City of South El Monte v. Southern California Joint Powers Insurance Authority (38 Cal. App. 4th 1629, 1995)

Opinion

KITCHING, J.

This appeal involves issues of coverage for members of a joint powers insurance authority. The matter arises from a declaratory relief and breach of contract action seeking a determination of a joint powers authority’s duty to defend and indemnify a member city against a lawsuit for damages caused by the enactment of an anti-noise ordinance.

Defendant and appellant Southern California JointPowers Insurance Authority (Authority) appeals from the summary judgment entered in favor of plaintiff and respondent City of South El Monte (City) on City’s action for declaratory relief and breach of contract.

The question this court must decide is whether the Authority, a self-insuring pool comprised of 35 member cities, must defend and indemnify City for damages that allegedly resulted from the passage of a municipal ordinance. Under the facts of this case, our answer is no.

We find the member cities of the Authority determined the risks of loss they agreed to cover from their pooled funds. The joint powers agreement and the intent of the cities which signed it governed the operation and interpretation of their joint liability protection program. The scope of coverage is defined in the memoranda and the excess insurance policies that comprise this self-insurance program. The member cities, through the Authority, adopted the definition of occurrence contained in the excess insurance policies to determine what claims they would cover.

We find coverage of City in the underlying lawsuit was precluded under the joint liability program administered by the Authority because the adoption and enforcement of a municipal ordinance did not constitute an occurrence for which claims were pooled. Therefore, the Authority had no duty to defend or indemnify City. Accordingly, we reverse the judgment.

Factual and Procedural Background

1. Municipal Joint Liability Pools

Joint powers authorities, in which two or more municipalities join together to exercise any power that each has the power to exercise individually, have been sanctioned by the Joint Exercise of Powers Act, Government Code section 6500 et seq., since 1949. The municipalities have the power to insure, either through self-insurance or the purchase of a commercial policy, or both, against a broad range of liabilities. (§§ 990, 990.4.) They can also insure through participation in joint powers pooling arrangements, such as the Authority. (§ 990.8, subd. (a).) To understand the rights and obligations of the signatory members of the Authority, we first look at the purpose and development of these joint powers pooling arrangements.

a. Background

In the 1970’s, California cities faced an insurance crisis. Many commercial carriers refused to provide liability insurance to governmental agencies. When insurance was available, the increased costs of coverage made it unaffordable. (Young, Survey Results: Pools a Significant Risk-Financing Option (May/June 1988) Public Risk.)

In response to the crisis, the cities of Contra Costa County, in December 1975, undertook a study which showed the feasibility of a collective insuring arrangement, such as a self-insured liability pool, as an alternative to commercial insurance. The concept of pooling, the sharing of risks by multiple entities through the use of joint self-insurance and excess insurance programs, was attractive to small and medium-size cities that did not have the financial capabilities to provide their own self-insurance programs. The study indicated the pools would provide a cost savings and create an internal administrative structure that would be responsive to claims and effectively manage the members’ risk liability program. (Warren et al., Joint Risk Management and Insurance Study.)

The respective city attorneys who reviewed the study concluded, based upon discussions with legal counsel at the Department of Insurance, that although these municipal insurance pools would be constitutional, the department would regard such arrangements as “a clear situation of transacting insurance.” However, subjecting the pools to the statutory requirements of the Insurance Code would place member entities in the position of having the same duties and obligations as commercial insurers. Such an arrangement would adversely affect the pool’s ability to provide members cost-effective liability coverage and subsequently defeat the purpose and intent of these self-insuring groups. The attorneys recommended a legislative solution.

b. Government Code Section 990.8, Subdivision (c)

The legislative response to the municipal insurance crisis and implementation of the pooling arrangement was Senate Bill No. 2054. The purpose of this bill was to amend section 990.8 and recognize these self-insuring pools as an alternative to insurance and remove them from regulation under the Insurance Code. (See Assem. Com. on Finance, Insurance, and Commerce, Analysis of Sen. Bill No. 2054 (1975-1976 Reg. Sess.) as amended June 1, 1976.) The legislative analysis stated, in relevant part:

“Senate Bill 2054 amends that portion of the Government Code which authorizes a local governmental agency to insure itself for the following risk:

“Tort or inverse condemnation liability;

“errors and omissions liability of employees; and

“insurance against the expense of defending a claim against the local public entity or employee. (Government Code § 990)

