Insurance Coverage – Auto Exclusion for “Nonrelative Resident” not Permitted

Insurance Coverage – Auto Exclusion for “Nonrelative Resident” not Permitted

Court Of Appeal, Fourth Appellate District (September 24, 2014)

Many automobile policies have exclusions against coverage for injury to other insureds, commonly including “resident relatives” for close family relatives who live with the named insured.  This case considered the validity of an insurer’s purported exclusion for persons who reside with the named insured but are not necessarily related to the insured.Hung Chu (“Chu”) was born in Vietnam, and came to the United States as a student in 2006.  By 2008, he was attending Orange Coast College, and was living with his aunt and uncle.  While in Vietnam, Chu became acquainted with Tu Pham (“Pham”), who also came to the United States to attend school.  In May or June of 2008, Pham began sharing a room with Chu at Chu’s family’s house.  Both Chu and Pham paid rent to Chu’s aunt and uncle to share the room. 

In October of 2008, Chu was driving his 1995 Honda Accord with Pham as a passenger, when he got in an accident with another vehicle driven by Krystal Hoang.  Pham filed suit against both Chu and Hoang, recovering a judgment of $333,300 against Chu.Chu had been insured at the time of the accident under an automobile liability policy issued by Mercury Casualty Company (“Mercury”).  The policy contained what was called a “resident exclusion,” and when read with other definitions in the policy, purported to exclude coverage for any claims of injury to any persons who lived in the same dwelling as the named insured.

Mercury defended the action brought by Pham, but after the judgment was obtained, Mercury filed a declaratory relief action to confirm it owed no duty to indemnify Chu against Pham’s claims, and for reimbursement of its defense costs.  Mercury brought a summary judgment motion based on the resident exclusion, and the trial court granted the motion, holding there was no duty under the policy to indemnify Chu with respect to Pham’s judgment.  Chu appealed. The Court of Appeal reversed the trial court’s decision. 

The Court first noted that Insurance Code Section 11580.1 created by statute all exclusions that were allowed in an automobile liability policy.  Exclusions not contained in that code section are impermissible and invalid.  Section 11580.1 contains an exclusion “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 the insured,” which was similar to the language in Mercury’s policy.  However, Mercury’s policy defined an insured not just to include relatives who reside with the named insured, but anyone who “resides in the same dwelling as the insured.”  This would include relatives and non-relatives alike.

The Court noted that the California Supreme Court had allowed the resident relative exclusion in Farmers Insurance Exchange v. Crocking (1981) 29 Cal.3d 383.  The public policy reasons behind such a limitation were to prevent “suspect inter-family legal actions which may not be truly adversary and over which the insurer has little or no control.”  The Crocking court noted that under 11580.1, such an exclusion of coverage was appropriate, and that the legislature may reasonably have concluded that the benefits to the public from automatically including “family member” coverage in all automobile liability policies was outweighed by the “probable adverse consequences” of such a rule, including increased premiums, increased numbers of uninsured drivers, and the possibility of collusion in such claims.

The Court of Appeal noted that in the 33 years since the Crocking decision, the “resident relative” exclusion had been the subject of judicial interpretation over many different versions of the exclusion, with the terms being broadly construed to find coverage, and narrowly construed to exclude coverage.  To date, there had been no cases interpreting an exclusion which, like Mercury’s, did not attempt to limit the exclusion to relatives who shared the named insured’s household, but to all co-residents of the insured.  The Court noted that the entire decision in Crocking was based upon the premise that the excluded person was a relative who resides “with some permanence” with the named insured.

The Court of Appeal held that the Crocking court’s reasoning did not apply to non-relatives sharing the same dwelling.  The Court noted that cohabitation can be temporary and involve complete strangers.  There was no legal basis to assume insurers faced the same risk of fraudulent lawsuits. In addition, the Court held that the ability to limit coverage for injury to “an insured” under section 11580.1 did not mean that an insurer could define anyone it liked as “an insured” solely for a basis to exclude coverage.  Rather, that person must have some coverage afforded them in some way under the policy and must have an “insurable interest.”  A parent or child or other close family member may have some responsibility or have some liability if their close family member has an accident.  On the other hand, if Chu had an accident with a third person, there was no possible way that could affect Pham, simply because he lived in the same home.  No public policy supported such a broad expansion of the exclusion. Finally, the Court noted that it appeared Mercury was naming Pham as “an insured” for the sole purpose of excluding him from coverage for bodily injury caused by the use of the insured vehicle by the named insured.

Following Mercury’s argument to its conclusion, it could conceivably exclude coverage for any members of a large apartment complex simply because they lived in the same building with Mercury’s insured.  This would defeat the public policy behind requiring mandatory automobile insurance liability and would undermine financial responsibility laws. Summary adjudication in Mercury’s favor was reversed, and the matter was remanded, with instructions that the nonrelative resident exclusion was stricken and that Mercury could not claim Pham was “an insured.”

Comment Bases for exclusion under an automobile liability are expressly listed in Insurance Code section 11580.1.  If they are not listed there, they are prohibited.  The resident relative exclusion is allowed under that section, but courts will not extend that beyond the close familial relationship to exclude coverage for claims of persons who are not related but live together in some way.

For a copy of the complete decision, see: