THE MISADVENTURES OF ERNIE AND OLIVER: MORE ON POLICY FORMATTING
A deeper look at definitions, conditions and endorsements
By Christopher W. Cook
The holiday season came and went. Ernie and Oliver got in the spirit by watching Jim Henson’s Emmett Otter’s Jug-Band Christmas every other day; on each occasion they sang “When the River Meets the Sea” exceedingly off key.
Ernie and Oliver have begun engaging and orating with new clients needing special coverages. Ernie recently wrote a commercial policy for an extraordinary okapi farm, and Oliver wrote one for an antique music store’s elderly organs.
The pair’s education on policies remains on the lower tier of new agents, and I don’t see things going well as they emprise onward with their business. Just look at Oliver’s (or is that Ernie’s?) expression as he eyes his latest sale.
Just as a comma saves Grandma from us consuming her, proper punctuation can be key to avoiding an E&O claim.
Let’s review in more detail some of the policy formatting notes mentioned in our previous installment to help avoid E&O claims.
Definitions—Any reader of our Court Decisions feature should understand the importance of providing definitions in a policy. Several cases ask questions like “Was it an occurrence?”, or “Was it an accident?”, “Was the occurrence an accident?” In these situations, the outcome of the claim may come down to how a word is defined in the policy.
Words or phrases that have special meaning in the policy should be clearly defined. The definitions may vary from policy to policy. The definitions section, sometimes referred to as a “policy dictionary,” can also be found in different portions of a policy, typically toward the front for personal lines and the back for commercial. Distinguishing which words are defined in the definitions section is also important and may be done by using quotation marks or italicized or boldface type.
For example, the ISO Business Auto Coverage Form (CA 00 01) uses the following definitions:
- “Insured contract” means:
- A lease of premises;
- A sidetrack agreement;
- Any easement or license agreement, except in connection with construction or demolition operations on or within 50 feet of a railroad;
An “insured contract” does not include that part of any contract or agreement:
That indemnifies a railroad for “bodily injury” or “property damage” arising out of construction or demolition operations, within 50 feet of any railroad property and affecting any railroad bridge, or trestle, tracks, roadbed, tunnel, underpass or crossing; …
If you noticed the quotation marks around “bodily injury” and “property damage,” you’ll find that those two phrases are defined in C. and M., respectively, in the policy’s definitions section. Also note that definitions can contain exceptions and exclusions for a specific word or phrase.
The bottom line is that definitions help shape the coverage by telling the insured what is and isn’t covered in the policy; they should be clear and straightforward.
Conditions—This section is necessary to make a policy effective, explaining the rights and responsibilities of the insured and the insurer. Several conditions are common in all policies, and they can vary from one policy to another.
Going back to the ISO form previously shown, a key component of the conditions section is the one listed as “Duties in the Event of Accident, Claim, Suit or Loss.” This sets forth the duties to be performed by the insured in case of an accident, as seen with:
- Duties in the Event of Accident, Claim, Suit or Loss
We have no duty to provide coverage under this policy unless there has been full compliance with the following duties:
In the event of “accident”, claim, “suit” or “loss”, you must give us or our authorized representative prompt notice of the “accident” or “loss”. Include:
How, when and where the “accident” or “loss” occurred;
The “insured’s” name and address; and
To the extent possible, the names and addresses of any injured persons and witnesses.
Refusal to complete listed duties could be grounds for denial of the claim. Package policies may contain conditions specific to sections of coverage, e.g., property or liability. They may also contain conditions applying to all sections of the policy.
Endorsements—These are used to modify basic property and casualty policies to meet specific needs of an insured. For example, a client may have a watercraft stored on his or her property and would like to add physical damage and liability coverage for the craft to a homeowners policy.
Endorsements can also be used to broaden coverage, such as including employees as insureds when they drive their personal vehicles for company business, or to broaden a pollution liability policy by including pollution emitted from cargo vehicles. They can also be used to restrict coverage, for example, by limiting employee dishonesty coverage in a crime policy to scheduled individuals or positions.
Endorsements also can be used to change a word or phrase in a policy. A company may wish to change the definition of employee in its CGL policy to exclude leased workers.
Understanding how to use endorsements and how they affect coverage can benefit your agency. Recommending endorsements to enhance coverage adds value that can help an agency retain customers and attract new ones. Identifying a lack of endorsements in a competitor’s policies can also help increase sales. In essence, knowledge of endorsements is key to minimizing E&O exposures.
Punctuation—Let’s talk briefly about grammar. I’m not going to give a lecture, but although the modern trend leans toward lighter punctuation (e.g., using fewer commas), courts may not acknowledge this shift. Everyone does know the difference between “Let’s eat Grandma!” and “Let’s eat, Grandma!”, right?
Let’s look at some examples.
Compare the following two statements:
Coverage on properties that have a concrete roof is subject to a $10,000 deductible.
Coverage on properties, that have a concrete roof, is subject to a $10,000 deductible.
What did the commas do to the meaning?
The placement of the commas in the second statement creates an ambiguity. When an ambiguity exists in policy wording, courts generally construe it in favor of the insured because—as we learned in our October 2018 installment—an insurance policy is a contract of adhesion, meaning that its wording “sticks to” the maker of the contract.
Let’s look at another punctuation scenario that arose during the 2004 hurricane season in Florida. A policy stated:
“HURRICANE COVERAGE: Coverage under this policy includes loss or damage caused by the peril of windstorm during a hurricane. It includes damage to a building’s interior or property inside a building, caused directly by rain, snow, sleet, hail, sand or dust if direct force of the windstorm first damages the building causing an opening through which the above enters and causes damage.”
A claim was denied because of a missing comma after the phrase “sand or dust.” In its current form, the policy covers damage to the building’s interior or property inside the building caused by all of the perils listed with the exception of sand or dust unless there is direct damage to the building first.
Just as a comma saves Grandma from us consuming her, correct punctuation can be key to avoiding an E&O claim. In our next installment, we’ll discuss insurance valuation and special interests. Until next time …