“Section 990.4 permits a local government entity to self-insure, buy insurance through an admitted carrier, or purchase insurance through a surplus line broker, or any combination of the above. Section 990.8 authorizes two or more local entities, by a joint powers agreement, to provide the insurance authorized by that part of the Government Code cited above through any method authorized in Section 990.4. The management consultant study [Contra Costa County cities] concluded that under existing law, it is permissible for local public entities to pool their liability risks but that a question remains as to whether or not they could lawfully pool property and workers compensation risks since it may be considered ‘insurance’ thereby subjecting the entities to a need to obtain certificates of authority. As a result, SB 2054 proposes to provide that the pooling of self-insured claims or losses as authorized by Section 990.4 shall not be considered insurance nor be subject to regulation under the Insurance Code.” {Ibid.) On October 1, 1976, Senate Bill No. 2054 became law and section 990.8 was amended to add a provision stating: “The pooling of self-insured claims or losses among entities as authorized in subdivision (a) of Section 990.4 shall not be considered insurance nor be subject to regulation under the Insurance Code.” When Section 990.8 was again amended in 1982, the new provision became subdivision (c). Subdivision (c) has two parts. First, it exempts self-insurance programs from Insurance Code regulation. Second, it declares that self-insurance programs “shall not be considered insurance.”

Against this background, the Authority was formed.

2. The Authority and the Joint Liability Insurance Program

In June 1977, 35 Southern California cities, including South El Monte, entered into a written joint powers agreement (Agreement) creating the Authority. The Agreement delineates the powers and the limitations of the Authority.

Under terms of the Agreement, the Authority is a separate entity with responsibility “to administer a joint protection program wherein Cities will pool their losses and claims, [and] jointly purchase excess insurance and administrative and other services . . . .” (Art. 2.) It is authorized to provide insurance coverage “as necessary,” including, but not limited to, self-insurance and commercial insurance, as well as excess coverage. (Arts. 5, 19.) The Authority assists the cities in obtaining insurance coverage for risks not included in the basic coverage of the Authority. (Art. 19.) The Authority also provides claims adjusting and subrogation services for claims covered by the joint liability protection program. (Art. 19.)

The governing power of the Authority resides in a board of directors (Board), composed of one representative from each member city, specifically a city council member. (Art. 7.) The Board elects a 5- to 9-member executive committee from among its members, to which it may give authority to make and implement any decisions, including those involving administration of the Authority. (Arts. 8, 10.) The president of the Board sits on the executive committee. (Art. 10.) The Board has the power to review, and/or modify or override, any decision or action of the executive committee. (Art. 8.) The executive committee has the power to determine and select a joint liability protection program for the Authority, including all necessary insurance and excess insurance needed to carry out the program.

The joint liability protection program (Program) offered by the Authority consisted of a self-insurance retention pool and excess coverage provided by a commercial insurance carrier. The Program encompassed defense and indemnity against public tort liability as well as workers’ compensation coverage and the health and welfare benefit programs of the member cities. (Art. 10.) Article 15 of the Agreement specifically required liability insurance coverage for member cities. This would provide them protection against claims for personal injury, errors and omissions, contractual liability, comprehensive liability, and “such other areas of coverage as the Executive Committee may determine.”

The “Memorandum of Joint Liability Protection Program,” adopted by the executive committee, explained the purpose and terms of the Program and stated, in relevant part: “This Memorandum is not and shall not be construed as a contract between the Authority and its Members. The only Agreement between the Members is the Agreement , of the Members Creating the Authority as amended from time to time. The provisions of the Joint Protection Program are subject to and subordinate to said Agreement or any action taken by the Board of Directors in connection with the Joint Liability Protection Program.”

As to coverage, the memorandum provided that “[t]he Authority will pay on behalf of the Covered Party all sums which the Covered Party [member or entity signatory to the Agreement] shall become obligated to pay by reason of liability imposed by law for monetary damages because of: HD A. Bodily Injury [*][] B. Property Damage fiQ C. Errors and Omissions [f] D. Personal Injury [*]□ as these terms are herein defined and to which this Memorandum applies, caused by an Occurrence during the period of joint self-insurance. [U Coverage shall be determined based upon the facts alleged in the claim or lawsuit or subsequently discovered and ascertained . . . .” The memorandum defined “occurrence” as “an accident, or event including continuous or repeated exposure to conditions, which results during the period of self-insurance, in Bodily Injury or Property Damage neither expected nor intended from the standpoint of the Covered Party.” The memorandum further provided that “[a]ny disputes concerning coverage or procedures of the Joint Liability Protection Program shall be appealed to the Authority’s Executive Committee in the manner and form that it may from time to time determine.”

The Program administered by the Authority consisted of the following features: (1) member cities bore individual responsibility for losses incurred up to the first $10,000; (2) covered losses incurred which exceeded $10,000 but did not exceed $90,000 were paid out of the Authority’s self-insurance retention pool; (3) covered losses exceeding $90,000 but not exceeding $400,000 were covered by the same self-insurance pool, with the added feature that such losses were shared by member cities in amounts proportional to the size of their city payrolls and subject to a premium refund; and (4) losses in excess of $400,000 were covered by excess indemnity insurance purchased by the Authority.

