Filed 2/9/21 Carson v. Truck Insurance Exchange CA3
NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
MIKE CARSON et al., C081767
Plaintiffs, Cross-defendants and (Super. Ct. No. 34-2013-
Appellants, 00138428)
v.
TRUCK INSURANCE EXCHANGE,
Defendant, Cross-complainant and
Respondent.
Plaintiffs Jack Sweigart, Mike Carson, and Bob Payne (collectively the SCP
parties) appeal the judgment entered following the trial court’s grant of defendant Truck
Insurance Exchange’s (Truck) motion for summary judgment. In the underlying
litigation, the SCP parties were named in a suit brought by the Ranch at Clay Station
Homeowner’s Association (the HOA) and individual homeowners. Truck insured the
HOA. The SCP parties sought coverage under the policy, which Truck denied.
Litigation followed and the parties filed cross-motions for summary judgment. The trial
1
court granted Truck’s motion, finding the SCP parties excluded from coverage by the
policy’s terms. The SCP parties challenge the trial court’s reasoning. We shall affirm
the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
The Underlying Litigation
Developer JTS Communities, Inc. (JTS) built a condominium development, the
Ranch at Clay Station. The Ranch at Clay Station consisted of 1,200 acres with 222
homes and 400 acres designated as a “common area.” The homeowners believed the
common area would be conveyed to the HOA for communal use, including horseback
riding, hiking, and biking. After the completion of construction, JTS declared it retained
title to the 400-acre common area and intended to sell it to a third party for $2 million.
In response, the HOA and individual homeowners brought suit against JTS over
the common area, in Montgomery v. JTS Communities, Inc. (Montgomery).1 In the
second amended complaint, filed in July 2011, the plaintiffs added claims against
Sweigart, Payne, and Carson.
Sweigart served as president of the HOA in 2004. He has been president of JTS
from 1999 to the present. Payne was on the HOA’s board of directors from 2005 through
August 2007 and was also an officer. From December 2003 through September 2008,
Payne worked for JTS in the warranty department. Carson served on the initial HOA
board of directors and also served as its president. Carson served on the board between
2005 and 2009. He was initially appointed by JTS and later elected by the homeowners.
Carson also performed land development work for JTS from 1999 to the present.
1 Montgomery v. JTS Communities, Inc., Sacramento County Superior Court, case No.
34-2010-00073633.
2
The second amended complaint identifies the parties and sets forth their
involvement. With respect to Sweigart, it alleges: “Jack T. Sweigart . . . was and is an
individual doing business in the County . . . Sweigart and Does 76 through 100 were and
are the owners of JTS and owned, planned, subdivided, developed, constructed,
marketed, maintained, and sold the residences, the homes at The Ranch [at Clay Station].
Further, Plaintiffs believe and contend that Sweigart directed his agents, employees, and
representatives to mislead the . . . HOA and the Homeowners regarding the use and
ownership of the Common Area, among other things.”
As to Carson and Payne, the second amended complaint states: “Defendants Mike
Carson and Bob Payne (hereinafter ‘Board Members’ and collectively included in
‘Defendants’) were and are individuals doing business in the County . . . Plaintiffs
believe and contend, and based thereon allege, Board Members and Does 126-150 were
and are representatives of JTS who served on the . . . HOA board of directors under the
control and direction of JTS.”
The second amended complaint alleges a single cause of action against Sweigart,
Carson, Payne, and JTS for breach of fiduciary duty: “48. Payne, Carson, Sweigart, and
JTS and its agents and representatives (hereinafter ‘JTS Defendants’) as directors of
the . . . HOA, owed a fiduciary duty to Plaintiffs not to exercise their powers to gain
pecuniary benefit for themselves by causing Plaintiffs harm in violation of California
Corporations Code §§ 7210, 7231 and related statutes.
“49. As stated above, JTS Defendants were in control of the . . . HOA from
approximately 2003 through 2008. Attached hereto as Exhibit F is a matrix detailing the
chronology of the JTS controlled board of the . . . HOA.
“50. Plaintiffs believe and understand, and based thereon allege, that JTS
Defendants, and each of them as directors of the . . . HOA, breached that duty by:
“(A) Failing to properly investigate the annexation of the Common Area;
3
“(B) Refusing to accept the annexation of the Common Area when offered by
JTS;
“(C) Inappropriately contracting for maintenance service with entities which
directly and indirectly benefited JTS;
“(D) Improperly withholding financial information and documents from . . .
HOA;
“(E) Allowing property taxes to accrue on the Common Area in excess of
$150,000; and
“(F) Other breaches of fiduciary duty which will be discovered as investigation
continues.
“Plaintiffs are informed and believe and on that basis allege that JTS, and its
agents and representatives, and each of them, took the action described in this paragraph
for their own pecuniary benefit. Defendants, and each of them, suffered no harm as a
result of the action but knew it would cause harm to Plaintiffs.
