HARTFORD FIRE INSURANCE COMPANY v. SPARTAN REALTY INTERNATIONAL INC (1987)

Hartford Fire Insurance Company issued a business liability policy of insurance to Spartan Realty International, Inc., excluding nonowned auto/hired car coverage.   A Spartan employee driving a rented car collided with another automobile, seriously injuring Gary R. Yeakel and Francis J. Pavese, who sued Spartan and David Sanders, its sole shareholder.   After the complaint was filed, Spartan exercised an option available under the policy and Hartford issued an endorsement to the policy insuring against liability arising out of the use of nonowned or hired automobiles.   Hartford defended Spartan and Sanders with a reservation of rights.   Sanders also tendered his defense to Royal Insurance Company, his individual carrier, who accepted with a reservation of rights.   Two years later, Hartford realized the policy excluded coverage at the time of the accident, so advised Spartan and filed an action in declaratory relief naming Spartan, Sanders and Royal as defendants.   The court adjudicated Hartford's conduct did not waive the exclusion of coverage and Hartford was not estopped from asserting noncoverage.   Spartan and Sanders appealed.   Royal appealed separately.   We consolidate the appeals and affirm.¹

I

Spartan employed licensed real estate broker Esther Ann Stephens, who drove a rented car.   September 1, 1983, Stephens collided with a car occupied by Yeakel and Pavese.   They sustained serious injuries.

Effective April 20, 1983 to April 20, 1984, Hartford issued a policy of insurance insuring Spartan.   Section II-Comprehensive Business Liability Coverages, Coverage D Business Liability, excluded coverage for bodily injury arising out of the ownership or use of any automobile operated by any person in the course of employment by Spartan, the insured.   Thus, on September 1, 1983, the date of the accident, the policy excluded coverage for liability for damages arising out of the accident involving Stephens, Spartan's employee, and her rented car.   Sanders individually carried an automobile insurance policy issued by Royal with policy limits of $300,000.

On December 28, 1983, Yeakel and Pavese filed a complaint for damages naming Stephens, the car rental company and Spartan as defendants.   Hartford received notice of the claim in November 1983 and the claim was assigned to claims supervisor John Flynn.

Meanwhile, on December 1, 1983, Spartan exercised an optional coverage under section II of the Hartford policy covering liability for damages arising out of the use of any “non-owned automobile or hired car.”   From and after December 1, 1983, Spartan was thus insured under this coverage for liability arising out of the use by an employee of a rented automobile.

Hartford received the Yeakel-Pavese complaint and processed the claim.   January 16, 1984, Flynn wrote to Spartan confirming claim discussions and advising the claims had been referred to attorney Lou Estes to represent Sanders and Spartan.   The letter recites the Coverage D Business Liability and the exclusion from that coverage of liability for damages arising out of the use of rented or loaned automobiles by Spartan or by use of automobiles in the course of employment by any employee of Spartan, i.e., Stephens and her rented car.   The letter then states the Coverage D Business Liability provides “non-owned auto/hired car coverage” which is consistent with the December 1, 1983 endorsement added after the accident and which is made available as an option under the policy.

Flynn goes on to state the Yeakel-Pavese complaint alleges Stephens was employed by Spartan who was in the course and scope of employment at the time of the accident, which of course nicely tracks liability for the nonowned auto/hired car endorsement and concludes with a reservation of rights in accepting the defense.

Spartan and Sanders were defended by Estes at Hartford's expense.   Almost two years later, Hartford wrote to Spartan and Sanders advising the optional coverage for nonowned automobile and hired car was added three months after the accident, the optional coverage was not then in effect, Hartford proposed to file in declaratory relief to determine coverage, and offered to pay costs of counsel in defending the suit pending coverage determination.

Hartford immediately filed its complaint seeking a declaration the policy as issued and in effect at the time of the accident excluded coverage as the optional nonowned auto/hired car coverage was effective after the accident.   Hartford's second cause of action concerned the refusal of Royal, Sanders's personal automobile insurer, to assume Sanders's defense on the theory Hartford's coverage of Sanders was in excess of Royal's primary coverage.   Hartford asked for a declaration concerning Royal's obligation to defend Sanders and to reimburse Hartford's costs incurred in Sanders's defense.

Hartford then moved for summary adjudication the policy in effect at the time of the accident excluded coverage as the optional endorsement was not added to the policy until three months after the accident.   Spartan and Sanders then moved for an adjudication Hartford was required to defend and indemnify them in the lawsuit and as a matter of law, Hartford waived its coverage defense and is estopped to assert a coverage defense.

The court granted Hartford's motion and ruled the motion of Spartan and Sanders was moot, and put their motion off calendar.   Spartan and Sanders appeal the order.   We affirm.

II

The parties agree the policy in effect September 1, 1983, the day of the accident, excluded coverage for the damages suffered by Yeakel and Pavese.   They also agree the issue on appeal is whether Hartford's conduct constitutes a waiver of the exclusion or estops Hartford from asserting exclusion.

