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Insurer Denying Coverage May Rely On Insured's Statements Coupled With Extrinsic Facts

It is always difficult to determine whether or not a decision to deny coverage is a reasonable decision that will pass muster with the Courts. The Safeco Insurance Company of America v. Parks (2004) 122 Cal.App.4th 779, case is a highly fact-intensive case which provides some insight into the facts insurers may rely on for a denial of a claim for coverage.

A short recitation of the facts is necessary. Michelle Miller (""Michelle"") was a seventeen year old female who went drinking with her twenty-one year old boyfriend, Jamey Parks (""Parks""). Parks became intoxicated so Michelle drove Parks' car towards their respective homes. While driving, the car had a flat tire and Michelle pulled the car over to the side of the road. Parks became violent and began hitting Michelle. Michelle contacted other friends of hers for assistance and they came to pickup both Michelle and Parks. Parks continued his violent assault on Michelle. The friends and Michelle both forced Parks to exit the car on the side of the freeway and drove off without him. Due to his intoxicated state, Parks walked on to the freeway and was struck by a vehicle causing him to lose a leg.

Inasmuch as Michelle was a minor, Parks brought a lawsuit against Michelle, as well as her divorced parents. Michelle's mother, at the time, had a live-in boyfriend, whom she ultimately married (""Barnett""), who was also a named defendant. Michelle's father (""Miller"") lived alone.

The Barnetts tendered Parks' claim to their homeowners insurer, Safeco Insurance Company (""Safeco""). The Safeco policy defined an insured as the ""[Named Insured] and the following residents of your household, (a) your relatives; (b) and any other person under the age of twenty-one who is in the care of any person named above."" As part of its investigation of the claim, Safeco spoke to both of the Barnetts, as well as the attorney for both Parks and Michelle (Michelle's father, Miller, had auto insurance coverage issued by California Casualty which defended both Michelle and her father). After speaking to the foregoing individuals, as well as reviewing the California Highway Patrol Accident Report, the existing pleadings in Parks' lawsuit, and the transcript of Michelle's deposition in that lawsuit, Safeco denied coverage for the claim in April, 2001. Subsequently, Miller's attorney provided a transcript, to Safeco, of the Barnetts' depositions as well as the deposition of a former friend of Michelle's taken in Parks' lawsuit.

All of the information provided to Safeco at that time indicated that Michelle lived with her father, not with the Barnetts. Safeco's conversations with the Barnetts revealed a denial by Eddie Barnett that Michelle was a resident of his household, that he had any legal relationship with her whatsoever, and that Barnett asserted that he did not provide any financial support for Michelle. According to the Barnetts, Michelle stayed at the Barnetts' house every couple of months and when she did come over, she used a guestroom since she did not have her own bedroom in the Barnetts' house. Additionally, the Barnetts testified in their depositions that Michelle was not expected to do any chores; she occasionally had overnight guests, but she did not have a key to the house or permission to drive Eddie Barnett's vehicle.

In contrary testimony, Jennifer Parker, a former friend of Michelle, testified that she had stayed with Michelle at the Barnetts' house at least twice a month. She also testified that Michelle had a room in the house with an adjoining bathroom and that Michelle kept clothes, furniture, and other personal belongings in her room. Parker also testified that Michelle lived at the Barnett house for a couple of months after Parks' accident.

Parks was successful in his arbitration against Michelle and after the arbitration award was affirmed, Michelle assigned her rights and claims against Safeco to Parks. Parks subsequently brought a lawsuit against Safeco for breach of contract and bad faith, and failure to settle his claims against Michelle within the policy limits. Safeco filed its own declaratory relief action against Michelle. Michelle filed a cross-claim against Safeco for bad faith, failure to defend as well as a failure to settle Parks' claims. After a three day non-jury trial, Safeco was found to have a duty to defend Michelle and indemnify Michelle for the 2.1 million dollar judgment obtained by Parks against Michelle. The issues of bad faith were stayed pending Safeco's appeal on the coverage issues.

