Introduction to Insurance Policies

Chapter 1 Introduction to Insurance Policies 1-1 TYPES OF POLICIES 1-1:1 Personal Lines Versus Commercial Lines Policies Personal lines policies are purchased by an individual, rather than an organization, to protect against personal risks. Personal lines insurance includes homeowners and personal automobile insurance (including insurance for recreational vehicles used for noncommercial purposes), personal watercraft insurance, residential property insurance, (including earthquake and flood insurance), inland marine insurance covering personal property, and umbrella or excess liability insurance providing coverage when written over one or more underlying personal automobile or residential property insurance policies. 1 Commercial lines policies are purchased, usually by an organization, to protect against commercial risks. Commercial lines insurance encompasses a wide array of insurance products including, but not limited to, commercial property insurance (including business income coverage), commercial general liability insurance, commercial automobile insurance, farm/agricultural insurance, crime/fidelity coverage, workers compensation insurance, marine insurance, product liability coverage, directors and officers liability insurance, professional liability insurance, and employment practices liability insurance, among other coverages. Commercial lines policies also 1. Cal. Ins. Code 1625.5(a). CALIFORNIA INSURANCE LAW 1

Chapter 1 Introduction to Insurance Policies include commercial umbrella or excess liability insurance written over one or more underlying primary commercial policy. 1-1:2 Property Versus Liability Policies There are important differences between first-party property policies and third-party liability policies. If the insured is seeking coverage against loss or damage sustained by the insured, the claim is first party in nature; if the insured is seeking coverage for the insured s liability to another person, the claim is third party in nature. 2 A first party insurance policy provides coverage for loss or damage sustained directly by the insured (for example, fire, property, builder s risk, life, disability, and health insurance). 3 By contrast, a third party liability policy provides coverage for the liability of an insured to a third party (for example, a commercial general liability policy, a directors and officers liability policy, or a professional liability policy). 4 First party property coverage protects the insured s interests in property from fortuitous physical losses. 5 Property insurance is a contract pursuant to which the insurer agrees to indemnify the insured in the event that the insured property suffers a covered loss. 6 The insurer promises to pay money to the insured upon the happening of an event, the risk of which has been insured against. 7 Coverage under a property policy is commonly provided by reference to causation, for example, a loss caused by certain enumerated perils. 8 Third party liability coverage protects the insured against claims asserted against it by third parties as a result of the insured s acts or omissions. 9 In a typical third party liability policy, the insurer assumes a contractual duty to pay judgments the insured becomes legally obligated to pay as damages because of bodily injury, property damage, personal and advertising injury or, depending on the policy type, other injury caused by the insured s acts or omissions. 10 The 2. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 399, n.2 (1989). 3. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 663 (1995). 4. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 663 (1995). 5. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406-07 (1989). 6. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406-07 (1989). 7. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 663 (1995). 8. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406-07 (1989). 9. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 663 (1995). 10. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 663 (1995). 2 CALIFORNIA INSURANCE LAW

TYPES OF POLICIES 1-1 right to coverage in the third party liability insurance context often draws on traditional tort concepts of fault, proximate cause and duty. 11 1-1:3 Occurrence Versus Claims-Made Policies Liability policies are ordinarily written on either an occurrence basis or a claims-made basis. Occurrence-based policies cover a different spectrum of claims than claims-made policies. 12 An occurrence policy extends coverage to the insured s liability for certain damage so long as that damage occurs during the policy period. 13 Thus, an occurrence policy does not restrict the period during which a claim may be made. 14 For example, occurrence policies are frequently implicated years after the damage or injury occurred in certain environmental pollution and toxic tort claims. 15 As a result, occurrence-based policies are typically more expensive than those written on a claims-made basis. 16 A claims-made policy, on the other hand, generally covers claims which are asserted against the insured by a third party during the policy period, regardless of when the underlying damage occurred. 17 In other words, insurance policies written on a claims-made basis cover only claims made against the insured while the policy is in effect. 18 Claims-made policies were developed to limit an insurer s risk by restricting coverage to the single policy in effect at the time a claim was asserted against the insured, without regard to the timing of the damage or injury. 19 Consequently, with traditional occurrence policies the risk of a claim surfacing at some future date after expiration of the policy period is borne by the insurer, while with claims-made policies 11. Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406-07 (1989); see also State v. Allstate Ins. Co., 45 Cal. 4th 1008, 1031 (2009) ( While coverage under both first and third party insurance is a matter of contract, the contractual scope of third party liability insurance coverage, reflected in the policy language, depends on the tort law source of the insured s liability. ). 12. A.C. Label Co., Inc. v. Transamerica Ins. Co., 48 Cal. App. 4th 1188, 1192 (1996). 13. A.C. Label Co., Inc. v. Transamerica Ins. Co., 48 Cal. App. 4th 1188, 1192 (1996). 14. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 689 (1995). 15. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 689 (1995). 16. Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 689 (1995). 17. A.C. Label Co., Inc. v. Transamerica Ins. Co., 48 Cal. App. 4th 1188, 1192 (1996); Slater v. Lawyers Mutual Ins. Co. 227 Cal. App. 3d 1415, 1423 (1991). 18. Abifadel v. Cigna Ins. Co., 8 Cal. App. 4th 145, 159 (1992); Homestead Ins. Co. v. American Empire Surplus Lines Ins. Co., 44 Cal. App. 4th 1297, 1300, 1303 (1996). 19. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 688 (1995). CALIFORNIA INSURANCE LAW 3

