In Mercury Casualty v. Chu (No. G049132, filed 9/24/14), a California appeals court held that a “resident exclusion” in an auto policy is an unenforceable overly broad expansion of the statutorily permitted exclusion when applied to a nonrelative passenger, contrary to public policy.
Mercury’s insured was in an auto accident that injured his passenger, who was also his unrelated roommate. “Residents” were included as insureds in Mercury’s policy, with “resident” defined as “an individual who inhabits the same dwelling as the named insured.” The policy’s exclusions barred coverage for: “[L]iability for bodily injury to an insured or liability for bodily injury to an insured whenever the ultimate benefits of that indemnification accrue directly or indirectly to an insured….” Mercury characterized the effect of the provisions when taken together as a “resident exclusion” and, therefore, applicable to the insured’s nonrelative roommate.
The court noted that Insurance Code Section 11580.1(c) lists the only permissible exclusions allowed under California law for an automobile liability insurance policy, and cited California State Auto. Assn. v. Gong (1984) 162 Cal.App.3d 518 for the proposition that: “Any exclusion not expressly authorized by section 11580.1 is therefore impermissible and invalid.”
Citing Farmers Ins. Exchange v. Cocking (1981) 29 Cal.3d 383, as holding that resident relative exclusions are generally valid as a means to prevent fraudulent or collusive claims, the Mercury v. Chu court stated: “We conclude the [Cocking] Court’s reasoning does not apply to nonrelatives ‘inhabit[ing] the same dwelling’ as the named insured. Cohabitation can be temporary and involve complete strangers. There is no legal basis to assume insurers face the same risk of fraudulent lawsuits. College roommates often are complete strangers who do not have direct pecuniary interests or legal responsibilities with respect to each other.”
Although Insurance Code section 11580.1(c)(5) only refers to “an insured,” the Mercury court drew its reasoning from the whole statutory scheme, saying that the code section “must be read together with sections 11580.06 and 280 [of the Insurance Code].” Section 11580.06 defines “insured” as “the person or persons to whom any policy subject to this article is issued as named insured and any other person to whom coverage is afforded under the terms of any such policy.” But, pursuant to section 280, coverage can only be afforded to persons having an “insurable interest.” “Accordingly, to be ‘an insured’ the nonrelative resident must have an insurable interest. [An unrelated roommate] does not have an insurable interest in the nature of the potential legal liability for [the insured’s] vehicle or [his] actions as a driver.”
The Mercury court acknowledged that the roommate might acquire an insurable interest while operating the vehicle as a permissive user, but found that irrelevant to a passenger. “To accept Mercury’s new exclusion, we would have to place an unreasonable obligation on Pham’s and Chu’s other college roommates to determine how to avoid exposure to the risk of injury by Chu, who as to them, is uninsured. Certainly, Chu’s roommates could decide not to ride in the same car as him but should they also be expected to avoid walking on the streets when Chu is out driving? We conclude no public policy consideration or legal authority justifies denying Pham’s claim against the named insured of the policy. We find no significance in the mere status of cohabitation.”
The Mercury court concluded by stating that: “The overbreadth can be cured only by rewriting (reforming) either the exclusion clause or the insured clauses, or both. We are not empowered to do so. Exclusions and exceptions contained within a policy must be construed strictly against the insurer.  We will not rewrite Mercury’s definition of ‘an insured’ but conclude the clause including ‘residents other than’ relatives and named insureds must be stricken as invalid.”
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