Let me rewrite the title of this post for everyone: Injury Victims Lose Against Insurance Company When Second District Court of Appeal Gets It Exactly Wrong in Baker v. National Interstate Insurance Company.

When a company buys a general liability policy, most folks would assume that the reason is to cover general liability.  For instance, an injury victim’s damages in a personal injury or wrongful death action.  But I guess not according to the Second District Court of Appeal in Baker.

In Baker, the court of appeal overruled a trial court’s decision and interpreted an exclusion clause as to extinguish liability for the wrongful death and injuries of a bus driver.

The case goes something like this: Four Winds, a transportation and school bus company, buys an insurance policy – a general liability policy.  Next, La Shaun Clemmons, who owned another school bus business, bought a bus from Four Winds.  Subsequent to the sale of the bus, Clemmons asked Four Winds to inspect and prepare the bus for a change of ownership inspection that is conducted by the highway patrol.  Later Clemmons is involved in an accident and killed when her seat broke loose and she was thrown through the windshield.

Clemmons family sued Four Winds for her injuries and wrongful death based on a negligent inspection of the bus.  Four Winds tendered the claim to their insurance company in accordance with the terms of the policy.  And Clemmons, the injury victim, offered to settle the case within the limits of the policy, which were $1 million dollars.

Now here is where the story should become simple – the insurance company investigates the claim, realizes that liability is pretty clear and that the damages if the case goes to trial would be huge, and takes the offer to settle the case within the policy limits, which is in the best interest of the insurance company’s insured as well as the injury victim’s family.  Sounds reasonable and makes sense right?  Wrong!

To make a long story short, the insurance company denied the claim based on the Products-Completed Operations Hazard exclusion that was written into the policy and which is standard in many CGL (commercial general liability) policies. Four Winds then assigned the plaintiffs’ its rights under the policy, which allowed the plaintiffs to go after the insurance company and they did.

The trial court, in reliance on Insurance Co. of North America v Electronic Purification Co. (1967) 67 Cal.2d 679, ruled that the exclusion clause at issue applies only to work performed on the insured’s “products.”  Thus, it was inapplicable to the current case because Four Winds’ inspection of the bus was independent of its sale of the bus.  Sounds reasonable to me, but not to the court of appeal.

The California Court of Appeal, Second Appellate District, Division Eight, reversed the trial court’s decision.  The court of appeal distinguished the current case from the California Supreme Court’s long standing ruling in Insurance Co. of North America v Electronic Purification Co. by finding the exclusion at issue applied to either “‘your product’ or ‘your work’” read and defined separately.  The court of appeal ignores the Supreme Court’s clear reasoning for reading those terms together and disregards forty years of jurisprudence on this matter.

The court’s opinion makes a mockery of the whole reason businesses buy policies and seek general liability coverage to begin with; to provide coverage for general liability including bodily injuries and wrongful death.  The court simply casts aside the Supreme Court’s analysis in Electronic Purification regarding differing language for different terms in the contract as “not entirely dispositive.”

Put simply, the court read the language of the policy and determined that if insurance companies want to sell general liability policies that exclude general liability under nearly every scenario imaginable – no problem.