“51. Plaintiffs believe and allege that as a direct and proximate result of the
breach of fiduciary duty above, Plaintiffs have been harmed as more fully set forth in
prayer and of this complaint in an amount to be proven at trial.”
In February 2012 the SCP parties filed a first amended cross-complaint for
indemnity and declaratory relief against the Montgomery plaintiffs. The SCP parties
alleged the HOA owed a duty to defend and indemnify them in Montgomery based on
their service as directors of the HOA.
While Montgomery was pending, the SCP parties tendered their defense to Truck.
They argued the underlying action triggered Truck’s duty to defend them as directors and
officers under the HOA’s primary policy and umbrella policy. Truck denied coverage.
In August 2014 the parties to Montgomery entered into a settlement agreement.
As part of the settlement, the HOA received a nonrevocable exclusive easement to all but
five of the 400 acres in dispute. The agreement also contained a provision requiring the
4
HOA’s board of directors to pass a resolution indemnifying the SCP parties for all
attorney fees and cost incurred in the underlying action. Subsequently, the HOA adopted
the resolution.
As part of the agreement, the Montgomery plaintiffs agreed to dismiss the action.
The SCP parties reserved the right to pursue their cross-complaint for indemnity against
the HOA. Subsequently, the Montgomery action was dismissed with prejudice.
Truck was unaware of the settlement or the board resolution until after the
settlement was adopted by the HOA.
The Truck Policy
The HOA had purchased a condominium owner’s policy from Truck. The policy
contained commercial general liability coverage and a directors and officers
endorsement.
The directors and officers liability coverage states, in part: “We will pay those
sums which you become legally obligated to pay as damages because of a ‘Claim’ for
any ‘wrongful acts’ committed by any insured, or any other person for whose acts you are
legally liable. The ‘wrongful acts’ of an insured natural person must be committed in
their conduct of management responsibilities for the organization. We will have the right
and duty to defend you against any ‘suit’ seeking those damages. However, we will have
no duty to defend you against any ‘suit’ seeking damages for ‘wrongful acts’ to which
this insurance does not apply.”
The policy was effective November 5, 2010, and included a retroactive date of
November 5, 2007, which applied to the directors and officers endorsement.2
2 The dissent points out that Sweigart and Payne were no longer members of the board
on November 5, 2007, the retroactive date, and thus were not covered by the policy.
Perhaps so, although plaintiffs disagree and the trial court chose to base its holding on the
policy exclusion exclusively, as do we.
5
The “Ranch at Clay Station HOA” is the named insured. The insured also
includes “Any person who has been, now is, or shall become: [¶] a. A duly elected
director or trustee of an insured organization; [¶] b. Duly elected or appointed officer of
an insured organization . . . .”
The policy defines a claim as “a demand or ‘suit’ against any insured for a
‘wrongful act.’ ” A wrongful act “means any negligent acts, errors, omissions or breach
of duty committed by an insured in their capacity as such.”
Exclusions
The policy also sets forth exclusions. The exclusion at issue here states:
“EXCLUSIONS:
“This insurance does not apply to ‘Claims’: [¶] . . . [¶]
“12. Relating to or arising from the insured serving in any capacity in any
organization, which at the time of such services is not an insured under this policy;
“13. Brought or maintained by or on behalf of an insured organization unless the
‘Claim’ is brought and maintained totally independent of, and totally without solicitation,
assistance, participation or intervention of any officer, director or trustee of an insured
organization;
“14. For liability under or breach of any oral, written or implied contract or
agreement, or for liability of others assumed by the insured under any such contract or
agreement, but this exclusion will not apply to the extent the insured would have been
liable in the absence of such contract or agreement . . . .”
The Indemnity Cross-complaint
In November 2014 the trial court heard argument on the SCP parties’ indemnity
cross-complaint. The HOA argued the focus of the Montgomery action was not the SCP
parties’ breach of duty as HOA board members, but on claims and misrepresentations
unrelated to board member activities. The trial court disagreed. The court entered
6
judgment in favor of the SCP parties on their claim for defense and indemnity. The court
found: “Carson, Sweigart and Payne were sued as board members and it was alleged that
as board members, they had engaged in certain misconduct as board members that
included, inter alia, a breach of fiduciary duty. The board resolved unanimously to
indemnify them. By alleging each individual was a board member and that as board
members, they breached their fiduciary duty to the HOA, the HOA is estopped to deny
they were at relevant times directors.”
Dueling Complaints
In January 2013 Truck filed an action for declaratory relief against the SCP parties
and the HOA, seeking a declaration that it had no duty to defend the SCP parties in the
Montgomery action. Truck referenced Exclusion No. 12 and Exclusion No. 13 of the
policy.
