LEAD PAINT DEBATE
Attention to the basics can help minimize problems
The Court Decisions column is a popular part of Rough Notes magazine. One reason for this is that the court room is where the promises made in an insurance contract often become real. All insurance professionals can develop “what if” scenarios, but until those scenarios are tested with an actual loss and a court decision, they remain mental exercises. This column comes from the industry expert editors of Policy Forms & Manual Analysis (PF&M). This is a knowledge base consisting of more than 15,000 pages of coverage explanations from Rough Notes Company’s digital solutions. The editors are going to dig a little deeper into one of those court decisions to identify a coverage problem, provide possible solutions and/or offer broader perspectives.
By Bruce D. Hicks, CPCU, CLU
This issue’s featured case, CX Reinsurance Company v. Johnson, is short, quite intriguing and it presents an opportunity to add clarity. It involves contract rights which appear to have been applied in a confusing manner.
A group of landlords were dealing with claims against them. Tenants sought damages for bodily injury caused by lead paint that existed in their respective rented residences. The landlords held commercial general liability policies from a reinsurer. Apparently, the underlying policies (and by extension the reinsurance forms) included coverage against harm inflicted by lead paint.
Under some arrangement, the reinsurer rescinded the policies. Afterwards, the parties addressed the loss situation with contracts involving a reduced level of coverage for the lead paint damage. The litigation ended with a final decision impacting two groups.
The claimants who held final judgment at the time of appeal could pursue losses under the terms of coverage found in the original policies. The other group, without established judgments, had no legal ground to pursue damages.
The case details are a jumble. Hopefully, there was logic to be found in the complete case. This summary lacked full info on why the carrier was able to rescind coverage and its subsequent actions. As it is, no sense can be made of what originally triggered the dispute. It also isn’t clear whether different coverage resumed under a rewrite or court-directed contract reformation.
With regard to insurance policies, a recission is an act that ends coverage, but it’s different than a cancellation or non-renewal. It describes the act of rendering a policy void! Cancellations/non-renewals do not affect the fact that, for a period of time, a valid policy existed. Recissions result in, essentially, the removal of a policy.
Cancellations/non-renewals do not affect the fact that, for a period of time, a valid
policy existed. Recissions result in, essentially, the removal of a policy.
A decision to rescind coverage is justified for a serious situation but does not automatically mean a negative act. It is more accurate to view it as a method of correction. Insurance policies have a specific coverage intent. Rescission may occur when there is a significant misalignment.
When a loss occurs, it is often a revealing moment. An insurer may discover critical details, such as an applicant deliberately supplied incomplete or misleading information to secure coverage. It’s a method that may be used to avoid confusion or debate regarding possible coverage because changing terms on an existing policy at a given point during a policy period can create ambiguity.
Completely voiding a contract usually means that the contracting parties are done with each other, often because the level of communication was too poor or bad faith/dishonesty created a problem.
If circumstances are such that an insurer-insured relationship is to be maintained, the less radical and far more routine method of reclassifying and adjusting rating on an existing policy is the preferred move.
Of course, the best situation involves properly vetting potential clients, thorough exposure identification, solid underwriting, accurate rating and clear communication among all parties.
Those practices are guaranteed to minimize problems.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educa-tional Products Division, at The Rough Notes Company. He has more than 30 years of property/casualty insurance experience, including personal and small business underwriting as well as compliance duties for several national and regional insurers. Active in the CPCU Society, Bruce served as a governor of the organization from 2007 through 2010 and currently serves on its International Interest Group Committee.