By Dominic S. Nesbitt
Liability insurance policies of every stripe –
e.g., Commercial General Liability, Directors & Officers, Professional
Liability – use the connective phrase “arising out of,”
both in insuring and exclusionary clauses, to connote the degree of causation
necessary either to trigger coverage or to exclude coverage. Since “arising
out of” plays such an integral role in defining those risks an insurance
policy will cover or exclude, it is critical that the phrase be interpreted
in a manner faithful to California’s rules of policy construction.
When “arising out of” is used in an insuring clause, there
is full agreement among California courts that it should be broadly construed.
See, e.g., Acceptance Ins. Co. v. Syufy Enterprises, 69 Cal.App.4th 321, 328 (1999) (“It is settled that this language
does not import any particular standard of causation or theory of liability
into an insurance policy. Rather, it broadly links a factual situation
with the event creating liability, and connotes only a minimal causal
connection or incidental relationship.”). On the other hand, when
“arising out of” is used in an exclusion, courts have reached
differing conclusions with respect to the meaning of the phrase. Cases
have divided along a fault line between those stating that the phrase
has the same broad meaning as when used in an insuring clause, and those
that apply a narrower construction.
As discussed below, the cases construing the phrase “arising out
of” broadly when used in an exclusion overlook the cardinal rule
that “an entirely different rule of construction applies to exclusionary
clauses as distinguished from coverage clauses.”
See
State Farm Mut. Auto. Ins. Co. v. Partridge, 10 Cal.3d 94, 101 (1973).
- California Courts Are Divided Over The Meaning Of “Arising Out Of”
When Used In An Insurance Policy Exclusion
Several California cases have stated that “arising out of”
should be interpreted broadly both in insuring clauses and exclusions.
See, e.g., Jon Davler, Inc. v. Arch Ins. Co., 229 Cal.App.4th 1025, 1035 (2014) (“[C]ourts generally have ‘interpreted
the phrase ‘arising out of’ very broadly,’ even where
the phrase appears in an exclusion.”);
Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins., 106 Cal.App.4th 293, 301 (2003) (noting that “arising out of”
is generally equated with “origination, growth or flow from the
event”). It has been stated, for example, that “arising out
of” is a broad concept that does not import any particular standard
of causation.
Jon Davler, supra;
see also Continental Cas. Co. v. City of Richmond, 763 F.2d 1076, 1081 (9th Cir. 1985) (stating in dictum that “[t]he
claim need bear only an incidental relationship to the injury to come
within the exclusionary clause of the [insurer’s] policy”).
However, other California cases holding to the contrary have reasoned that
the phrase “arising out of” must be more narrowly construed
in an exclusion, and have rejected insurers’ efforts to deny coverage
for a claim simply because it has some connection with, or incidental
relationship to, an excluded risk.
See, e.g., Charles E. Thomas Co. v. Transamerica Ins. Grp., 62 Cal.App.4th 379, 383-384 (1998). The Ninth Circuit Court of Appeals,
for example, has held that to “arise out of” the excluded
risk, the claim “must have been a part of or directly and proximately
resulted from” that risk.
HS Services, Inc. v. Nationwide Mut. Ins. Co., 109 F.3d 642, 647 (9th Cir. 1997) (interpreting an “Employment-Related
Practices Exclusion”). Similarly, the California Supreme Court has
suggested that a “non-ambiguous causal relationship” would
be required to bring into play an exclusion for injury “arising
out of” the use of a motor vehicle.”
See Partridge, supra, 10 Cal.3d at 101-102. This narrower construction of “arising out
of” is, of course, a far cry from a broader interpretation that
some insurers contend supports a denial of coverage whenever a claim bears
some remote or incidental relationship to an excluded risk.
-
Narrowly Interpreting “Arising Out Of” Accords With California’s
Fundamental Canons of Insurance Policy Construction
A bedrock principle of insurance policy interpretation is the narrow-construction
rule applicable to policy exclusions.
See
Partridge, supra, 10 Cal.3d at 101-102 (explaining that “[w]hereas coverage clauses
are interpreted broadly so as to afford the greatest possible protection
to the insured . . . exclusionary clauses are interpreted narrowly against
the insurer”) (citations omitted);
Church Mut. Ins. Co. v. United States Liab. Ins. Co., 347 F. Supp. 2d 880, 885 n. 4 (S.D. Cal. 2004) (“Cases interpreting
‘arising out of’ as used in . . . coverage provisions are
not on point because coverage provisions are liberally construed in favor
of coverage, while exclusion provisions are narrowly construed against
the insurer.”
In view of this rule of construction, the California Supreme Court has
indicated that “arising out of” should carry a narrower meaning
when used in an exclusion.
See
Partridge, supra, at 102 (“[T]he fact that an accident has been found to ‘arise
out of the use’ of a vehicle for purposes of an automobile policy
is not necessarily determinative of the question of whether that same
accident falls within a similarly worded exclusionary clause of a homeowner’s
policy.”);
see also Hon. H. Walter Croskey,
et al., § 4:120.5 (The Rutter Group 2016) (“When the phrase ‘arising
out of’ is used in an
exclusion, rather than a coverage provision, it is interpretednarrowly against the insurer.”) (Italics in original).
Therefore, when a policyholder is confronted with an insurer denying coverage
on the ground that an excluded risk bears some remote or incidental relationship
to a claim, it would be well advised to remember the “narrow-construction”
rule that applies to all exclusions, including those which contain the
phrase “arising out of.” It is, on its face, anathema to the
narrow construction rule to “very broadly” construe the terms
of an exclusion, including the phrase “arising out of.” Cases such as
Partridge,
Thomas, andHS Services, which narrowly interpret “arising out of” in an exclusion,
were decided in accordance with this rule.