A couple of days later, the SCP parties filed a complaint for breach of contract and
breach of the covenant of good faith and fair dealing against Truck. The SCP parties
alleged Truck breached its duty to defend them in the Montgomery action. The two
actions were consolidated.
Dueling Summary Judgment/Adjudication Motions
In April 2015 both the SCP parties and Truck filed motions for summary
judgment/adjudication over insurance coverage. In its motion, Truck argued the acts of
the SCP parties fell outside the policy because their acts were not committed in “their
‘conduct of management responsibilities for the [HOA].’ ” Nor were their acts within
their capacity as the managers of the HOA board of directors. Exclusion No. 12 and
Exclusion No. 13 of the policy applied and barred coverage for claims asserted by the
SCP parties. In their opposition, the SCP parties argued they were sued for breach of
fiduciary duty as HOA board members, not JTS employees, and the “insured capacity”
exclusion did not apply.
7
Following oral argument, the trial court denied the SCP parties’ motion for
summary adjudication. The court denied Truck’s motion for summary judgment, but
granted its motion for summary adjudication. The trial court found Truck had no duty to
defend or indemnify the SCP parties under the Exclusion No. 13, the “insured-vs.-
insured” exclusion. The court’s order stated: “Because the court grants summary
adjudication of Truck’s declaratory relief complaint based on the insured-vs.-insured
exclusion, it does not address the parties’ other arguments in support of or in opposition
to this part of the motion.” The SCP parties filed a motion for reconsideration.
After additional briefing, the trial court issued a minute order vacating its prior
order granting summary adjudication. The court found Truck did not meet its burden of
demonstrating the nonexistence of any triable issue regarding the applicability of
Exclusion No. 13. The court granted Truck’s motion for summary judgment on the basis
of Exclusion No. 12.
Following more supplemental briefing, the trial court affirmed its prior minute
order granting summary judgment in favor of Truck on the basis of Exclusion No. 12.
Following entry of judgment, the SCP parties filed a timely notice of appeal.
DISCUSSION
Standard of Review
A motion for summary judgment must be granted if the submitted papers show
there is no triable issue as to any material fact and that the moving party is entitled to
judgment as a matter of law. The moving party initially bears the burden of making a
“prima facie showing of the nonexistence of any genuine issue of material fact.”
(Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 845.) “A prima facie showing is
one that is sufficient to support the position of the party in question.” (Id. at p. 851.)
Once the moving party has met its burden, the burden shifts to the opposing party to
8
show the existence of a triable issue of material fact. (Code Civ. Proc., § 436c,
subds. (c), (p)(2).)
We review de novo the record and the determination of the trial court. First, we
identify the issues raised by the pleadings, since it is these allegations to which the
motion must respond. Second, we determine whether the moving party’s showing has
established facts negating the opponent’s claims and justifying a judgment in the moving
party’s favor. When a summary judgment motion prima facie justifies a judgment, the
final step is to determine whether the opposition demonstrates the existence of a triable,
material issue of fact. (Barclay v. Jesse M. Lange Distributor, Inc. (2005)
129 Cal.App.4th 281, 290.)
The parties agree the interpretation of an insurance policy presents a question of
law. (Waller v. Truck Insurance Exchange, Inc. (1995) 11 Cal.4th 1, 18.) In interpreting
the policy, we determine the mutual intent of the parties at the time the contract was
formed. If possible, we consider only the written provisions of the policy. We interpret
policy terms using their “ ‘ordinary and popular sense’ ” unless they are used in a
technical sense or with a special meaning. (AIU Ins. Co. v. Superior Court (1990)
51 Cal.3d 807, 821-822.)
Although policy exclusions are construed strictly, courts are not free to ignore an
exclusion if it clearly applies. (Minkler v. Safeco Ins. Co. of America (2010) 49 Cal.4th
315, 322; California Traditions, Inc. v. Claremont Liability Ins. Co. (2011)
197 Cal.App.4th 410, 418-419.) The burden rests with the insurer to prove a claim falls
within an exclusion. (Brodkin v. State Farm Fire & Casualty Co. (1989) 217 Cal.App.3d
210, 216.) An exclusionary clause must be conspicuous, plain, and clear to be
enforceable. (State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201-202.)
9
Duty to Defend
The SCP parties argue the Montgomery action triggered Truck’s duty to defend
because there was a “potential” that the SCP parties could be liable for damages as HOA
board members. According to the SCP parties, “if there is even the mere potential that
they were sued in their capacity as HOA officers or directors, there is a duty to defend.”
The trial court correctly rejected this argument.
