Opinion ID: 1159939
Heading Depth: 4
Heading Rank: 1

Heading: The Scope of Sentry's Employers' Liability Coverage

Text: (4a) Our first inquiry, therefore, is whether the Sentry policy is reasonably susceptible of a construction other than that found by the trial court. Interpreting the policy as appellants suggest, the employers' liability provision, as applied in the context of the facts of this case, would read in part as follows: [Sentry agrees] to pay on behalf of [Producers] all sums which [Producers] shall become legally obligated to pay as damages because of bodily injury by accident ... sustained ... by any employee of [LAS] arising out of and in the course of his employment by [LAS]. In other words, appellants would freely interchange Producers and LAS in the policy language because technically both are named insureds under the policy. In support of their argument that the policy is reasonably susceptible of such an interpretation, appellants presented evidence to the trial judge detailing the close relationship (including common officers and directors) between Producers and LAS, and the fact that officers of both corporations treated the two as one entity. [2] Appellants also presented the testimony of Richard Shehadey, an officer of both corporations who handled the acquisition of the Sentry and Federal policies. He testified, among other things, that it was his understanding that the Sentry policy covered both companies for injuries to employees of either company, regardless of who was the employer, and that this purpose was achieved by naming both companies as insureds; the Federal policy covered only the companies' vehicles and third party liability. It was also his understanding that coverage under the two policies would not overlap. (5) While extrinsic evidence may be considered by a court as an aid in the interpretation of a written contract when it is relevant to prove a meaning to which the language of the instrument is reasonably susceptible ( Pacific Gas & E. Co. v. G.W. Thomas Drayage etc. Co. (1968) 69 Cal.2d 33, 37 [69 Cal. Rptr. 561, 442 P.2d 641, 40 A.L.R.3d 1373]), `[i]f the evidence offered would not persuade a reasonable man that the instrument meant anything other than the ordinary meaning of its words, it is useless.' ( Blumenfeld v. R.H. Macy & Co. (1979) 92 Cal. App.3d 38, 45 [154 Cal. Rptr. 652].) The foregoing testimony nonetheless does not establish that the language of the policy is reasonably susceptible of a meaning other than that Sentry's employers' liability coverage protected Producers only against its liability as an employer. (6) In assessing Producers's assumptions regarding coverage, we observe that a finding of ambiguity in policy language cannot be based on an unreasonable misunderstanding on the part of the insured. ( Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 869 [27 Cal. Rptr. 172, 377 P.2d 284]; Interinsurance Exchange v. Velji (1975) 44 Cal. App.3d 310, 319 [118 Cal. Rptr. 596].) A reasonable person in the position of an officer of Producers would not disregard the fact that legally Producers and LAS were each separate entities, and accordingly that person would not assume coverage existed under Producers's employers' liability policy where the potential plaintiff is not a Producers's employee. (4b) This policy is one covering an employer's liability, that is, liability incurred by virtue of one's status as an employer. Yet, Producers's liability to Noyes was not based on any employment relationship between them, but arose instead from Producers's negligent maintenance of its delivery truck. Despite the fact that Producers did not incur legal liability to Noyes as his employer, appellants assert that the employers' liability provisions should be construed to provide coverage to Producers for Noyes's injuries. We decline to hold that the language of the policy is reasonably susceptible of such an interpretation. Our construction of the policy also accords with established public policy as to the nature and purpose of this type of insurance. While employers' liability insurance is not required by statute, it is statutorily authorized [3] and regulated, [4] and the statutory provisions governing such insurance are helpful to our inquiry herein. Insurance Code section 11750, authorizing the creation of a rating organization for workers' compensation, states in pertinent part: The purpose of this article is to promote the public welfare by regulating concert of action between insurers in collecting and tabulating rating information and other data that may be helpful in the making of adequate minimum rates for workers' compensation insurance and for employers liability insurance incidental thereto and written in connection therewith. ... (Italics added.) Employers' liability insurance is further defined as insurance of any liability of employers for injuries to, or death of, employees arising out of, and in the course of, employment when this insurance is incidental to, and written in connection with, the workers' compensation issued to the same employer and covering the same employer interests.  (Ins. Code, § 11750.1, subd. (f), italics added.) Appellants' interpretation of the Sentry policy, providing coverage to Producers for an injury to an LAS employee, arising out of his employment with LAS, runs contrary to the statutorily expressed notion that employers' liability insurance is aimed at providing additional protection to the same employer, who has workers' compensation insurance covering the employee's injury. Appellant's argument also contravenes the statutory prohibition that liability insurance does not include workers' compensation insurance (Ins. Code, § 108), and the Insurance Commissioner's rule that other classes of insurance may not be included in the same policy providing workers' compensation and employers liability insurance. (Cal. Admin. Code, tit. 10, § 2350 [general rule 8, published separately in the Manual of Rules, Classification and Basic Rates for Workers' Compensation Insurance].) [5] By interpreting the employers' liability provisions as providing coverage in the absence of an employment relationship, appellants essentially construe the provision as a general liability policy for those plaintiffs who are coincidentally employees of a company named as an insured on the same workers' compensation and employers' liability policy as the defendant company, a situation likely to occur in the group insurance context. (See Ins. Code, § 11656.6.) [6] Appellants' erroneous interpretation would similarly affect the purchase of group insurance. Insurance Code section 11656.6 allows employers to combine to purchase workers' compensation insurance at lower premiums, provided [e]ach member of an organization insured under a group policy shall be treated as a single and separate entity as respects rates, classifications and rating plans. (Ins. Code, § 11656.7.) Appellants' interpretation would frustrate this statutory goal as insurers would be justifiably concerned that by providing group coverage, they may be held liable under an employer/defendant's employers' liability coverage simply due to the fortuitous circumstance that the plaintiff/employee had a job with an unrelated member of the same compensation carrier's group policy. Carriers would likely either refuse to provide group coverage, or would do so at greatly increased rates, in either case, to the detriment of the insured employers and their employees. Thus, we conclude that the Sentry policy is not reasonably susceptible of an interpretation providing Producers coverage for tort liability arising from injuries to a nonemployee and his spouse.