Dig a Little Deeper
By Linda Ferguson, CPCU
WHEN THE SHOE IS ON THE OTHER FOOT
Questionable terms left undefined typically take on their “plain meanings”
The Court Decisions column is one of the most popular features of Rough Notes magazine. One reason is that the courtroom 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 mere mental exercises. In this column, the editors of PF&M Analysis, a publication of The Rough Notes Company, will dig a little deeper into one of those court decisions to identify a coverage problem and then provide possible solutions.
This court decision hinges on the term “advertising idea.” The Bikila family sued Vibram, a shoe manufacturer, because it used the name Bikila to advertise its minimalist shoes. Abebe Bikila was an Olympic runner well known for running barefoot. Vibram insurer Holyoke Mutual Insurance Company denied coverage for two reasons. First, the alleged offense was not part of the policy’s personal and advertising injury definition, and second, the action was excluded because of the Infringement of Copyright, Patent, Trademark or Trade Secret exclusion.
Vibram disagreed and argued that its use of the name Bikila was not infringement but instead was the result of Vibram’s using another’s advertising idea, which was a covered offense.
To resolve the coverage issue, the appellate court turned not to the exclusions but instead to the definitions section. This is not unusual. The definitions sections of ISO forms continue to grow because courts can find coverage when a term used to describe a coverage or an exclusion is considered vague. When a court determines that a term could be construed in more than one way because insurance is subject to the law of adhesion, the definition that is most advantageous to the policyholder is the one that must be used.
The law of adhesion applies when contracts are entered into by parties who are unequal. One party prepares the contract and supplies the wording, and the other party can either accept the wording or go elsewhere. Most insurance contracts are prepared by the insurance company with little or no input from the policyholder. Because of this unequal relationship in the creation of the contract, the courts require that ambiguities in wording be read for the benefit of the lesser party.
The two fastest growing sections of insurance policies are the exclusions and the definitions.
Sometimes courts will refer to the “doctrine of reasonable expectations” when discussing how they interpret an insurance contract. The policyholder did not write the contract, so that policyholder will have expectations based on the wording presented to him or her. If a reasonable argument can be advanced to support an alternative way of interpreting a term, the court will rule in favor of the policyholder even though the insurance company interpretation may be just as reasonable as the one presented by the policyholder.
As an example, the ISO CG 00 01 04 13–Commercial General Liability Coverage Form Definition Section provides the following definition:
14. “Personal and advertising injury” means injury, including consequential “bodily injury,” arising out of one or more of the following offenses:
a. False arrest, detention or imprisonment;
b. Malicious prosecution;
c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;
d. Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;
e. Oral or written publication, in any manner, of material that violates a person’s right of privacy;
f. The use of another’s advertising idea in your “advertisement” or
g. Infringing upon another’s copyright, trade dress or slogan in your “advertisement.”
Because “personal and advertising injury” is a defined term, whenever it is used in the coverage form, this definition must be used and only the offenses listed in this definition are to be considered. There may be injury and there may be an offense, but if the offense is not one of the offenses listed, there is no personal or advertising injury and therefore no coverage.
Vibram and Holyoke Mutual agreed that because of this definition any coverage available in the Vibram CGL policy was under Coverage B-Personal and Advertising Injury.
Holyoke argued that coverage did not apply because the claim was not for one of the offenses listed in the definition. It further argued that an exclusion also precluded coverage, and the trial court agreed. However, Vibram argued that using the name “Bikila” was an advertising idea, and therefore based on item “f.” above, coverage would apply.
“Advertising idea” was not a defined term, so the appellate court considered what would be the “plain meaning” of the term. It then ruled that Vibram’s argument for coverage was reasonable.
Clarification vs. limitation
The two fastest growing sections of insurance policies are the exclusions and the definitions. Both are fueled by court interpretations that have granted coverage in situations that insurance companies had not anticipated when the policy was written. Many times the insurance company will state that such changes are clarifications of coverage and not restrictions because the writers of the language had never anticipated the court interpretations. However, from the policyholder’s standpoint, such clarifications must be considered as restrictions because the court interpretation in favor of coverage cannot be carried forward as precedent in similar situations when the new wording is used.
When providing coverage reviews for customers, it is important to consider the edition dates of coverage forms. Some insurance companies are using current edition date forms that include changes in definitions and exclusions amended for “clarification,” while others use older and possibly more ambiguous forms.
For the benefit of the policyholder, the same principle that applies to wine and whiskey applies to coverage forms and policies: Older is often better.
Linda D. Ferguson, CPCU, is senior vice president of Technical and Educational Products at The Rough Notes Company, Inc., and has over 45 years of experience in the insurance industry.