The trial court noted in the Montgomery action, the plaintiffs alleged the SCP
parties acted as JTS’s agents when they engaged in the misconduct at the center of the
action. The court summarized the connections between the SCP parties and JTS and the
SCP parties’ actions on behalf of JTS. The second amended complaint alleged Sweigart
owned JTS and directed his employees and agents to mislead the HOA and other
plaintiffs. The SCP parties breached their duties as HOA directors by “[i]nappropriately
contracting for maintenance services with entities which directly and indirectly benefited
JTS.” Sweigart also misrepresented JTS’s intent to dedicate a common area to the HOA.
The court concluded: “Given these allegations that the SCP Parties’ misconduct
was related to and motivated by their allegiance with JTS, any reasonable construction of
the exclusion in § B(12) and the Montgomery Action [second amended complaint] yields
a conclusion that the Montgomery Action was a claim related to or arising from the SCP
Parties’ service in an organization which at the time of such service was not an insured.
(See Davis v. Farmers Ins. Group (2005) 134 Cal.App.4th 100, 106-107 [even in a policy
exclusion, the phrase ‘arising from’ has a broader meaning than the phrase ‘caused by’]
[citation].)”
The SCP parties also contend the duties they allegedly breached were owed by the
HOA to its members and therefore the SCP parties could only be acting in their capacity
as HOA board members. According to the SCP parties, the complaint does not focus on
any alleged benefit to JTS, but on the potential harm to homeowners.
10
The court also found this contention wanting: “The suggestion appears to be that
the allegations must be construed either to establish that the SCP Parties acted in their
capacities as officers and directors of the HOA or as agents of JTS. Because there is no
apparent basis in either the policies or the law for such a mutual exclusion, the court
rejects the suggestion. The fact that the Montgomery Plaintiffs alleged the SCP Parties to
have engaged in misconduct as HOA officers and directors triggered the coverage
provisions in the D&O Endorsements. That the Montgomery Plaintiffs also alleged that
the SCP Parties acted as agents of JTS triggered the exclusion in § B(12).”
We agree with the trial court’s analysis of both the facts and the law. Under
Exclusion No. 12, the Truck policy does not apply to claims: “Relating to or arising from
the insured serving in any capacity in any organization which at the time of such service
is not an insured under this policy.” (Italics added.) In this regard the exclusion is not
restricted to claims premised on specific actions taken by an insured on behalf of an
organization that is not insured under the policy. Rather, the exclusion applies broadly to
claims “relating to” the insured’s service “in any capacity in any organization which at
the time of such service is not insured under this policy.” Here, while the claimed breach
of fiduciary duty may not be based on actions by the three affected directors on behalf of
JTS, it is clearly “related to” their service at JTS, an organization that is not insured under
the policy. The exclusion anticipates and takes into account complications and conflicts
that can arise when individuals serve organizations whose interests might diverge, as
occurred in the present case. It is a broad exclusion that encompasses claims relating to
the insured’s service in any capacity to an organization that is not a named insured.
The dissent insists the allegations of the complaint “establish only that Carson
was an employee of JTS and acted in a representative capacity for JTS when he served
as a director on the board.” (Conc. & dis. opn. post, at p. 5.) The alleged breach of
fiduciary duty was for his own pecuniary benefit in his capacity as an HOA director,
not because he served JTS in a manner separate from his position on the board. If
11
Truck intended to exclude developer-directors from coverage during a period where
several, if not a majority, of the board’s directors were developer-directors, it had an
obligation to do so in a plain, conspicuous, and clear manner.
The allegations cannot be read as the dissent reads them. The complaint does
not seek recovery from Carson because he worked for JTS but because he violated his
duty of undivided loyalty to the HOA, permitting his service to JTS to take priority.
The gravamen of the breach of fiduciary duty claim is that Sweigart, Payne, and
Carson acted to benefit JTS to the detriment of the HOA.
Perhaps Carson could have defeated this claim but Truck could choose not to
cover claims related to his service to JTS, an uninsured. That is what the exclusion
provides and that is what this case is about. Words can sometimes be obfuscated to
create ambiguity. But the language of the exclusion, while quite broad, is also quite
clear, plain, and conspicuous and covers the circumstances of the present dispute.
Trial Court’s Determination in the Montgomery Action
The SCP parties contend the trial court’s findings in the Montgomery action bar
the trial court in the present case from concluding that Exclusion No. 12 applies. The
court in the Montgomery action found the SCP parties “were sued as board members and
it was alleged that, as board members, they had engaged in certain misconduct as board
members that included, inter alia, a breach of fiduciary duty.” The Montgomery court’s
rejection of the HOA’s argument that the SCP parties were not sued as board members is
binding on Truck and the court.
The trial court considered and rejected this argument: “Assuming arguendo the
Montgomery court’s determinations binds this court, the court never addressed the
question whether the exclusion in § B(12) applies.” In addition, the court noted “a
determination that the Montgomery Plaintiffs’ allegations fell within the coverage
12
provisions in the D&O Endorsements does not preclude a determination that an exclusion
to coverage applies as well.”
