Unpublished Disposition, 907 F.2d 154 (9th Cir. 1988)

MEMORANDUM^* 

The question is whether an insurance company has a duty, under the terms of a certain insurance policy, to defend or indemnify the insured.

* In 1982 the Bhojanis purchased Datta Drive-In Dairy ("Drive-In") in which the former owners sold alcoholic beverages. The former owners were insured by Aetna which agreed to transfer its insurance coverage. After the Bhojanis were substituted as the insured on the policy, the Bhojanis annually renewed their insurance coverage with Aetna. The Bhojanis apparently believed that the insurance policy covered any liability that might arise from the Drive-In's selling alcoholic beverages. The insurance policy, however, contained a "liquor liability" exclusion.

On September 12, 1984, a certain Phyllis Finney filed a lawsuit in Orange County Superior Court, naming the Bhojanis as defendants.¹  This complaint arose out of a December 2, 1983 automobile accident in which Finney's car was struck by a vehicle driven by a certain Jeffrey Koza. Koza was a minor and allegedly intoxicated at the time of the accident. The complaint alleged that the Bhojanis had allowed the Drive-In to sell liquor to Koza. The Bhojanis denied furnishing alcoholic beverages to Koza and contended that none of their employees sold alcoholic beverages to him.

On April 15, 1985, the Bhojanis tendered the defense of the Finney lawsuit to Aetna and requested indemnification under the policy. Aetna rejected the request, stating that the Bhojanis were not covered nor entitled to a defense under the policy.

On August 19, 1988, Aetna filed this action for declaratory relief in the United States District Court for the Central District of California seeking a determination that the insurance policy's liquor liability exclusion excused Aetna from any duty to defend or indemnify the Bhojanis in the Finney suit. The Bhojanis answered and filed a counterclaim against Aetna, alleging breach of contract, tortious breach of the implied covenant of good faith and fair dealing, violation of the California Insurance Code, breach of fiduciary duty, and negligent infliction of emotional distress.

The district court granted Aetna's motion for summary judgment, finding that the insurance policy's liquor liability exclusion was applicable and enforceable. The Bhojanis' counterclaim was dismissed. The Bhojanis now timely appeal from the district court's order.

II

We consider first whether Aetna may rely upon the liquor liability exclusion contained in its insurance contract. Because this action was brought in federal district court on the basis of diversity of citizenship, California substantive law applies. See Continental Casualty Co. v. Richmond, 763 F.2d 1076, 1079 (9th Cir. 1985).

* The Bhojanis argue that because Aetna's agents knew both that the Bhojanis sold alcoholic beverages and that the Bhojanis reasonably expected to be covered, Aetna had a duty to notify them of the exclusion. Aetna responds that when the Bhojanis accepted the insurance policy they were charged with the knowledge of its contents, including the exclusion. There apparently is some conflict regarding whether receipt of the policy itself provides the insured with "notice" of an exclusion under California law.

In support of their argument that they did not receive notice of the exclusion, the Bhojanis rely primarily upon dicta in Underwriters Insurance. Co. v. Purdie, 145 Cal. App. 3d 57, 193 Cal. Rptr. 248 (1983). In that case, the California Court of Appeal observed that receipt of the policy itself does not necessarily provide the insured with constructive notice of an exclusion. 145 Cal. App. 3d at 65, 193 Cal. Rptr. at 252. "In the case of standardized insurance contracts, exceptions and limitations on coverage that the insured could reasonably expect, must be called to his attention, clearly and plainly, before the exclusions will be interpreted to relieve the insurer of liability or performance." Id. (emphasis in original) (quotations omitted). The Purdie court found that the insurer satisfied its duty to notify the insured about a firearm exclusion because the insurer's agent expressly warned the insured about the exclusion. The Bhojanis argue that, unlike in Purdie, Aetna and its agents failed to notify them about the liquor liability exclusion even though Aetna knew that alcohol sales were an important part of the Drive-In's business and that the Bhojanis expected the policy to cover any liability that might arise from the liquor sales. Although the Purdie dicta may support the Bhojanis' argument, the one case relying upon these dicta has been withdrawn. See Aetna Casualty and Sur. Co. v. Velasco, 194 Cal. App. 3d 1441, 240 Cal. Rptr. 290 (1987) (withdrawn Dec. 17, 1987).

