In general, the law concerning “separation is insureds” is pretty clear.  In just about all states, the terms “any insured” and “an insured” are interpreted just as they say.  Any means any.  An means an.  But, after this initial interpretation, states depart.   

In some states, an exclusion that applies to certain conduct by “any insured” or “an insured” precludes coverage even for an insured who did not, himself or herself, commit the excluded conduct.  Think of an exclusion for the “criminal act of any insured.”  So long as “any insured” committed a criminal act, the exclusion is satisfied, and it applies to all insureds.  Thus, it excludes coverage for an insured, who did not commit the criminal conduct, but is alleged to have been negligent for not preventing their insured-spouse or insured-child from doing so.        

But courts in some states say “whoa, not so fast.”  As they see it, despite what “any insured” and “an insured” mean on their face, in the abstract, the exclusion applies only to the insured that actually committed the excluded conduct.  Therefore, in the case of an exclusion for the “criminal act of any insured,” a spouse who did not commit the criminal conduct, but is alleged to have been negligent for not preventing it, is not subject to the exclusion.  In essence, an exclusion for the “criminal act of any insured” is read as the “criminal act of the insured.”

Courts in this latter camp tie their conclusion to the policy’s “separation of insureds” clause, which is intended to provide each insured with separate coverage – but not separate limits -- as if each were separately insured with a distinct policy.  As these courts see it, to preclude coverage to one insured, for the conduct of another insured, is incompatible with the purpose of the “separation of insureds” clause.           
         
California is considered to be in the latter camp.  At least that’s what I would have said.  In Minkler v. Safeco Ins. Co., 232 P.3d. 612 (Cal. 2010), the Supreme Court of California held that coverage was owed under the liability section of homeowner’s policies to an insured-mother for failing to take reasonable steps to prevent her insured-son from sexually molesting a minor over the course of several years.  The policies contained exclusions for “Personal Liability [coverage] … do[es] not apply to bodily injury or property damage: (a) which is expected or intended by an insured or which is the foreseeable result of an act or omission intended by an insured.”

The Minkler court held “that, in light of the severability clause, Betty would reasonably have expected Safeco’s policies, whose general purpose was to provide coverage for each insured’s ‘legal[] liab[ility]’ for ‘injury or … damage’ to others, to cover her separately for her independent acts or omissions causing such injury or damage, so long as her conduct did not fall within the policies’ intentional acts exclusion, even if the acts of another insured contributing to the same injury or damage were intentional.  Especially when informed by the policies that ‘[t]his insurance applies separately to each insured,’ it is unlikely Betty understood that by allowing David to reside in her home, and thus to become an additional insured on her homeowners policies, [she was] narrowing [her] own coverage for claims arising from his [intentional] torts. In light of the severability provision, Safeco’s intent to achieve that result was not clearly expressed, and the ambiguity must be resolved in the [insured’s] favor.” 

In reaching its decision, the California high court observed that courts nationally are “split on the general issue whether a severability-of-interests provision in a policy covering multiple insureds alters the otherwise collective effect of an exclusion for the acts of ‘an’ or ‘any’ insured.”

Based on Minkler, it seems like a court addressing California law would limit an “any insured” exclusion to only the insured who actually committed the excluded conduct.  In other words, if the policy contains a separation of insured’s clause, coverage is not precluded for an innocent  co-insured, whose only alleged liability is for failing to prevent the excluded conduct from taking place.

For this reason, I suspect that many will find the Ninth Circuit’s decision in Bayes v. State Farm, No. 17-56035 (9th Cir. June 10, 2019) to be surprising.  At issue was coverage for Susan Potter, under a Renter’s policy issued by State Farm, for claims that her adult son molested a child in Ms. Potter’s home day care.  To be clear, it was alleged that the molestation was committed by Ms. Potter’s son.  The action, brought by the parent of a molested child, was solely against Ms. Potter for negligent supervision of her son.  

The State Farm policy contained the following exclusion:

Sexual Molestation Exclusion. We do not cover bodily injury, property damage, or medical expense arising out of or resulting from the actual, alleged or threatened sexual molestation of a minor by:
a. any insured;
* * *
We have no duty to defend or settle any sexual molestation claim or suit against any insured. . . (emphasis added)
     
The State Farm policy also contained a separation of insureds clause.

Based on the Sexual Molestation Exclusion, State Farm disclaimed coverage to Ms. Potter, who then assigned her claims against State Farm to Holy Bayes, the mother of the molested child.  Bayes filed suit against State Farm.

Putting aside what happened at the district court, the Ninth Circuit, following a detailed discussion of Minkler, held that no coverage was owed to Bayes on account of the Sexual Molestation exclusion.  But doesn’t this seem inconsistent with Minkler, where the court held that, in light of the separation of insureds clause, the policy’s intentional acts exclusion [bodily injury or property damage “which is expected or intended by an insured”] did not apply to the insured who did commit an intentional act, even if another insured did.

The Bayes court reached the decision is did by pointing to one sentence in the Minkler opinion: “Significantly, the California Supreme Court observed that because ‘Betty’s policies did not contain a specific exclusion for claims arising from sexual molestation . . . nothing we hold in this case concerns how an exclusion framed in those terms should be construed.”

This was the basis for the Bayes court to distinguish Minkler, namely, that the California Supreme Court had stated that its decision may not apply to a specific exclusion for claims arising from sexual molestation.  The court stated: “In this case, Susan and Cooper Potter’s Renters Policy expressly excluded injury or damage ‘arising out of or resulting from the actual, alleged or threatened sexual molestation of a minor by [] any insured . . .We have no duty to defend or settle any sexual molestation claim or suit against any insured . . .’ Applying the severability-of-interests or ‘separate insurance’ clause to each, Susan and Cooper Potter, alongside the Sexual Molestation Exclusion does not result in any ambiguity. State Farm expressly excluded coverage for this type of damage or injury, regardless of the theory for liability.”

Basically, the Bayes court had before it the situation that the Minkler court specifically noted it did not.

Not surprisingly, there was a dissenting opinion that would have followed Minkler, based on its reasoning, notwithstanding the Minkler court’s attempt to limit its holding:  “Were we deciding this case on a blank slate, I would likely agree with my colleagues that the State Farm Policy’s Sexual Molestation Exclusion unambiguously excludes Susan Potter from coverage for claims arising from acts of sexual molestation committed by her adult son Cooper. But this case does not come to us on a blank slate. In my view, notwithstanding the California Supreme Court’s attempt to limit its holding in Minkler (citation omitted), Minkler's reasoning forecloses the facile conclusion the majority reaches today.”

The dissent acknowledged the Minkler court’s possible limitation on its holding, but was not persuaded by it: “I recognize it would be odd to reach a result seemingly compelled by the reasoning of a case that carefully stated it was saying ‘nothing’ about this very circumstance.  But neither the majority nor any other court to consider the same question has explained how a contrary result can be squared with Minkler’s basic premise: A severability clause requires us to apply the Policy’s exclusions to each insured as if she were the only insured.”