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California Supreme Court Rewrites an Insurance Policy
(c) 2004 by ClaimSchool
Written by Barry Zalma, Esq., CFE

Insurance Fraud Investigations are difficult enough. They require a knowledge of insurance policies and the interpretation of insurance policies. When conducting a fraud investigation the insurer and the investigator rely on the policy wording meaning what it says. The courts, on the other hand, are required to interpret insurance policies and often do so with an intent to protect the policyholder rather than to interpret what should be clear.

The California Supreme Court, apparently rejecting its own, well-established, rules of construction of insurance policies, re-wrote the wording of a Jewelers’ Block policy of insurance. In what appears to be a case of reasoning backward to provide insurance coverage for a jewelry salesman who was exceedingly stupid – he left his jewelry in his car with the keys in the ignition and the engine running to check on a clanking noise -- only to have a thief jump in the car and drive away with the jewelry, the Supreme Court has compelled insurers to make their coverage more restrictive.

The Supreme Court majority, finding an ambiguity in the word "upon" has redefined an exclusion requiring an insured to be "in, on or upon" the automobile at the time of a loss for coverage to apply to mean "in close proximity."

As Justice Kennard stated in her dissent "The majority's holding misreads the plain meaning of the language, and is contrary to the holdings of the overwhelming majority of courts in other jurisdictions. We should enforce the contract between the parties as it is written, not rewrite its terms."

Unfortunately the dissents lost the argument with the Supreme Court in E.M.M.I. Inc. v. Zurich American Insurance Company, No. S109609 (Cal. 02/23/2004). As a result, until the policy wording changes to comport with the holding of the California Supreme Court, stupid, lazy, or incompetent jewelers who -- for more than 100 years new there was no coverage for a theft unless they were in, on or upon the vehicle, now can get coverage if they walk away -- as long as they don't walk too far away. The "close proximity" definition chosen by the Supreme Court is so loose and ambiguous that it will result in hundreds of law suits to determine if two, four, ten or twenty feet from a vehicle is "close proximity."

Intelligent insurers will modify the language to provide less coverage and to avoid arguments of ambiguity by merely eliminating the words "on or upon" and require the insured to "actually be in" the automobile at the time of the theft for the loss to be covered.

The provision at issue exempted from coverage jewelry stolen from a vehicle unless the insured was "actually in or upon such vehicle at the time of the theft." The question presented to the Supreme Court was whether the exception to that exclusion applies when the insured is not in the vehicle but is in close proximity to the vehicle and is attending to it when the theft occurs. The Supreme Court concluded the vehicle theft exclusion, as a whole, is ambiguous and fails to plainly and clearly alert insureds that there is no coverage if a theft occurs when the insured has stepped out of the vehicle but remains in close proximity and is attending to it.

In this case, Brian Callahan, a jewelry salesman, left his home with two "hard cloth garment bags" containing jewelry (some of which belonged to E.M.M.I. Inc., a manufacturer and marketer of jewelry) in the trunk of his vehicle. Shortly after driving away from his home, he heard a clanking noise emanating from the rear of the vehicle. Callahan stopped on the side of the road to investigate the source of the noise, got out of the car and closed the car door but left the engine running. He walked to the rear of the vehicle and, as he crouched down to visually inspect the exhaust pipes, he felt someone pass quickly by him. When he looked up, he saw an individual get into his car and drive away. Callahan was no more than approximately two feet from the car during the entire time he was outside the vehicle until the time of the theft. The police subsequently found the vehicle, but the jewelry was missing. In this case, two feet from the car, where he was too far away to stop the thief from entering his car and driving it off, is "close proximity" and therefore not excluded.

The Supreme Court recognized that Jeweler's block insurance was conceived at the turn of the 20th century. It provides coverage under a single policy for the "various risks inherent" in the jewelry business. In the present case, the policy excluded from coverage theft from a vehicle unless the insured or a designated employee was "actually in or upon" the vehicle at the time of the theft. As the Minnesota Supreme Court has observed, "The [exclusion] was obviously intended to cover any situation where a loss occurred when the property was not protected by the presence of someone in or upon the car . . . ." (Ruvelson, Inc. v. St. Paul Fire & Marine Ins. Co. (1951) 235 Minn. 243, 251 [50 N.W.2d 629, 634] (Ruvelson).)