In Aetna Casualty and Surety Co. v. Richmond, 76 Cal. App. 3d 645, 143 Cal. Rptr. 75 (1978), the court stated: "It is a general rule that the receipt of a policy and its acceptance by the insured without an objection binds the insured as well as the insurer and he cannot thereafter complain that he did not read it or know its terms. It is a duty of the insured to read his policy." 76 Cal. App. 3d at 652, 143 Cal. Rptr. at 79 (quotations omitted). The court therefore concluded that the insured was charged with the knowledge of the exclusion. Id. The Richmond rule has been consistently followed by the courts. See, e.g., Mt. Hawley Ins. Co. v. Federal Sav. & Loan Ins. Corp., 695 F. Supp. 469, 481 (C.D. Cal. 1987); Hackethal v. National Casualty Co., 189 Cal. App. 3d 1102, 1112, 234 Cal. Rptr. 853, 858 (1987). We are persuaded that Richmond is the sounder statement of California law. Applying Richmond, we conclude that the Bhojanis must be bound by the terms of the alcohol liability exclusion.

B

May Aetna rely upon the exclusion? An insurer may rely upon an exclusion if it is conspicuous, plain and clear. See Cal-Farms Ins. Co. v. TAC Exterminators, 172 Cal. App. 3d 564, 577, 218 Cal. Rptr. 407, 414 (1985). Exclusionary clauses are to be construed against the insurer and liberally in favor of the insured. See Stewart v. Bohnert's Estate, 101 Cal. App. 3d 978, 985, 162 Cal. Rptr. 126, 129 (1980).

Aetna maintains that the liquor liability exclusion is conspicuous. We agree. California courts have invalidated exclusions for not being conspicuous when they are contained in a section of the policy bearing no clear relationship to the insuring clause and concealed in fine print. See, e.g., Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 273, 54 Cal. Rptr. 104, 110 (1966). The California Supreme Court, however, held that an exclusion clause was conspicuous where it appeared in the insurance policy under the boldfaced hearing "EXCLUSIONS" in a print the size and intensity identical to the rest of the policy. See National Ins. Underwriters v. Carter, 17 Cal. 3d 380, 384-85, 131 Cal. Rptr. 42, 45 (1976).

Here, the policy's exclusion is equally conspicuous. As in Carter, the heading "EXCLUSIONS" in the instant policy is in boldface print and the type is normal size. The exclusion provision is easy to locate (as it appears immediately below the general statement of coverage), and it appears in a logical place in the policy.

In determining whether exclusions are "plain and clear," courts consider whether the exclusions are drafted in clear language that is comprehensible to a lay person. See Cal-Farm, 172 Cal. App. 3d at 578, 218 Cal. Rptr. at 414. The policy should be read as a lay person would read it, interpreting the terms in their popular sense. Id.

Applying these principles, we find the language of the liquor liability exclusion to be plain and clear.²  There are no unclear terms and the lay person would easily understand that there is no coverage for liability resulting from the sale of alcohol "in violation of any statute," to "a minor," or to "a person under the influence of alcohol." Because the policy's alcohol liability exclusion in this case is conspicuous, plain and clear, the district court did not err in concluding that Aetna may rely on the exclusion.³ 

III

The Bhojanis argue that Aetna's declaratory judgment action is premature because questions of fact remain to be settled in the underlying liability action (e.g., whether the Bhojanis sold alcohol to Koza).