City was also issued memoranda entitled “Summary of General Liability Program” for July 1, 1984, through June 30, 1985, and for July 1, 1985, through June 30, 1986. The memoranda explained the Program would provide for pooling the self-insured retained losses of the member cities, and attached copies of the excess liability insurance policies the Authority had obtained for the members. The memoranda further explained that “[i]n accordance with the Agreement, the Authority will administer, investigate, defend, settle and/or pay on behalf of Members, all claims and judgments which are under the retention level and within the defined coverage of the Excess Insurance.” (Italics added.) The memoranda summarized procedures for filing and reviewing claims, and specifically stated “[t]he Authority shall have no right, duty or obligation to defend claims which are not within the coverages provided and defined in the Excess Insurance Policies.” (Italics added.)

Member cities received still additional information regarding the Program. An October 23, 1985, memorandum entitled, “Procedures on General Liability Coverage Determination,” adopted as a policy statement by the executive committee, provided further explanation of procedures and coverage determinations. The memorandum explained coverage determinations were made pursuant to the definitions, terms, conditions and exclusions in the excess insurance policies. Furthermore, “[a]ny claims or suits, or parts thereof, which are not within the coverage of the excess insurance are not ‘self-insured’. They are ‘uninsured’, and [the Authority], under the Agreement, has no authority to defend or pool them.” Additionally, the memorandum stated: “In cases where coverage is denied or disputed, Primary Insurance Carriers issue a ‘Reservation of Rights’ letter. [The Authority] does not issue ‘Reservation of Rights’ letters, per se, because it is not an insurance carrier, and does not wish to give any appearance of being such. Also [the Authority] is not bound by the ‘Duty to Defend’ principle which is applicable only to primary insurance carriers.”

City was also issued copies of “Summary of Comprehensive General (and Automobile) Liability Coverage Program,” Nos. 10 and 14, for the relevant coverage period, which summarized details of the schedule of coverage more fully explained in the “Summary of General Liability Program” memoranda and the policies.

a. Contract Law Determines Questions of Coverage

Both parties agree coverage of claims under the Program will be determined by the terms and definitions of the excess insurance policies. However, the issue arises whether principles of insurance law should be used to resolve questions of coverage. Under the facts of this case, our answer is no. Considering the purpose of the pooling arrangements, we determine questions of coverage are properly answered by relying on rules of contract law that emphasize the intent of the parties. Given a local entity’s broad power to insure against all potential liabilities and to do that through joint power pooling arrangements, principles governing insurance carriers and insurance law have no applicability, absent consent of the parties to the pooling agreement.

Joint authority pools are member directed. Municipalities best understand the nature of their risks and losses and a “sense of ownership in the pool endeavor [is] an important motivation in practicing risk management.” (Young, Survey Results: Pools a Significant Risk-Financing Option, supra, p. 28.) The pools are the creation of the membership and reflect the local perspective on matters the members have elected to pool and share. Members agree to abide by the terms of their joint powers agreements and programs and agree to pool prescribed losses. They have the authority to self-insure as they deem appropriate and to provide additional coverage as necessary. This authority is based on the members’ perceptions of which risks they elect to pool and which risks they do not.

Members jointly determine the scope and extent of their own coverage. They do so by creating member-written agreements and programs tailored to suit the needs of the participating entities. The governing bodies of these pooling arrangements interpret the agreements and programs to implement the intent of the members. The joint powers agreement, bylaws and the self-insurance program, with related coverage memoranda, provide the framework within which to determine the rights, liabilities, and intentions of the pools and their respective members.

In our case, an analysis of duty to defend and coverage issues must give full effect to the intent of the member cities of the Authority as reflected in the policies and procedures adopted by the executive committee with the approval of the Board. The Authority, through its members, agreed to adopt the definition of occurrence in the excess insurance policies to decide the issue of what is a covered claim. They did not agree to also incorporate principles governing insurance carriers and insurance law into coverage decisions. It is this Agreement by the member cities that is the crux of the coverage determination.

b. The Excess Insurance Policies

Between 1984 and 1986, the Authority purchased a “Special Excess Liability Policy for Public Entities” for the member cities. The policies named the Authority and each member city as named insureds, and provided coverage for damages due to bodily injury, property damage, errors and omissions, and personal injury “to which this policy applies, caused by an occurrence.”

The first policy, No. SXP 3584343, defined occurrence as “an accident, or event including continuous or repeated exposure to conditions, which results during the policy term, in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” (Italics added.) As to errors and omissions, “ ‘occurrence’ means any actual or alleged errors or omissions by an insured during the policy term, which results in injury or damage neither expected nor intended from the standpoint of the insured.” An “occurrence” was additionally defined as “any injury or damages sustained during the policy term, by any person or organization and arising out of personal injury . . . .” (Italics added.)