Rules Governing Interpretation of Insurance Policies

The Supreme Court, stating its long-held rules of Interpretation of insurance policies, said:

A policy provision is ambiguous when it is susceptible to two or more reasonable constructions. (Waller, supra, 11 Cal.4th at p. 18.) Language in an insurance policy is "interpreted as a whole, and in the circumstances of the case, and cannot be found to be ambiguous in the abstract." (Ibid.) "The proper question is whether the [provision or] word is ambiguous in the context of this policy and the circumstances of this case. [Citation.] `The provision will shift between clarity and ambiguity with changes in the event at hand.' [Citation.]" (Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 868.) Ambiguity " ` "is resolved by interpreting the ambiguous provisions in the sense the [insurer] believed the [insured] understood them at the time of formation. [Citation.] If application of this rule does not eliminate the ambiguity, ambiguous language is construed against the party who caused the uncertainty to exist. [Citation.]" "This rule, as applied to a promise of coverage in an insurance policy, protects not the subjective beliefs of the insurer but, rather, `the objectively reasonable expectations of the insured.' " ' [Citation.] `Any ambiguous terms are resolved in the insureds' favor, consistent with the insureds' reasonable expectations.' " (Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 763.)

Falling back on a selective reading of dictionaries the Supreme Court found that the word "upon" is interchangeable with "on" and that the definition of "on" includes "in close proximity." (Citing to Merriam-Webster's 10th New Collegiate Dict. (1995) pp. 811, 1298 ["a village [on] the sea"]; Black's Law Dict. (6th ed. 1990) p. 1088)

The Supreme Court found the main culprit for the ambiguity it found was the use of the word "upon" to refer to a vehicle concluding that "a reasonable insured would likely interpret the exception to mean that the insured must be either inside the vehicle, or in some other location relative to the vehicle." Ignoring 100 years of use and interpretation the Supreme Court concluded, also, that "[H]ad the insurer intended the phrase "or upon" to apply solely to the use of motorcycles or other means of transportations such as ships and trains, it could, and should, have made this intention clear to the insured."

Since the Court found the vehicle theft exclusion and its exception ambiguous, it resolved the ambiguity in favor of the insured, consistent with the insured's reasonable expectations. (Kazi v. State Farm Fire & Casualty Co. (2001) 24 Cal.4th 871, 879.). It then applied the "reasonable expectations" rule, substituted its "reasonable expectations" from those of 100 years of jewelers and insurers, and concluded "that coverage would be provided in this context -when the insured is in close proximity to the vehicle and attending to it when the theft occurs."

The court then reviewed the history of other decisions relating to the same exclusion. Of the California cases, the most significant is Revesz v. Excess Ins. Co. (1973) 30 Cal.App.3d 125 (Revesz). In that case, the Court of Appeal construed a "salesman's floater" policy with exclusion and exception provisions identical to those at issue in this case. There, the salesman, in need of driving directions, parked at a curb in front of a gas station, locked the ignition, got out, and took his keys with him as he walked around in front of the car toward a parkway. Thirty seconds after leaving his car and while he was still within two to three feet from it, the salesman heard the car door close and saw a thief drive away in his car, which contained his jewelry. The insured maintained that the term "upon" in the exception to the policy exclusion should be interpreted to mean " `in or about' or `in close proximity to' [the] vehicle while the insured is engaged in work incidental to loading, unloading or transporting jewelry. Such interpretation would provide coverage while the insured is walking to the rear of his car to remove jewelry, or while he is changing a tire, or while he momentarily leaves his vehicle to obtain directions, the situation presented in [that] case." The Court of Appeal found it unnecessary to decide whether the term "upon" should be interpreted as urged by the insured: "Having parked his vehicle at the curb, locked the ignition, removed his keys, and left the vehicle for the purpose of seeking information, he had temporarily abandoned the vehicle."

The exception to the exclusion therefore did not apply. The decisions from other jurisdictions, the Supreme Court found, involved temporary abandonment of the vehicle.

