By Donald S. Malecki, CPCU

When it comes to manuscripting policies or endorsements, those who take pen in hand to develop the product need to be careful. The reason is that if there is any ambiguity in the document, it can be interpreted adversely against the drafter.

So, for example, if a producer decides to embellish the wording of an endorsement, with the consent of the underwriter, the producer and his or her client may be confronted with a problem, if it turns out that the document is ambiguous. (The word "ambiguous" is used here to mean that the wording produces two reasonable interpretations, instead of one.)

Another caveat is that whatever the document being manuscripted, it needs to correspond to the rest of the policy. It is simply astonishing to see endorsements that provide no clue on the provisions of policies they are designed to interact with or replace.

Of course, an endorsement does not have to replace any policy provision. It can be used to introduce a new provision. But if the intent is to replace a provision of the policy, then there should be some continuity in the wording and some clarity about the exact provision being amended.

For example, standard property and liability policies today define key terms. The defined terms either are emphasized by quotes or appear in bold face type.

What commonly happens when an endorsement is manuscripted is that the drafter either forgets or ignores the fact that the endorsement of the policy and the balance of the structure must be consistent. If a word appears in quotes within the policy to signify that it is a defined term, it is necessary that the same term, if used in the endorsement, also appear in quotes. Otherwise, the term in the endorsement may be interpreted by the courts to take on an entirely different meaning causing serious dispute at the expense of the drafter.

What appears to be a flagrant disregard for the proper construction of an insurance policy is when a manuscript endorsement is attached to an old standard comprehensive general liability policy. The manuscript endorsement's purpose is to "gut" the policy with the reintroduction of new, undefined terms and conditions.

This is a gutsy maneuver because if a dispute over coverage arises and there is some question about the application of the policy's terms and conditions, those who front these contracts are not likely to have the edge in any dispute.

It cannot be over emphasized how often disputes arise over manuscript endorsements. Quite frankly, it is somewhat surprising that underwriters even permit these ambiguous documents to be issued on the insurer's paper. Underwriters and others should be aware of what it can cost in terms of time and expense to litigate an ambiguous document.

On the other hand, it may make good risk management sense from the underwriter's perspective to have someone else do the manuscripting. If manuscripting is essential, it should be done in such a way that the document can be checked by someone other than the drafter and the underwriter who ultimately accepts the "work of art."

Use of commas

The use of commas also can mean the difference between coverage and no coverage. In 1953, Stewart Brown, the associate counsel and tax counsel for USF&G Company, wrote an interesting article in the Insurance Counsel Journal titled "Commas-In-Law."

The primary thrust of his article was that some people like to use commas not realizing the impact they can have on the meaning of the final product. The impetus for his article was his experience on a committee charged with drafting a general liability policy. It came to the point where the work halted because the consensus of the committee differed over the use of one comma.

Although this author discusses some cases that have caused problems involving earlier policy language, those interested in this subject might wish to read it since it still offers helpful advice.

No safety in numbers

Speaking about committees, there is nothing safe in numbers when it comes to drafting policies. In fact, some of world's worst policies are produced by committees.

The problem commonly involves the deficiency of two important ingredients: the proper use of the "King's English," and some understanding about the track record of policy language. Based on some of the policies being produced, one can only surmise that the committee's most prevalent skill is cutting and pasting.

It is not uncommon for a drafting committee of say, an umbrella policy, to begin their task by taking the "monkey-see-monkey-do" approach; that is, selecting what they believe are the five best umbrellas on the market. Once having made that decision, they then implement the best of the five insuring agreements, add what exclusions they feel may be appropriate, add the usual conditions, slap on a declarations page and then offer it as a competitive product.

What the committee usually fails to do is determine whether or to what extent the wording implemented has been subject to litigation, and its outcome. They seldom take pains to see to it that there is continuity in the provisions. The result is a monster of a product that creates more problems than the money they take in on sales.

Typography of wording

The last subject of this sermon deals with the typography or structure of the policy or endorsement. The best way to explain this kind of common problem is with an example. Let's take the liquor liability exclusion of the standard commercial general liability policy as an example. It reads as follows:

"Bodily injury" or "property damage" for which any insured may be held liable by reason of:

(1) Causing or contributing to the intoxication of any person;

(2) The furnishing of alcoholic beverages to a person under the legal drinking age or under the influence of alcohol; or

(3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages."

In reading a recent general liability policy of an excess and surplus lines insurer, it was observed that the last paragraph above read as follows:

"(3) Any statute, ordinance or regulation relating to the sale, gift, distribution or use of alcoholic beverages.

This exclusion applies only if you are in the business of manufacturing, distributing, selling, serving or furnishing alcoholic beverages."

A slight indent of the last paragraph makes a big difference in the scope of the exclusion! The reason is that it is only subpart (3) above that is subject to the condition relating to being in the business of manufacturing.

Some insurers' policies we have observed include several such differences in the typography of a policy's provisions. The insurer may be able to argue reformation and correct the situation without much problem, but it is not always possible to do so. In the case of Reeder v. Cetnarowski 547 N.E.2d 376 (Ct. App. OH 1988), the "a" provision in an auto policy relating to the "persons insured" provision was construed against the insurer because the typography or actual placement of words created an ambiguity.

This entire subject of drafting policies and endorsements is very important because errors and omissions are being made with increasing frequency. Those producers, consultants and underwriters who are parties to these kinds of activities should tread very carefully because this is becoming very fertile area for litigation.