We agree with the trial court. The court in Montgomery considered JTS and the
SCP parties’ cross-complaint for indemnity against the HOA stemming from the 2014
settlement agreement. Under the settlement agreement, the HOA passed a board
resolution agreeing to indemnify the SCP parties for attorney fees incurred in the
Montgomery action. The court determined JTS should recover nothing, but awarded the
SCP parties $605,860 in attorney fees based on the settlement agreement. The court
determined: “Based on all the evidence presented SCP has established a right to
indemnity under the terms of the contract.” The Montgomery court never considered
whether or not the SCP parties were an insured under the Truck policy. The court simply
enforced a contractual obligation.
DISPOSITION
The judgment is affirmed. Truck shall recover costs on appeal. (Cal. Rules of
Court, rule 8.278(a)(1) & (2).)
/s/
RAYE, P. J.
I concur:
/s/
MURRAY, J.
13
ROBIE, J., Concurring and Dissenting.
I concur in the majority’s conclusion that defendant Truck Insurance Exchange
(Truck) had no duty to defend plaintiffs Jack Sweigart and Bob Payne in the underlying
litigation, but for a different reason. I further dissent to the majority’s conclusion that
Truck had no duty to defend plaintiff Mike Carson. I believe the policy, with respect to
Carson, must be read in favor of coverage and against Truck because exclusion No. 12 is
ambiguous and it does not appear that the allegations at issue in this case are of the nature
intended to trigger application of this type of exclusion.
I
Truck Had No Duty To Defend Sweigart And Payne
The directors and officers liability coverage form endorsement (the endorsement)
to the condominium owners policy issued by Truck (the policy) to named insured The
Ranch at Clay Station Homeowners Association (the association) provides: “We will pay
those sums which you become legally obligated to pay as damages because of a ‘Claim’
for any ‘wrongful acts’ committed by any insured, or any other person for whose acts you
are legally liable. The ‘wrongful acts’ of an insured natural person must be committed in
their conduct of management responsibilities for the organization. We will have the right
and duty to defend you against any ‘suit’ seeking those damages. However, we will have
no duty to defend you against any ‘suit’ seeking damages for ‘wrongful acts’ to which
this insurance does not apply.” “Wrongful act” is defined as “any negligent acts, errors,
omissions or breach of duty committed by an insured in their capacity as such.” The
amendatory coverage endorsement to the policy defines a claim as either “a civil or
administrative adjudicatory proceeding” or “a written demand for monetary damage
against the insured for a wrongful act.”
It is undisputed Sweigart and Payne met the definition of “insured” under the
endorsement as directors on the association’s board of directors (the board). It is further
1
undisputed that the policy at issue “does not apply to ‘loss’ from ‘wrongful acts’ which
took place before the Retroactive Date” of November 5, 2007.
The undisputed facts establish that the wrongful acts complained of as to Sweigart
and Payne -- i.e., acts taken while they were on the board -- occurred prior to
November 5, 2007, because Sweigart served on the board only in 2004 and Payne served
on the board from August 2005 to August 2007. (See Montrose Chemical Corp. v.
Superior Court (1993) 6 Cal.4th 287, 298-299 [undisputed extrinsic evidence can
establish the absence of a potential for coverage].) Truck, accordingly, had no duty to
defend Sweigart and Payne in the underlying litigation relating to their actions while
serving on the board.
II
Truck Had A Duty To Defend Carson
It is undisputed Carson met the definition of “insured” under the endorsement
when he served on the board. The question is whether exclusion No. 12 negates that
coverage given the allegations in the second amended complaint. In my view, it does not.
I believe it is necessary to again review the allegations (somewhat expanded from the
majority’s recitation) before applying the law.
A
The Allegations And Undisputed Facts
As to Carson,3 Truck relies on paragraph 9 and the fifth cause of action in the
second amended complaint filed in the Montgomery4 action as the basis for applying
3 The endorsement contains a “Separation of Insureds” provision, which provides:
“Except with respect to the Limits Of Insurance, and any rights or duties specifically
assigned in this Coverage Form to the Named Insured, this insurance applies as if each
insured were the only insured.”
4 Montgomery v. JTS Communities, Inc., Sacramento County Superior Court, case
No. 34-2010-00073633.