The Bhojanis rely upon Cal-Farm in support of their argument. Such reliance is misplaced. In Cal-Farm, the application of an exclusion was directly dependent upon a finding in the underlying liability action. See 172 Cal. App. 3d at 579-80, 218 Cal. Rptr. at 415-16 (determining that the exclusionary clause applied only if a certain third party was found liable in the underlying action). In this case the question presented in Aetna's declaratory judgment action is not whether the Bhojanis are liable in the underlying Finney suit, but rather whether such liability, if any, is covered by the policy.

IV

The Bhojanis contend that Aetna cannot be excused from its duty to defend them in the Finney suit because Aetna has failed to demonstrate that the underlying action is of the type which falls within the liquor liability exclusion. Aetna disagrees, pointing out that any liability that may arise from the Finney suit necessarily falls within the liquor liability exclusion.

" [A]s long as the [underlying] complaint contains language creating the potential of liability under an insurance policy, the insurer must defend an action against its insured." CNA Casualty v. Seaboard Sur. Co., 176 Cal. App. 3d 598, 606, 222 Cal. Rptr. 276, 279 (1986). Moreover, " [t]he insurer's obligation to defend is not dependent on the facts contained in the complaint alone; the insurer must furnish a defense when it learns of facts from any source that create the potential of liability under its policy." Id. (emphasis in original).

Conversely, if there is no potential for liability under the insurance policy, the insurance company has no duty to defend. See Hartford Fire Ins. Co. v. Superior Court, 142 Cal. App. 3d 406, 191 Cal. Rptr. 37 (1983) (no duty to defend when the only potential for liability could have resulted from the operation of an aircraft and the insurance policy expressly excluded from coverage any damages arising from the ownership of an aircraft by the insured).

The Bhojanis' liability in the underlying Finney suit, if any, would not be covered by the insurance policy. The Finney suit alleges that the Bhojanis sold alcohol to an intoxicated minor. Any potential liability in the Finney suit would be excluded from the policy's coverage by the liquor liability exclusion.

The Bhojanis alternatively argue that the policy's promise to defend against false or groundless suits arising out of the Bhojanis' ownership or maintenance of the Drive-In requires Aetna to defend in the Finney suit. However, as Aetna points out, the "groundless, false or fraudulent" clause only extends to risks that are covered by the policy. See Gray, 65 Cal. 2d at 274, 54 CalRptr. at 111. As discussed above, the liquor liability exclusion clearly excludes from the policy's coverage any risk resulting from the sale of alcohol.

The Bhojanis next contend that Aetna may not refuse to defend without first conducting an investigation of the underlying action. The Bhojanis, however, misread the case they rely upon in support of this argument. In Mullen v. Glens Falls Insurance Co., 73 Cal. App. 3d 163, 173, 140 Cal. Rptr. 605, 611 (1977), the California Court of Appeal faced the question of whether "an insurance company can, without having all of the facts before it, refuse to defend an insured in a lawsuit brought against the insured, if at the time the company denies the defense it is aware of some facts indicating potential liability under the policy." (emphasis added). The court only concluded that when the insurance company was notified that there might be potential liability under the policy, it could not deny the insured a defense without further investigating the underlying action. Id. Mullen does not stand for the proposition that the insurer has a broad duty to investigate for any potential liability before refusing to defend as the Bhojanis assert.

In sum, given that the underlying Finney action does not expose the Bhojanis to potential liability that is covered under the policy, the district court properly found that Aetna does not have a duty to defend.

V

The Bhojanis argue that because the district court did not fully consider their counterclaim against Aetna, it erred in granting summary judgment and dismissing the counterclaim. In their counterclaim, the Bhojanis alleged negligent misrepresentation, breach of contract, breach of statutory duties under the California Insurance Code, and breach of the implied covenant of good faith and fair dealing, all allegedly resulting from Aetna's refusal to defend.

The Bhojanis' allegation in their counterclaim--that they were injured when Aetna improperly refused to defend them in the Finney suit--is dependent on the finding that Aetna had a duty to defend the Bhojanis. Because Aetna does not have a duty under the policy to defend or indemnify the Bhojanis in the Finney suit, the district court properly dismissed the Bhojanis' counterclaim.⁴ 

AFFIRMED.