The Decision

The Supreme Court ignored the fact, that it cited, that courts "have uniformly construed this and similar language adversely to the contentions of the [insured]." Greenberg v. Rhode Island Ins. Co. (1946) 66 N.Y.S.2d 457, 459 in which the court concluded that the word `actually' in the exception "means that which exists in fact or reality, in contrast to that which is constructive, theoretical or speculative." The Supreme Court found different the decision in Royce Furs, Inc. v. Home Insurance Co. (1968) 291 N.Y.S.2d 529, because a fur salesman parked and locked his vehicle and entered a hotel to register. The vehicle, which contained furs locked in the trunk, was parked six to 10 feet from the hotel entrance and was visible from inside the hotel through a large window. As the salesman returned to his vehicle, a man bolted into the car and drove off. The New York Supreme Court, Appellate Division denied coverage because the salesman was not "actually in or upon" the vehicle when the theft occurred, pointing out that the insured's "representative was not in the automobile, but was far enough from it to have given the thief the opportunity to enter the car."

The court found, similarly, that American Stone Diamond, Inc. v. Lloyds of London (S.D.Tex. 1996) 934 F.Supp. 839, the insured was transporting jewelry in the trunk of his automobile. He pulled into a gas station, refueled his vehicle, and went inside the station to pay. He returned to his vehicle within minutes to find the jewelry had been stolen from the trunk. The federal district court denied coverage, noting that the insured "was not literally, physically, in or upon the car at the time of the theft." The federal court stated: "Courts have consistently held nearly identical policy language to be unambiguous and, based upon such exclusions, have denied coverage to insureds who were not literally in or upon their vehicles at the time of the losses, even though the insureds may have been only a short distance away from the vehicle, watching the vehicle, or absent from the vehicle for only a short period of time." Regardless, the California Supreme Court found identical language to be ambiguous because, in each case, the insured "temporarily abandoned the vehicle when the theft occurred."

Our holding that the insured in the present case was "upon" the vehicle when the theft occurred is consistent with the cases discussed above in which coverage was denied under the vehicle theft exclusion. In none of the cases in which the court found the exception to the vehicle theft exclusion inapplicable and denied coverage was the insured or its representative similarly "upon" the vehicle. The insureds in those cases were not in close proximity and actually attending to the vehicle when the theft occurred.

In Revesz, the insured intended to and did abandon his vehicle as he walked away from it in search of directions. With his back to the car, he was not only unable to observe his car, but apparently did not realize that someone was breaking into it despite the fact the door was locked and the insured was only two to three feet from the car. Unlike the insured in Revesz, the salesman here did not intend to and did not abandon his vehicle when he walked to the rear to inspect the tailpipe area. His intent and conduct was solely to attend to his vehicle without abandoning it or the jewelry locked in the trunk.

Although there is no language in the exclusion to indicate, let alone require, abandonment of the vehicle, the California Supreme Court has concluded that such abandonment is required before the exclusion can apply.

Analysis

Plaintiff E.M.M.I, Inc., sells jewelry. Its salesman, Brian Callahan, was carrying jewelry in his car. When Callahan heard a "clunking" noise coming from the car, he pulled the car over, got out of the car while leaving its engine running, went to the back of the car and bent over to look under the car. A thief ran by him, got into the car, and drove away.

As Justice Kennard said in her dissent:

Applicable law is well established and clear. The ordinary rules of contract interpretation apply to the construction of an insurance policy. (Safeco Ins. Co. v. Robert S. (2001) 26 Cal.4th 758, 762-763; Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264.) Judicial interpretation is controlled by words, as they are understood in their ordinary and popular sense. (Civ. Code, § 1644; Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18.) The function of the court in interpreting an instrument "is simply to ascertain and declare what is in its terms or in substance contained therein, not to insert what has been omitted, or to omit what has been inserted." (Code Civ. Proc., § 1858; Safeco Ins. Co. v. Robert S., supra, at p. 764; Jensen v. Traders & General Ins. Co. (1959) 52 Cal.2d 786, 790.) Language cannot be found to be ambiguous in the abstract and courts are "not to strain to create an ambiguity where none exists." (Waller v. Truck Ins. Exchange, Inc., supra, at pp. 18-19.)

