A California appeals court has ruled that an insurance company did not act in bad faith when it refused to reimburse a jewelry wholesaler for more than $1.5 million in property that the wholesaler claimed was mistakenly handed over to an individual who was merely posing as an armored-car agent. PNS Jewelry Inc. v. Penn-America Insurance Co., No. B212348 (Cal. Ct. App., 2d Dist., Mar. 1, 2010).

The decision of the 2nd District Court of Appeal, which affirmed the judgment of the California trial court, resulted from the following set of facts. Wholesale jeweler PNS Jewelry Inc. was insured by Penn-America Insurance Co. through a commercial property and liability policy. During the policy period, a PNS owner allegedly gave $1.5 million in jewelry to an individual pretending to be an employee of an armored car service that was hired to transport jewelry items to an out-of-state location. The jewelry was never recovered.

PNS subsequently sought coverage under its Penn-America policy. The insurer denied the claim, citing a voluntary-parting exclusion, which bars coverage when an insured voluntarily parts with property “if induced to do so by any fraudulent scheme, trick, device or false pretense.” PNS sued its insurer in the Los Angeles County Superior Court for breach of contract and bad faith, and both parties moved for summary judgment. The court granted summary judgment to the insurer.

PNS appealed, arguing that the provision cannot be enforced because it is “inconspicuous and unclear.” The Court of Appeal disagreed, finding that such exclusions are not uncommon and that PNS had a policy with another insurer that had an “almost identical” provision. Furthermore, the Court of Appeal determined the exclusion was conspicuous because it: (1) was listed under a bolded “exclusions” heading; (2) was not “buried” in a portion of the policy that contained unrelated material; and (3) used the same size font as the policy's other forms and endorsements.

The Court of Appeal also found that the language in the exclusion was plain and clear and not subject to another interpretation. The Court explained that by its plain terms, the voluntary parting exclusion excludes from coverage instances when the insured is tricked into parting with covered property. The word “voluntary” applies to the insured's “parting” with the property – i.e., when the insured purposely parts with the property without force. The Court further noted that although the owner of PNS was tricked into handing over jewelry because an individual was impersonating an expected courier, the owner nonetheless physically and purposely handed over the property. Therefore, the Court found that the policy plainly and clearly excluded such causes of loss.

A copy of the decision is available here.