III

An insurance company has the right to limit coverage and the limitation is valid unless not plainly stated or not in harmony with the expectations of the insured.  (Cravens, Dargan & Co. v. Pacific Indem. Co. (1972) 29 Cal.App.3d 594, 600, 105 Cal.Rptr. 607.)   Here, the parties agree the policy excluded coverage at the time of the accident.  Aetna Casualty & Surety Co. v. Richmond (1977) 76 Cal.App.3d 645, 143 Cal.Rptr. 75, considered estoppel and waiver arguments with respect to an insurance policy that excluded coverage for products liability:

“Richmond fourthly contends, nonetheless, that Aetna by its conduct waived the benefits of these exclusionary clauses.   Waiver is a question of fact [citation].  ‘[I]t is the general and quite well settled rule of law that the principles of estoppel and implied waiver do not operate to extend the coverage of an insurance policy after the liability has been incurred or the loss sustained.  [Citation.] ․ In 29A Am.Jur., Insurance, § 1135 (1960), the law and its rationale are explained as follows:  [¶ ] “The rule is well established that the doctrines of implied waiver and of estoppel, based upon the conduct or action of the insurer, are not available to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom, and the application of the doctrines in this respect is therefore to be distinguished from the waiver of, or estoppel to assert, grounds of forfeiture․” ’  [Citations.]”  (Aetna, supra, at pp. 652-653, 143 Cal.Rptr. 75, italics added.)

Aetna cites Conner v. Union Automobile Ins. Co. (1932) 122 Cal.App. 105, 111-112, 9 P.2d 863, as authority for the proposition coverage under an insurance policy may not be extended beyond its terms through application of waiver and estoppel concepts.   In Conner, a policy excluded liability for damage while the insured automobile towed a trailer.   An accident occurred while a trailer was towed.   The insured contended assumption of liability by the insurer to repair the car and partial payment for the repairs acted to waive the exemption.   The insurer's agent ordered the repairs on the assumption the company was liable.   Three weeks later, the insurer repudiated liability.   The insured sued for cost of repairs to the car, contending the insurer waived the exclusion by authorizing the repairs.

“The question is squarely presented on this appeal as to whether an insurance company may be estopped from denying its liability for damages to an automobile incurred in an accident under conditions specifically exempting the company from liability under the unambiguous terms of the policy, by reason of subsequent acts or conduct of the insurer.   This case does not involve the waiving of conditions which are required by the terms of the policy as a prerequisite to the establishment of liability, such as prompt notice of the accident.   It involves the construction of a contract of insurance which specifically limits the liability to the use of an automobile without an attached trailer.”  (Connor, supra, at p. 110, 9 P.2d 863.)

The court reversed judgment for the insured, holding the “doctrine of waiver” may not be used to reform a contract to create liability for a condition specifically excluded by the terms of the contract.  (Ibid.)

The court went on to say:

“If the contract is procured by fraud or the conduct of the insurer is such as to mislead the insured to his prejudice, then the insurer may be estopped from denying liability.   Estoppel is an equitable bar to the enforcement of a claim when the conduct of the claimant misleads the adverse party to his prejudice.   There was nothing in the conduct of the agent for the defendant in the negotiations for the issuance of the policy which could warrant the plaintiff in claiming he was deceived regarding the coverage of the trailer.   Neither did the agent's subsequent instructions to make the necessary repairs deceive the insured to his prejudice.   The plaintiff was undoubtedly disappointed when the insurance company repudiated its liability, but he was not prejudiced by its original assumption of liability, for undoubtedly the same repairs would have been required at the same cost, if he had made all arrangements himself.   Certainly the plaintiff was not prejudiced by the voluntary contribution of $125 by the insurer, which he could not have otherwise secured.   It therefore appears the conduct of the agents of the insurance company in subsequently misconstruing the policy constituted neither a waiver nor an estoppel.”  (Conner, supra, at pp. 110-111, 9 P.2d 863.)  2

California has long followed the Conner rule that fraud or misrepresentation as to coverage under a policy and issuance of a policy different in coverage from that represented to the insured estops the insurer from reliance on the coverage as stated in the issued policy.  (Ivey v. United National Indemnity Company (9th Cir.1958) 259 F.2d 205, 209;  Ames v. Employers Casualty Co. (1936) 16 Cal.App.2d 255, 266, 60 P.2d 347.)   Knowledge of an insurer that a building was erected on land to which the insured had no title waived a term of the policy to the effect the policy was void if the insured misrepresented ownership of the same.  (Goorberg v. Western Assurance Co. (1907) 150 Cal. 510, 518, 89 P. 130;  see 7 Witkin, Summary of Cal. Law (8th ed. 1974) Equity, § 135, pp. 5354-5355.)   However, the rule has not been extended to include post-accident conduct of the insurer as constituting a waiver or estoppel to deny coverage which is expressly excluded by the policy.  (See Roberts v. Underwriters at Lloyds London (D.C.Idaho 1961) 195 F.Supp. 168, 172-173;  44 Am.Jur.2d, Insurance, § 1577, pp. 587-588.)

We conclude the exclusion of liability for damages for nonowned/hired cars in effect at the time of the accident was not waived by Hartford nor was Hartford estopped to deny coverage by reason of its post-accident conduct.   The parties agreed upon coverage and exclusions from coverage.   Spartan paid the policy premium which was calculated upon the risks assumed and the liabilities excluded.   Hartford, Spartan and Sanders agree the policy in effect at the time of the accident excluded coverage.   Neither Spartan nor Sanders contend the policy issuance was induced by fraud or misrepresentations by Hartford.   They simply claim Hartford's post-accident conduct acts to waive the exclusion or estop Hartford from raising it.

The rule that waiver and estoppel are not available to bring within the coverage of an insurance policy risks not covered by its terms or expressly excluded affirms the rights of the parties to rely upon the terms stated in the policy.   Absent fraud or misrepresentation, the insurer is entitled to rely on the stated exclusions and the insured on the scope of the coverage.   Here, both parties agree the policy as issued excluded the risk.   Neither Spartan nor Sanders assert fraud or misrepresentation by Hartford as to scope of coverage.   We decline to rewrite the policy to include a risk the parties themselves agreed to exclude.³

Judgments affirmed.

BUTLER, Associate Justice.

WIENER, Acting P.J., and TODD, J., concur.