The ordinary, common, and popular understanding of the words "actually upon" mean in fact on a vehicle. Here, Presiding Justice Turner, writing for a unanimous Court of Appeal panel, put it thus: "[T]he provision in question is unambiguous. In its ordinary and popular usage (Civ. Code, § 1644; Bank of the West v. Superior Court, supra, 2 Cal.4th at p. 1265), `upon' is interchangeable with `on.' (citations omitted)... `[O]n (in various senses), or up and on: on and upon are generally interchangeable, the choice being governed by idiom, sentence rhythm, etc.' `On' can mean `in close proximity with,' as in `a village [on] the sea,' or `stay [on] your opponent.' (Merriam-Webster's Collegiate Dict., supra, p. 811.) `Upon' can also mean `in or into close proximity or contact with' as in `the enemy is [upon] us,' or `despondency fell [upon] me.' (Webster's 3d New Internat. Dict. (1981) p. 2517.) But we have not found any definition of `on' or `upon' that includes in close proximity to a car. (See Webster's 3d New Internat. Dict., supra, p. 1574 [`on' is `used as a function word to indicate presence within,' as in `rode there [on] a train,' or `booked passage [on] an ocean liner'].)" (Italics added)

I agree with Justice Kennard that "No one would understand the statement that "a person is on a car" to mean that the person was standing next to the car or two feet away from it."

Justice Chin, in his dissent, concluded that the words in the exclusion cannot, "contemplate coverage when the insured or its representative is "in close proximity" to the vehicle or somewhere nearby at the time of the theft. Rather, the insurer's use of the phrase "actually in or upon such vehicle" was deliberate."

Insuring jewelry salesmen is a high-risk proposition. Jewelry invites theft. Jewelry salesmen carry, as a requirement of their profession, high values and are well known targets of theft. Insurers who insure jewelers and their traveling sales people recognize the high risk and do not wish to take the risk of paying for stupidity like that in the EMMI case where the salesperson left his stock of jewelry in a car with the keys in the ignition and the engine running. He might as well have put a sign on the vehicle saying "PLEASE STEAL ME". He was certainly not acting in a manner to protect the goods against theft. Unattended vehicles especially invite theft. Unattended vehicles with the key in the ignition and the engine running send out an engraved invitation to those who would commit theft. The intent of the exclusion of theft when the insured is not actually, literally, in or upon the car, is to ensure the actual presence of someone in or upon the car in order to avoid a theft. (Ruvelson, Inc. v. St. Paul Fire and Marine Ins. Co. (Minn. 1951) 50 N.W.2d 629, 635 (Ruvelson).) As Justice Chin stated, "Zurich did not insure against theft when the insured's representative was nearby or close to the car, but only when he was actually in or upon the vehicle. Therefore, when Brian Callahan, who was in charge of the car containing the jewelry, exited the vehicle and left the engine running, he increased the risk of theft of the car and anything in it, including the jewelry. Under the insurance policy's plain language, and the many interpretative principles that guide us in reviewing insurance coverage issues, the theft is excluded from coverage."

Unfortunately Justice Kennard, Chin and Brown (all of whom dissented) were not the majority. Their opinions, although clear and well reasoned, are not the law. Insurers who insure jewelry risks in California have no option but to accept "close proximity" as the rule (which any court would find ambiguous if it was written into a policy) or change the words to "in" the vehicle at the time of the theft. This will provide more restrictive coverage and will require salesmen to travel in teams since the salesman will be unable to pump gas, go to the bathroom or move from the vehicle unless he takes his jewelry with him.

The Current Insurance Services Office Jewelers Block Policy, provides:

Theft from any vehicle unless you, an employee, or other person whose only duty is to attend the vehicle are actually in or upon such vehicle at the time of the theft. [Form CM 00 59 09 04]

This exclusion should now read, as the California Supreme Court requires:

Theft from any vehicle unless you, an employee, or other person whose only duty is to attend the vehicle are actually in or are in close proximity to such vehicle at the time of the theft.

The decision has totally rewritten the wording of the exclusion and has done so in a manner to make a clear exclusion impossible to enforce because no one knows what "close proximity" means. Does it only mean the two-feet away that Mr. Callahan was at the time EMMI's property was stolen. Can it be four feet, fourteen feet, or fifty feet away as long as the salesman claims he is "attending" the vehicle? I don't know and I do not believe the Supreme Court knows.

Insurers who wish to avoid the problem created by the Supreme Court can easily resolve it by changing the wording to:

Theft from any vehicle unless you, an employee, or other person whose only duty is to attend the vehicle are actually in such vehicle at the time of the theft.

Until the policies are changed insurers facing Jewelers' Block losses should conduct a thorough investigation, including statements from independent witnesses, to position the salesman at the time of the theft. If he was as far away as Mr. Revesz then the claim can probably be safely denied. If not, litigation must ensue.

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certified fraud examiner, credit card fraud, fraud investigation
certified fraud examiner, credit card fraud, fraud investigation