2
exclusion No. 12. In paragraph 9, the Montgomery plaintiffs alleged that Carson was
believed to be a representative of JTS Communities, Inc. (JTS) “who served on the
[board] under the control and direction of JTS.” In the breach of fiduciary duty cause of
action, the Montgomery plaintiffs alleged that, “from approximately 2003 through 2008,”
JTS was in control of the association, attaching exhibit F, “detailing the chronology of the
JTS controlled board of the [association].” In that chronology, for the period August
2007 to August 2008, the Montgomery plaintiffs designated two of the directors with a
“JTS” behind their names (Carson being one of them) and another with “H.O./JTS”
behind her name. The Montgomery plaintiffs further asserted, in pertinent part, that
Carson owed the association a fiduciary duty and breached that duty by:
“(A) Failing to properly investigate the annexation of the COMMON AREA;
“(B) Refusing to accept the annexation of the COMMON AREA when offered
by JTS;
“(C) Inappropriately contracting for maintenance service with entities which
directly or indirectly benefited JTS;
“(D) Improperly withholding financial information and documents from [the
association];
“(E) Allowing property taxes to accrue on COMMON AREA in excess of
$150,000; and
“(F) Other breaches of fiduciary duty which will be discovered as investigation
continues.”
The Montgomery plaintiffs further alleged that Carson took the foregoing actions
for his “own pecuniary benefit.”
It is undisputed that Carson served on the board from August 2005 until
approximately August 2009 and worked for JTS during that time. As noted previously, it
is further undisputed that the policy expressly applies retroactively to November 5, 2007.
3
B
The Exclusion Must Be Read In Favor Of Coverage
“Interpretation of an insurance policy is a question of law and follows the general
rules of contract interpretation. [Citation.] ‘The fundamental rules of contract
interpretation are based on the premise that the interpretation of a contract must give
effect to the “mutual intention” of the parties. “Under statutory rules of contract
interpretation, the mutual intention of the parties at the time the contract is formed
governs interpretation. [Citation.] Such intent is to be inferred, if possible, solely from
the written provisions of the contract. [Citation.] The ‘clear and explicit’ meaning of
these provisions, interpreted in their ‘ordinary and popular sense,’ unless ‘used by the
parties in a technical sense or a special meaning is given to them by usage’ [citation],
controls judicial interpretation. [Citation]” [Citations.] A policy provision will be
considered ambiguous when it is capable of two or more constructions, both of which are
reasonable. [Citation.] But language in a contract must be interpreted as a whole, and in
the circumstances of the case, and cannot be found to be ambiguous in the abstract.’ ”
(MacKinnon v. Truck Ins. Exchange (2003) 31 Cal.4th 635, 647-648.) “The proper
question is whether the [language] is ambiguous in the context of this policy and the
circumstances of this case.” (Bay Cities Paving & Grading v. Lawyers’ Mutual Ins. Co.
(1993) 5 Cal.4th 854, 868.) “[A]ny ambiguities in an insurance policy must be read
against the insurer.” (Silberg v. Cal. Life Ins. Co. (1974) 11 Cal.3d 452, 464.)
Insurance coverage is “ ‘ “ ‘interpreted broadly so as to afford the greatest possible
protection to the insured, [whereas] . . . exclusionary clauses are interpreted narrowly
against the insurer.’ ” ’ [Citation.] ‘[A]n insurer cannot escape its basic duty to insure by
means of an exclusionary clause that is unclear. As we have declared time and again
“any exception to the performance of the basic underlying obligation must be so stated as
clearly to apprise the insured of its effect.” [Citation.] Thus, “the burden rests upon the
insurer to phrase exceptions and exclusions in clear and unmistakable language.”
4
[Citation.] The exclusionary clause “must be conspicuous, plain and clear.” ’ [Citation.]
This rule applies with particular force when the coverage portion of the insurance policy
would lead an insured to reasonably expect coverage for the claim purportedly excluded.
[Citation.] The burden is on the insured to establish that the claim is within the basic
scope of coverage and on the insurer to establish that the claim is specifically excluded.”
(MacKinnon v. Truck Ins. Exchange, supra, 31 Cal.4th at p. 648.)
Exclusion No. 12 provides the insurance does not apply to claims “[r]elating to or
arising from the insured serving in any capacity in any organization which at the time of
such service is not an insured under this policy.”
Truck asserts the allegations were that Carson breached his fiduciary duties to the
association “because [he] engaged in conduct in service of JTS Communities, for JTS
Communities’ pecuniary benefit, and adverse to the Homeowners’ Association.” It
further asserts the Montgomery plaintiffs argued Carson was “acting in the best interests
of the developer, JTS Communities, an organization that was not insured under the policy
rather than in the best interest of the Homeowners’ Association” and it was undisputed
Carson was employed by JTS at all times relevant to the underlying litigation. The
majority concludes the allegations clearly establish the breach of fiduciary duty related to
Carson’s “service at JTS.” (Maj. opn. at p. 11.) While Truck’s and the majority’s
interpretation of the exclusion is certainly plausible, I believe the exclusion is ambiguous
when considered within the context of this policy and the circumstances of this case.
