California Supreme Court refuses to give effect to automobile policy language restricting coverage for permissive users of vehicle; coverage-limiting language insufficiently "conspicuous, plain, and clear" to be enforced

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

Haynes v. Farmers Insurance Exchange, 32 Cal. 4th 1198, 89 P. 3d 381 (California Supreme Court--May 17, 2004)

Haynes involved an automobile policy that provided, in two separate portions of the policy, there was no coverage for claims made arising out of permissive use of the vehicle. Policyholder William Gallahair had purchased an "E-Z Reader Car Policy" from Farmers. He permitted Christopher Morrow to drive the car. Joshua Haynes was riding in the car when an accident occurred, prompting Haynes to sue Morrow and Gallahair for damages. Farmers denied coverage. A portion of the body of the policy entitled "Other Insurance" stated that for "an insured person, other than you or a family member," coverage was available "up to the limits of the Financial Responsibility Law only." An endorsement to the policy entitled "Permissive User Limitation" stated that liability insurance for claims arising through permissive use of the car by someone other than the insurer or a family member were limited to $15,000 per person/$30,000 per accident rather than the $250,000 per person/$500,000 per accident provided for the policy generally in the declarations page. See 89 P. 3d at 1202-1204.

The California Supreme Court held that the endorsement, although not textually unclear, was nonetheless unenforceable because the endorsement was not sufficiently "conspicuous, plain, and clear" to be enforced. See 89 P. 3d at 1205. In Haynes, the policy language limiting benefits available for accidents arising from permissive use was hardly trumpeted, but neither was it buried and camouflaged. The language at issue was contained in an endorsement and not a footnote to the body of the policy. The Court's holding is clearly based on the placement and hidden nature of the coverage-limiting language rather than any lack of clarity in the language itself. Consequently, a case like Haynes v. Farmers is more accurately classified as an implicit reasonable expectations decision more than a case of construing ambiguous language against the insurer that drafted the policy. California precedent cited by the Supreme Court clearly establishes that California has long required that policy language not only be understandable but be sufficiently prominently placed to alert the policyholder if the "fine print" is to take away what apparently is given in the "large print" of the declarations pages. Although this could be viewed as an instance of a court resolving contextual ambiguity created by competing policy provisions, the approach is more of a reasonable expectations approach, arguably even a strong reasonable expectations approach. Accord, Jauregui v. Mid-Century Ins. Co., 1 Cal. App. 4th 1544, 1547 (1991). The dissenting judge found the majority holding to run counter to the traditional duty to read a policy, reflecting the degree to which the Haynes decision rested more on policyholder expectations than on the policy language.

Jeffrey W. Stempel

University of Nevada, Las Vegas