Chapter 1 Introduction to Insurance Policies that risk is shifted to the insured. 20 Thus, in general, a claims-made policy does not cover claims first made after expiration of the policy period, even if the insured s act or omission and harm occurred while the policy was in effect. 1-1:4 Primary Versus Excess Versus Umbrella Policies The terms primary and excess insurance policies refer to the priority or level of insurance coverage relative to a given loss. 21 There are two levels of insurance coverage: primary and excess. 22 A primary policy is one that applies first, and which provides immediate coverage upon the occurrence of a loss or happening of an event giving rise to liability. 23 In the liability insurance context, the insurer that issued the primary policy generally has the primary duty to defend and to indemnify the insured, unless otherwise excused or excluded by specific policy language. 24 An excess policy, however, provides secondary coverage that attaches only after all primary coverage has been exhausted and is no longer on the risk. 25 Thus, in the liability context, unless the provisions of the excess policy provide otherwise, an excess insurer has no obligation to provide a defense to its insured before the exhaustion of the primary coverage. 26 An umbrella policy is a subcategory of secondary insurance, with distinctive features. 27 Like an excess policy, an umbrella policy may provide excess coverage that attaches when the limits of underlying primary policies are exhausted by the payment of claims. 28 Unlike a true excess policy, however, an umbrella policy also typically provides coverage that drops down to cover some claims that are not covered by underlying primary insurance. 29 Thus, an umbrella 20. Root v. American Equity Specialty Ins. Co., 130 Cal. App. 4th 926, 945 (2005). 21. Hartford Acc. & Indem. Co. v. Super. Ct., 23 Cal. App. 4th 1774, 1779-80 (1994). 22. N. River Ins. Co. v. Am. Home Assurance Co., 210 Cal. App. 3d 108, 112 (1989). 23. North Am. Capacity Ins. Co. v. Claremont Liab. Ins. Co., 177 Cal. App. 4th 272, 291 (2009). 24. Fireman s Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 1304 (1998). 25. N. River Ins. Co. v. Am. Home Assurance Co., 210 Cal. App. 3d 108, 112 (1989); North Am. Capacity Ins. Co. v. Claremont Liab. Ins. Co., 177 Cal. App. 4th 272, 291 (2009). 26. Cmty. Redevelopment Agency v. Aetna Cas. & Sur. Co., 50 Cal. App. 4th 329, 338 (1996). 27. MGA Entertainment, Inc. v. Hartford Ins. Group, 869 F. Supp. 2d 1117, 1129-30 (C.D. Cal. 2012). 28. Powerine Oil Co., Inc. v. Super. Ct., 37 Cal. 4th 377, 398, fn. 9 (2005). 29. Powerine Oil Co., Inc. v. Super. Ct., 37 Cal. 4th 377, 398, fn. 9 (2005); Legacy Vulcan Corp. v. Super. Ct., 185 Cal. App. 4th 677, 689 (2010). 4 CALIFORNIA INSURANCE LAW

DIFFERENT TYPES OF PROPERTY POLICIES 1-2 policy operates to broaden an insured s primary coverage. 30 Insurance policies can sometimes include both excess and umbrella insurance. 31 Such policies can therefore provide both excess and primary coverage benefits to the insured. 32 1-2 DIFFERENT TYPES OF PROPERTY POLICIES 1-2:1 All Risk Versus Specified Peril Policies An All Risk policy protects the insured against all risks of loss unless the risk of loss is otherwise excluded or limited by the policy. 33 By contrast, under a Specified or Named Peril policy, the perils insured against vary depending on the form used. Typically, Specified or Named Perils include coverage for property damage caused by fire, storms, floods, lightning, explosions, riots and vandalism. 1-2:2 Automobile Automobile insurance policies typically provide several distinct coverages and can be issued to individuals (personal auto policies) or businesses or other organizations (commercial auto policies). An automobile policy usually includes coverage written on a first-party basis for physical damage to the insured s vehicle, such as damage caused by collision, theft, fire or vandalism. 1-2:3 Homeowners Homeowners insurance policies are typically package policies which include both first-party property coverage and third party liability coverage. Homeowners property coverage may be written on an allrisk or specified peril basis. The property coverage included within a homeowners policy provides protection for fortuitous physical damage or loss to the scheduled residential property (such as a singlefamily home, townhome, condominium unit, or apartment), including certain personal property of the insured, subject to various exclusions and limitations. 30. MGA Entertainment, Inc. v. Hartford Ins. Group, 869 F. Supp. 2d 1117, 1130 (C.D. Cal. 2012). 31. Legacy Vulcan Corp. v. Super. Ct., 185 Cal. App. 4th 677, 689 (2010). 32. Legacy Vulcan Corp. v. Super. Ct., 185 Cal. App. 4th 677, 689 (2010). 33. Strubble v. United Services Auto Ass n, 35 Cal. App. 3d 498, 504 (1973). CALIFORNIA INSURANCE LAW 5