In my view, the allegations establish only that Carson was an employee of JTS and
acted in a representative capacity for JTS when he served as a director on the board. The
Montgomery plaintiffs expressly alleged that Carson breached his fiduciary duty for his
own pecuniary benefit and only in his capacity as an association director, not because he
served for and provided services to JTS in a manner separate from his position on the
board. If the exclusion is read to negate coverage for decisions made and actions taken
by a director serving on the board in a representative capacity on behalf of a developer,
5
would coverage for a developer-director not always be denied and thus be illusory? In
my view, the interpretation advanced by Truck does not appear to be contemplated in the
context of this policy and the circumstances of this case.
Truck agreed to the retroactive application of the endorsement to November 5,
2007 -- a time when allegedly at least two and perhaps three developer-directors served
on the board. As Carson appropriately points out, a developer’s role in the management
of a homeowners association is anticipated, known, and regulated. If Truck intended to
exclude developer-directors from coverage during a period where several, if not a
majority, of the board’s directors were developer-directors, it had an obligation to do so
in a plain, conspicuous, and clear manner. (MacKinnon v. Truck Ins. Exchange, supra,
31 Cal.4th at p. 648.) Exclusion No. 12 is not plain or clear as to such an intent,
rendering it ambiguous under the facts of this case. (See Zahler v. Twin City Fire Ins.
Co. (S.D.N.Y., Sept. 17, 2007, No. 04 Civ. 10299 (LAP)) 2007 U.S. Dist. Lexis 74720, at
*16-17 [finding the phrase “serving as” in an analogous outside services exclusion5
ambiguous given extrinsic evidence that could support the insured’s view of the parties’
intent that the exclusion “ ‘turn[ed] on which “hat” the defendant [wa]s sued in, not
whether a “hat” is merely mentioned’ ”].) I think Carson’s interpretation that the
exclusion applies to claims relating to or arising from an action taken by Carson in his
role as an employee for JTS (independent of merely serving on the board) is a reasonable
interpretation in the context and under the facts of this case. The ambiguity must be
construed against Truck. (Silberg v. Cal. Life Ins. Co., supra, 11 Cal.3d at p. 464.)
5 The exclusion provided: “The Insurer shall not be liable to make any payment for
Loss in connection with any Claim made against the Directors and Officers . . . for, based
upon, arising from, or in any way related to such Directors or Officers serving as a
director, officer, trustee, regent, governor or employee of any entity other than the
Company even if such service is at the direction or request of the Company . . . .”
(Zahler v. Twin City Fire Ins. Co., supra, 2007 U.S. Dist. Lexis 74720, at *2-3.)
6
I further note that the allegations in this case do not appear to be of the nature
intended to trigger this type of exclusion. (See, e.g., Law Offices of Zachary R. Greenhill
P.C. v. Liberty Ins. Underwriters, Inc. (2015) 9 N.Y.S.3d 264, 267 [128 A.D.3d 556,
559] [capacity exclusion6 applied to malpractice counterclaim arising in the context of
the attorney suing to enforce the payment of consulting fees for his and his wife’s
nonlegal services -- in other words, the allegations were that the attorney was wearing
two hats simultaneously and thus he was not insured for misconduct occurring while
wearing a nonlegal and uninsured hat]; Cont’l Cas. Co. v. Adams (M.D.Pa., Sept. 12,
2003, No. 3: CV-02-1122) 2003 U.S. Dist. Lexis 16434, at *15-33 & fn. 10 [outside
service exclusion7 applied where underlying litigation alleged misconduct by the
individual defendants in their capacities as officers and directors of both the insured
entity and an uninsured entity]; Offutt v. Twin City Fire Ins. Co. (N.D., Sept. 26, 2014,
No. 3:13-cv-54) 2014 U.S. Dist. Lexis 188406, at *20 [dual service exclusion8 applied
6 The capacity exclusion provided the policy “ ‘does not apply to any claim arising
out of your services and/or capacity as [¶] . . . an officer, director, partner, trustee,
manager operator, or employee of an organization other than that of the name
insured . . . .’ ” (Law Offices of Zachary R. Greenhill P.C. v. Liberty Ins. Underwriters,
Inc., supra, 128 A.D.3d at p. 558.)
7 The exclusion provided the insurer “ ‘shall not be liable to pay any loss in
connection with any claim based upon, arising out of, directly or indirectly resulting
from, in consequence of, or in any way involving any actual or alleged conduct by the
individual insureds in the discharge of their duties as directors, officers, trustees,
employees or volunteers of any entity other than the entity or charitable organization,
even if directed or requested by the entity to serve as directors, officers, employees or
volunteers of such entities.’ ” (Cont’l Cas. Co. v. Adams, supra, 2003 U.S. Dist. Lexis
16434, at *22, underlining omitted.)
8 The dual service exclusion provided: “The Insurer shall not pay Loss . . . of an
Insured Person based upon, arising from, or in any way related to such Insured Person’s
service, at any time, as a director, officer, trustee, regent, governor or equivalent
executive or as an employee of any entity other than an Insured Entity.” (Offutt v. Twin
City Fire Ins. Co., supra, 2014 U.S. Dist. Lexis 188406, at *20.)
