's motion for summary judgment against Aetna.   That is, the available evidence establishes beyond serious dispute that Aetna had a duty to point out the “liquor liability exclusion” and failed to do so.   Accordingly, the exclusion is unenforceable and Aetna has a duty to defend and indemnify Velasco against any liability in the Gray v. Edmondson litigation.   We therefore conclude that on the evidence before the trial court, not only should it have denied summary judgment for Aetna, it should have granted summary judgment in favor of appellant Velasco.

DISPOSITION

The judgment is reversed and the matter remanded to the trial court with directions to enter summary judgment in favor of appellant consistent with the views expressed in this opinion.   Appellant is awarded his costs on appeal.

FOOTNOTES

1.   Business and Professions Code section 25602.1 reads in pertinent part:“A cause of action may be brought by or on behalf of any person who has suffered injury or death against any person ․ who sells ․ any alcoholic beverage to any obviously intoxicated minor where the furnishing, sale or giving of such beverage to the minor is the proximate cause of personal injury or death sustained by such person.”  (Cal.Bus. & Prof.Code, § 25602.1.)

2.   Aetna makes much of Velasco's admission the company's agent did not discuss specific coverages or exclusions with Velasco.   But this admission would only be relevant if Velasco's right to protection depended upon a finding the agent expressly promised Velasco the policy covered liability arising from sales of alcoholic beverages when it did not.   The rationale of Purdie and the cases it cites is quite different.   The duty is on the insurance company to bring exclusions to the attention of the insured not on the insured to ask whether he is covered for this or that potential risk of liability.   Thus, the failure to have a discussion about coverages and exclusions represents a failure to discharge an affirmative duty imposed on the insurance company not the insured.   Aetna does not contend it notified Velasco of the “liquor liability exclusion” in any other way, such as a warning on the declarations page or the like.   Accordingly, the absence of a discussion about specific coverages and exclusions inures to the detriment not the benefit of the insurer.   We further note there is no conflict between Velasco's admission he had no discussion about specific coverages and exclusions and his own declaration Aetna's agent reassured him the policy fully covered him in the operation of his new business.

3.   Since we hold the “liquor liability exclusion” is ineffective because the insurer's agent failed to notify the insured of its existence we need not address appellant's further contentions:  (1) Aetna is estopped from enforcing the exclusion, or (2) Aetna's agent was negligent in failing to apprise Velasco of this exclusion and Aetna is chargeable with this negligence, or (3) Aetna has a duty to defend even if it may not have a duty to indemnify since the duty to defend is broader than the duty to indemnify.

JOHNSON, Associate Justice.

LILLIE, P.J., and THOMPSON, J., concur.