Chapter 1 Introduction to Insurance Policies 1-2:4 Commercial Property Commercial property policies insure businesses and other organizations against fortuitous physical damage or loss to scheduled buildings and their contents, caused by a covered cause of loss. As with homeowners property insurance, commercial property policies may be written on an all-risk or specified peril basis. Commercial property policies generally include coverage for an insured s loss of business income or additional expenses incurred by the insured due to property damage. 1-2:5 Builder s Risk Builder s risk policies provide first-party property coverage to a person or organization during the course of construction. Such policies typically provide coverage for direct physical loss to covered property from any covered cause of loss. The purpose of builder s risk insurance is to compensate for loss due to physical damage or destruction caused to the construction project itself. 34 1-3 DIFFERENT TYPES OF LIABILITY POLICIES 1-3:1 Automobile Automobile insurance policies provide third-party liability coverage designed to protect the insured against liability for injuries to others or damage to the property of others, caused by the ownership, use, or operation of an automobile. Commercial auto policies often provide liability coverage not only for the use of vehicles owned or leased by the insured business or organization, but also to employees who are involved in accidents while using their own vehicles in the course and scope of their employment. Automobile policies often include optional medical payments coverage, subject to a separate lower limit of liability, that provides no-fault insurance for certain medical expenses for bodily injury caused by an automobile accident. Although medical payments coverage is typically categorized as liability insurance, 35 it is better understood as a first-party coverage as it may be utilized by the insured and is not dependent on the insured s liability to a third party. 36 34. Southern Cal. Edison Co. v. Harbor Ins. Co., 83 Cal. App. 3d 747, 757 (1978). 35. Cal. Ins. Code 108(b). 6 CALIFORNIA INSURANCE LAW

DIFFERENT TYPES OF LIABILITY POLICIES 1-3 In California, all automobile policies must include both uninsured motorist and underinsured motorist coverages, pursuant to statute. 37 Uninsured motorist coverage permits an insured to recover from his or her own insurer for bodily injury sustained by an insured due to an accident caused by an uninsured motorist. 38 Underinsured motorist coverage provides protection to an insured who is involved in an accident which is deemed the fault of an inadequately insured motorist. Underinsured motorist benefits are available in situations where the limits of liability of the at-fault motorist s liability insurance are less than the limits of the insured s underinsured motorist coverage. 39 Thus, underinsured motorists coverage serves to provide the insured with the same insurance protections he or she would have enjoyed had the at-fault driver carried liability limits equal to insured s underinsured motorist limits. 40 1-3:2 Homeowners Homeowners policies generally include personal liability coverage as part of a package policy issued to the individual homeowner(s). Homeowners personal liability coverage is usually provided pursuant to an agreement by the insurer to indemnify the insured for the insured s legal liability to pay damages for bodily injury and property damage caused by an occurrence during the policy period, subject to various exclusions, conditions, and limitations. Personal liability coverage also includes a promise on the part of the insurer to defend the insured against potentially covered claims. Homeowners policies may also include no-fault medical payments coverage. 1-3:3 Personal Lines Umbrella A personal umbrella policy provides excess liability protection to individuals against catastrophic loss, after the exhaustion of applicable liability coverage provided by the scheduled underlying insurance, such as automobile or homeowners policies. In addition, personal umbrella policies provide drop down primary coverage for certain 36. Progressive West Ins. Co. v. Super Ct., 135 Cal. App. 4th 263, 270 (2005). 37. Cal. Ins. Code 11580.2, et seq. 38. Cal. Ins. Code 11580.2(a)(1). 39. Cal. Ins. Code 11580.2(p). 40. Viking Ins. Co. v. State Farm Mut. Auto. Ins. Co., 17 Cal. App. 4th 540, 548 (1993). CALIFORNIA INSURANCE LAW 7