During the coverage litigation, Michelle and her mother attempted to retract their earlier testimony, and testified that they had been pressured by Eddie Barnett (now deceased) to lie regarding Michelle's status at the Barnett home because Eddie Barnett was concerned regarding the effect of the claim on the requirement to pay a high deductible under his policy. Thus, during the coverage trial, Michelle and her mother both agreed with Michelle's friend, Jennifer Parker, that Michelle moved from one parent's house to another and stayed at the Barnett household at least two weekends a month. She also had her own room at the Barnett house which was decorated with furniture and contained Michelle's personal belongings. They also testified that Eddie Barnett was a friend and a confidant of Michelle's but he was not a ""father figure"". Based upon this testimony, the coverage litigation trial court found that Michelle was a resident of the Barnett household under Eddie Barnett's care. The trial court also heard testimony that Eddie Barnett was a better parent to Michelle than Michelle's mother and that Eddie Barnett was the disciplinarian of Michelle. As such, the trial court found that the Safeco policy provided coverage for Parks' injuries since Michelle was deemed a resident of the Barnett home and in the care of Eddie Barnett.

The Court of Appeal disagreed with the trial court's conclusions. The Appellate Court found that the testimony in the coverage litigation was inconsistent with the testimony in the liability trial originally brought by Parks and, as such, the Appellate Court determined that the coverage litigation findings are ""irrelevant to the question whether Safeco breached a duty to defend Miller because the findings are based entirely on the facts that were unknown to and concealed from Safeco before Safeco declined the defense."" At the time of Safeco's denial, all of the parties insisted that Michelle did not reside in the Barnett household and was not under the care of Eddie Barnett. The later contrary statements, whether or not truthful, were not made until subsequent to Safeco's denial of coverage.

The timing of the information within Safeco's knowledge was key to the Appellate Court's decision. Prior to the denial of coverage, Safeco was only made aware of information that Michelle was not a resident in the Barnett household nor was she under the care of Eddie Barnett. Thus, Safeco's denial of coverage at the time was proper. The contrary information that Michelle was in fact a resident of the Barnett household and under the care of Eddie Barnett, was not disclosed to Safeco until after Parks' lawsuit had been concluded. Thus, the Appellate Court held that although the duty to defend is continuing, it lasts only until the lawsuit is concluded and, therefore, Safeco had no duty to defend the concluded Parks lawsuit. (Citing Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.)

A duty to defend is determined at the inception of a third party lawsuit against an insured. When the insurer receives knowledge of the lawsuit against its insured, an insurer can make a decision as to coverage based upon the complaint and the facts known to the insurer from any source, as well as the terms of the policy. Although facts extrinsic to a complaint can be used to establish a duty to defend, such facts must be known by the insurer at the inception of the underlying lawsuit. Gunderson v. Fire Insurance Exchange (1995) 37 Cal.App.4th 1106, 1114.

Facts known to Safeco at the time of its denial did not establish that Michelle qualified as an insured under the Safeco policy. Although the residence of a child with divorced parents can be established at more than one location, when the child visits one location on an infrequent basis, that parent's home may not necessarily be the "residence" within the terms of the policy. Furthermore, under the terms of the Safeco policy, Michelle also had to be a member of the Barnett household.

The gist of this case was that Safeco was entitled to rely upon the information that it obtained from its insureds as the primary source of information regarding the claim. Moreover, Safeco was entitled to disregard the contrary testimony of one person, Michelle's friend, in determining that Michelle was neither a resident nor a member the Barnett household. As such, when Safeco made a fully informed decision regarding the existence of coverage for the claim based upon information and facts known at the time of tender, Safeco's denial was proper. Additionally, Safeco did not learn of Parker's contrary deposition testimony until six months after Safeco denied coverage and the receipt of said information was obtained only a few weeks before the arbitration. The Appellate Court found that Safeco did not act unreasonably when it accepted the word of its insured and the insureds' parents over Michelle's former friend.


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