7
where allegations against the insured related to his position as chairman of an uninsured
entity]; Palmer v. Twin City Fire Ins. Co. (E.D.Pa., Nov. 20, 2017, No. 17-826) 2017
U.S. Dist. Lexis 190993, at *14-15 [dual service exclusion9 applied where claim was
based on insured’s filing of a petition in his capacity as president and owner of an
uninsured entity]; Coregis Ins. Co. v. Larocca (E.D.Pa. 1999) 80 F.Supp.2d 452, 456-457
[exclusion10 barred coverage because the allegations involved the attorney acting
simultaneously as an attorney and a partner in a real estate business]; Coregis Ins. Co. v.
Bartos, Broughal & DeVito, LLP (E.D.Pa. 1999) 37 F.Supp.2d 391, 392-395 [outside
business exclusion11 barred coverage in a legal malpractice suit where allegations were
that the attorney simultaneously acted as an attorney and an officer of an investment
partnership]; Westport Ins. Corp. v. Hippo Fleming & Pertile Law Offices (W.D.Pa.
2018) 349 F.Supp.3d 468, 481-483 [exclusion12 barred coverage where complaint alleged
9 The exclusion provided the insurer “ ‘shall not pay Loss . . . (I) of an Insured
Person based upon, arising from, or in any way related to such Insured Person’s service,
at any time, as a director, officer, trustee, regent, governor, or equivalent executive or as
an employee of any entity other than an Insured Entity. . . .’ ” (Palmer v. Twin City Fire
Ins. Co., supra, 2017 U.S. Dist. Lexis 190993, at *5.)
10 The exclusion barred coverage for “any CLAIM arising out of an INSURED’S
activities as an officer, director, partner, manager or employee of any company,
corporation, operation, organization or association other than the NAMED INSURED.”
(Coregis Ins. Co. v. Larocca, supra, 80 F.Supp.2d at p. 454.)
11 Applying the same exclusion as in Coregis, Ins. Co. v. Larocca, supra, 80
F.Supp.2d at page 454 and others. (Coregis Ins. Co. v. Bartos, Broughal & Devito, LLP,
supra, 37 F.Supp.2d at p. 393.)
12 The exclusion provided “[the Policy] shall not apply to any CLAIM based upon,
attributable to, or directly or indirectly resulting from . . . any INSURED’S activities as
an officer, director, partner, manager, or employee of any company, corporation,
operation, organization, partnership, or association other than the NAMED INSURED or
PRIOR FIRM, except as a member, director, or officer of any Bar Association, its
governing board or any of its committees, or as a member of a formal accreditation,
8
the insured committed legal malpractice and breach of contract by simultaneously acting
as an attorney and a real estate developer].)
A law review article describes this type of capacity or outside services exclusion
as follows: “Outside capacity exclusions apply where insured directors and officers
commit otherwise covered wrongful acts, but do so in a capacity other than as a director
or officer of the insured corporation, so it has been held that a claim made against a
director of the insured corporation, alleging that he committed wrongful acts while acting
in his capacity as director of a subsidiary of the insured company, was enough to trigger
the exclusion . . . .” (Annotation, Construction and Application of Exclusion Provisions
of Directors and Officers Insurance Policy, Exclusive of Regulatory and Insured vs.
Insured Exclusions (2008) 34 A.L.R.6th 345, italics added; see also Ragsdale v. Twin
City Fire Ins. Co. (N.D.Ga., Feb. 2, 2007, No. 1:05-cv-1118-TCB) 2007 U.S. Dist. Lexis
111207, at *12 [“After careful review, it is apparent to the Court that outside capacity
exclusions are designed to bar coverage in situations where a lawsuit alleges that
individual insureds engaged in conduct as agents of an uninsured entity, rather than the
entity to which the [directors’ and officers’] policy was issued”]; Niagara Fire Ins. Co. v.
Pepicelli, Pepicelli, Watts & Youngs (3d Cir. 1987) 821 F.2d 216, 220-221 [holding that
an outside business exclusion bars coverage whenever a lawsuit arises from an attorney
acting simultaneously as both an attorney and officer or director of an uninsured business,
but concluding that the exclusion did not apply to the malpractice claim against the
attorney because that claim did not result from the attorney acting in favor of outside
business interests].)
ethics, peer review, licensing board, standards review, or similar professional board or
committee related to the practice of law.” (Westport Ins. Corp. v. Hippo Fleming &
Pertile Law Offices, supra, 349 F.Supp.3d at p. 476.)
9
Because I find no merit in the remainder of Truck’s arguments and conclude
exclusion No. 12 does not bar coverage, I would reverse the judgment in favor of Truck
as to its duty to defend Carson.
/s/
Robie, J.
10