Chapter 1 Introduction to Insurance Policies specified personal injury offenses, including invasion of privacy, false imprisonment, libel, and slander. 1-3:4 Commercial General Liability A commercial general liability ( CGL ) policy is the most common form of liability insurance provided to businesses and other organizations. 41 The CGL policy, usually written on a standard form, represents a contractual agreement on the part of the insurer to defend and indemnify the insured against the insured s liability to pay damages for bodily injury or property damage caused by an occurrence during the policy period, or for certain enumerated personal and advertising injury offenses committed during the policy period. While broader than many other types of liability coverages, CGL insurance is nevertheless provided subject to various exclusions, conditions, and limitations. 1-3:5 Errors and Omissions Errors and omissions ( E&O ) insurance, also known as professional liability coverage, provides liability protection for an insured individual, business, or other organization against thirdparty claims arising from negligent errors or omissions in performing professional services. Under an E&O policy, unlike CGL insurance, an insurer agrees to indemnify the insured against liability for economic losses sustained by a third-party as a result of the insured s performance or failure to perform certain professional services. E&O policies are most commonly written on a claims-made basis. 1-3:6 Directors and Officers Liability Directors and officers ( D&O ) liability insurance is a form of liability coverage that provides protection for individual directors and officers against third-party claims for economic loss arising out of certain wrongful acts or omissions while acting in their capacity as directors or officers of the insured business or other organization. D&O policies provide coverage both to the individual directors and officers for loss that is not indemnified by the insured organization, 41. Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 16 (1995). 8 CALIFORNIA INSURANCE LAW

THE CONCEPT OF FORTUITY IN INSURANCE POLICIES 1-4 and to the organization itself for amounts paid to its directors and officers to indemnify their losses. D&O policies now commonly include entity coverage for certain of the insured business or other organization s own wrongful acts. D&O policies are generally written on a claims-made basis and have several unique features not present in CGL and other liability coverages, including limitations with respect to the payment of defense costs. 1-3:7 Employment Practices Liability Employment practices liability insurance ( EPLI ) provides coverage to business entities and other organizations, along with their directors, officers, managers, and employees to protect against third-party claims for employment-related wrongful acts, including wrongful termination, discrimination, harassment, retaliation, and other forms of wrongful workplace conduct. EPLI policies provide indemnity coverage against certain types of economic loss sustained by a third-party as a result of an insured s employment-related wrongful conduct. EPLI policies also include coverage for defense costs for potentially covered claims. EPLI coverage is typically provided on a claims-made basis, and is subject to particular exclusions and other limitations. 1-3:8 Commercial Lines Excess/Umbrella A commercial excess policy provides a secondary layer of liability protection to businesses and other organizations, after the exhaustion of underlying CGL or other applicable primary liability insurance policies. A commercial umbrella policy, in addition to providing excess coverage, usually provides drop down primary coverage for certain claims not covered by the underlying primary policies, subject to the insured s first satisfying a deductible or self-insured retention. 1-4 THE CONCEPT OF FORTUITY IN INSURANCE POLICIES The concept of fortuity is the basic premise underlying property insurance, and also informs coverage under certain types of liability policies. 42 Under California law, insurance is a contract whereby 42. MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 197 Cal. App. 4th 766, 780-81 (2010). CALIFORNIA INSURANCE LAW 9

Chapter 1 Introduction to Insurance Policies one party undertakes to indemnify another against loss, damage or liability arising from an unknown or contingent event. 43 Perils or risks in a property policy refer to fortuitous, active, physical forces such as lightning, wind, and explosion, which bring about the loss. 44 Property insurance protects against the risk of loss, not known losses or certainties of loss. 45 There are similar limitations in the liability insurance context. For example, by statute, and as a matter of public policy in California, an insurer may not provide coverage for willful injuries by the insured against a third party. 46 1-5 STANDARDIZED FORMS Insurers often include standardized policy forms in the most commonly issued policies. The Insurance Services Office, Inc. ( ISO ) is a preeminent insurance industy company that provides rating, statistical, and actuarial policy forms and related drafting services to property and casualty insurers. 47 Policy forms developed by ISO are frequently used by insurers, at least as the starting point for their policies, especially general liability policies. 48 The applicable rules of policy interpretation, discussed below, are the same regardless of whether the insurance contract is written on standardized ISO forms or utilizes forms prepared by the insurer. California courts have suggested, however, that ISO drafting history may be of considerable assistance in determining coverage issues in certain situations. 49 43. Cal. Ins. Code 22; Cal. Ins. Code 250. 44. State Farm Fire & Cas. Co. v. Super. Ct., 215 Cal. App. 3d 1435, 1445 (1989). 45. Cal. Ins. Code 22; Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406 (1989). 46. Cal. Ins. Code 533; Waller v. Truck Ins. Exchange, Inc., 11 Cal. 4th 1, 18 (1995). 47. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 671 (1995). 48. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 671 (1995). 49. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 670-71 (1995). 10 CALIFORNIA INSURANCE LAW