In a special endorsement to the first policy for law enforcement activities, “occurrence” was defined as “an event, including continuous or repeated exposure to conditions, which results in bodily injury, property damage or personal injury neither expected nor intended from the standpoint of the insured, as respects occurrences arising from law enforcement activities . . . .” (Italics added.) The endorsement further stated “[w]here there is a conflict between the insuring agreements, definitions ... of this endorsement and those of the policy, the insuring agreements, definitions ... of this endorsement shall apply.” “It is a well established rule of construction of insurance policies that if the provisions of an effective indorsement conflict with those of the body of the policy, the indorsement controls. [Citations.]” (Estate of Murphy (1978) 82 Cal.App.3d 304, 309-310 [147 Cal.Rptr. 258].)

The second policy, No. SXP 3584427, defined occurrence as “an accident, or event, including injurious exposure to conditions, which results, during the policy period, in personal injury, property damage, or public officials errors and omissions neither expected nor intended from the standpoint of the insured.” (Italics added.)

We conclude that the insuring language in the relevant policies, read in conjunction with the special endorsement, limits the definition of “occurrence” to damage for bodily injury, property damage, errors and omissions, and personal injury which is neither expected nor intended from the standpoint of the insured. This is the same definition contained in the memorandum of joint liability protection program.

3. The Third Party Lawsuit

On or about April 14, 1986, Jacquelyn Sherlin (Sherlin) filed a first amended complaint for damages against City and Councilman Stanley M. Quintana (Quintana) for violation of federal civil rights (42 U.S.C. §§ 1983, 1985, 1988), interference with prospective economic advantage, and intentional infliction of emotional distress. The complaint alleged that City and Quintana “unlawfully agreed and conspired” to enact and enforce an anti-noise ordinance for the purpose and effect of preserving Quintana’s residence and closing down Sherlin’s business.

According to the Sherlin action, in March 1985, Sherlin relocated her electroplating business to an area of City zoned for industrial and manufacturing use, and adjacent to Quintana’s residence. City immediately enacted an emergency anti-noise ordinance that imposed residential noise limits in that industrial area, which adversely affected the business’s necessary nighttime operations. City then enforced the ordinance, from March 1985 through December 1985, by subjecting Sherlin’s business to frequent and disruptive inspections by law enforcement officers and health and safety inspectors. Sherlin’s business sustained severe economic damage. The Sherlin action further alleged City and Quintana were liable for these losses because the enactment and enforcement of the ordinance caused cessation of the business, reduction of the value of its assets, and destruction of any profits that would have been generated.

City tendered the Sherlin action to the Authority for purposes of a defense and for indemnification.

4. The Rejection of Tender of Defense

The Authority rejected City’s tender of defense. Based on the complaint, the Authority denied coverage and declined to defend on grounds the charging allegations did not give rise to a covered “occurrence” as defined by the terms of the policies, and liability for the City’s actions was not within the terms of the pooling program adopted by the member cities.

After a period of litigation, City settled the Sherlin action by agreeing to pay $75,000.

On July 26, 1990, City filed a first amended complaint against the Authority for declaratory relief and breach of contract seeking a determination of the Authority’s duty to provide a defense against the Sherlin action and to indemnify City for costs of settlement and retained counsel. On September 17, 1990, the Authority answered and denied City’s allegations, and asserted a number of affirmative defenses, including lack of any contractual agreement and failure of the Sherlin action to allege any covered occurrences.

5. Summary Judgment Motion

On April 7, 1992, City moved for summary judgment on grounds of the Authority’s obligation to defend and indemnify. City argued it was entitled to have the Authority defend the underlying Sherlin action because allegations of damage for errors and omissions and personal injury gave rise to covered occurrences under the terms of the Agreement and excess insurance policies. City further argued the terms of the Agreement, Program, and coverage memoranda, created a contract of indemnity between the two entities, under which the Authority was obligated, pursuant to a “benefit of any doubt” standard of review, to reimburse City for defense and settlement costs.

In opposition, the Authority argued it was not a commercial insurer and had never issued an indemnity contract to City. Furthermore, the Authority argued, the Sherlin action alleged intentional enactment and enforcement of a municipal ordinance that had the intended result of shutting down Sherlin’s business, acts that did not constitute occurrences for the purpose of triggering coverage under the terms of the Program.

In a declaration filed in support of the Authority’s opposition, Authority’s insurance program manager James Moore (Moore) provided evidence that the scope of coverage of the Program was determined by the member cities. Moore declared: “While the Authority may apply the . . . Program broadly in order to give the member cities the benefit of the doubt, the Program is certainly not without limits. Throughout their agreement, the member cities, not the Authority, determine the types of claims to be covered under the Program. The Authority is certainly not at liberty to extend the Program beyond the scope of claims which the member cities expect to be covered. [