WHEN THE PUNISHMENT FITS THE CRIME
“Eligible losses” is key when breaking down this Court Decisions case
Losses that occur and that are,
in any significant manner, under your control
are excluded from coverage.
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.
Dig A Little Deeper
By Bruce D. Hicks, CPCU, CLU
At the heart of the case Sunday v. McMillan-Warner Mutual Insurance Company is a prime illustration that when a loss occurs, the policyholder’s interest is often diametrically opposed to the insurance company’s.
What happened that caused a loss? An older teen and two friends were hunting. It was dark and past the official hours during which hunting was permitted, a formula that contributed to a tragic act. Another hunter was leaving the hunting area. The older teen, for some reason, fired a weapon. The bullet struck the other hunter, and the teens fled the scene.
The older teen was caught and charged with negligent use of a firearm (a felony). The hunter who was shot was able to call and get help from her family. Sadly, she ended up with serious and permanent injuries. The shooter’s family was sued for the injuries they caused, and the suit was filed after the shooter was convicted for his crime. The teen’s family was insured under two separate homeowners policies.
As it turned out, after the circumstances of the lawsuit were reviewed by both a lower and higher court, a decision to deny the loss by both insurers was upheld. It came down to the fact that both policies included language that excluded losses stemming from criminal acts.
The family of the injured hunter presented arguments that did not persuade the insurers or the courts.
Here’s the thing: The core of any insurance policy is simple. It’s an agreement between two parties. The insurance company, the second party, agrees to provide coverage. The policyholder, the first party, agrees to pay the insurer for the coverage. What is covered varies widely. However, whether the policy protected a car, home, motorcycle, doctor’s liability, factory, tractor-trailer, yacht or plane, the mechanics are the same: Protection up to a described limit, subject to a deductible, conditions, and exclusions, is provided to an insured for eligible losses. Those last two words are key, “eligible losses.”
Insurance policies are intended to protect against losses that are accidents. The protection is to respond to life’s vagaries. Coverage is for occurrences that may happen to your property or may happen to others or their property, but any injury or damage that occurs to others is your fault. Still, they must be accidental. Losses that occur and that are, in any significant manner, under your control are excluded from coverage.
It’s hard to find a solution in a situation such as the one in our featured case. The parties to the suit seeking protection and damages had a major incentive to fight against outright acceptance of the policy wording. An innocent individual suffered life-long injuries. Treatment for the injury and ongoing costs were substantial. Given their situation, the policyholders and the claimants recognized an urgent need to create doubt about the policy language.
Over decades, language has evolved. Earlier policies often referred to intentional acts. While excluding such acts would appear to be clear cut, nothing ever is.
Court cases quickly sprung up questioning whether consequences could still be covered. A person may have intended an action, but injury or damage may have been unintentional. Consider a policyholder who is goofing around in his in-ground pool. He playfully shoves a neighbor during a party, that person loses his balance, falls, and suffers broken bones and lacerations.
In order to clarify coverage intent, wording was changed so that the exclusion applied regardless of the original intent. Getting to that point has yet to be achieved. Using wording that includes criminal acts is an attempt to avoid the loophole of unintended harm.
Though the courts did not see any ambiguity, the policy language could create confusion. It is arguable that reliance on acts also being crimes introduces a bar to coverage that wasn’t needed. A focus on deliberate acts that is clearly worded achieves the goal of establishing a clear coverage intent. It’s difficult to think of a significant crime that is not, also, a deliberate action.
In the end, insurers seek language that restricts their payment obligations to accidents. Here’s the rationale behind that: While actual harm is frequently unintended, the point is that outcomes are, to some degree, foreseeable. The only way for insurance professionals to proceed is to hammer home how insurance is meant to perform
A policy that is poorly understood is vulnerable to failing to meet coverage expectations.
Bruce D. Hicks, CPCU, CLU, is senior vice president, Technical & Educational Products Division, at The Rough Notes Company, Inc. 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.