California Supreme Court refuses to give literal effect to jewelers' block policy language limiting coverage

Journal of Risk and Insurance, Sept, 2004 by Jeffrey W. Stempel

E.M.M.I., Inc. v. Zurich American Ins. Co., 84 P. 3d 38, 9 Cal. Reptr. 3d 701 (California Supreme Court--February 23, 2004)

Perhaps because of the high risk of moral hazard or outright fraud through "inside jobs" and because of the often suspicious-looking circumstances of jewelry losses (e.g., a courier stops to tie a shoe and the bag of gems is gone when he looks up), insurers have won a good deal of cases by persuading courts to take a fairly literal view of the requirement found in most jewelers' block policies that requires a gem courier to be "in or upon the vehicle" at the time of any theft from the vehicle. Many courts read the language literally to insist on the courier's physical contact with the vehicle if there is to be coverage for jewelry stolen from the courier while transporting the gems by car. However, the California Supreme Court held in E.M.M.I., Inc. v. Zurich American Ins. Co., 84 P. 3d 385, 9 Cal. Rptr. 3d 701 (Cal. 2004), that the word "upon" is sufficiently ambiguous that it must be construed in light of the policyholder's reasonable understanding of the scope of coverage to include thefts that take place when the insured person is in close proximity to the vehicle and attending it. See 84 P. 3d at 397-98. See also 84 P. 3d at 388-96 (reviewing axioms of contract construction and prior case law). See also Annot, Construction and Effects of "Jeweler's Block" Policies on Provisions Contained Therein, 22 A.L.R. 5th 579 (1994); Couch on Insurance [section]1:57. Two Justices dissented. See 84 P. 3d at 398 (Kennard, J., joined by Brown, J., dissenting).

E.M.M.I. v. Zurich is a big win for jewelers' block policyholders in the supreme court of the largest state concerning an issue that arises with some frequency. Many jewelers block policies contain arbitration provisions, shrinking the number of reported cases, which will make gauging the impact of the decision more difficult. But the case will certainly be used by policyholders before other courts and arbitrators, many of whom are likely to agree with the majority's analysis. Although the position of the E.M.M.I. v. Zurich dissenters and insurers has linguistic support (to be "upon" a tangible object usually means in physical contact with the object), the E.M.M.I. v. Zurich majority approach makes more sense in terms of rational application of the purpose of the insurance policy.

The reason this language is in a jewelers' block policy is to attempt to ensure that valuable jewels are not left just sitting around without a human guard, even in a locked car or trunk. This at least serves the purpose of deterring a prospective thief unless the thief is willing to exert physical violence against the courier or guard. Of course, this will not stop every thief. Some will be happy to brandish a firearm, knife, or club or even to use it on the courier. A scan of urban newspapers reveals that some jewel thieves can be heinously craven in their willingness to kill in order to steal. The "upon" the vehicle requirement therefore is far from a perfect deterrent. However, the same level of deterrence should be achieved under the E.M.M.I. v. Zurich test. If the jewelry courier is next to a vehicle and attending it, thieves who are unwilling to accost or assault the courier should be every bit as deterred regardless of whether the courier is touching the vehicle at a particular moment. In fact, a courier literally in the vehicle (e.g., sitting down, napping in the back seat) may be more vulnerable and present less deterrence than a courier pacing around the vehicle and ready to use a sidearm against a prospective thief.

Consequently, the E.M.M.I. v. Zurich result does not appear likely to be all that disastrous for insurers in operation. The problem, of course, is that the physical contact, "upon" the vehicle requirement is thought by insurers to make it harder for policyholders to recover when the courier is not only outside the vehicle but down the block getting a cup of coffee. But under the E.M.M.I. v. Zurich decision, an insurer should be able to defeat claims arising from losses when a vehicle was genuinely unattended by marshaling proof of what actually happened despite the courier's claims to have only been feeding the parking meter. Insurer counsel should remember that the "upon" the vehicle requirement is most properly styled as an exception to an exclusion for theft from vehicles (this was the California Supreme Court's view as well). Consequently, the burden of persuasion on the issue rests with the policyholder. If a courier's claims are doubtful, a court or arbitrator could find for the insurer simply by finding that the burden of proof on the issue has not been successfully shouldered.

Jeffrey W. Stempel

University of Nevada, Las Vegas