Digging Deep Into the Policy and Claim File: What Insurance Companies Don't Want You To Find
Rules of Construction and Interpretation. The interpretation of insurance contracts is a question of law that should be decided by a judge, not a jury. See, e.g., Gamble Farm Inn, Inc. v. Selective Ins. Co., 656 A.2d 142 (Pa. Super. Ct. 1995). Courts should interpret the policy to avoid ambiguities and give effect to all of its provisions. Houghton v. American Guaranty Life. Ins. Co., 692 F.2d 289 (3d Cir. 1982). Similarly, when interpreting policies, a court should not “treat words in the policy as mere surplusage”, but “must construe the policy in a manner that gives effect to all the policy’s language if at all possible.” Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706 (Pa. Super. Ct. 2007). If the policy, when viewed as a whole, is reasonably susceptible to more than one interpretation, it must be considered ambiguous. Vlastos v. Sumitomo Marine & Fire Ins., 707 F.2d 775 (3d Cir. 1983). In the case of ambiguity, if the intent of the parties cannot be determined, the “policy provision is to be construed in favor of the insured and against the insurer, the drafter of the agreement.” Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563 (Pa. 1983).
Claims-Made v. Occurrence. General liability insurance can come in two primary forms – claims made policies or occurrence coverage. Claims made policies, as the name indicates, provides coverage for claims made in the period the policy is in force. Claims made policies can be extended beyond the policy period through “tail” coverage that extends the date when a claim made is covered, but this often is expensive. In addition, because claims may arise from injuries or acts occurring substantially earlier than a claim and many claims made policies exclude acts or omissions occurring prior to the policy period, when purchasing a claims made policy, “prior acts coverage” will provide a “retroactive date” prior to the policy period inception. Any claim that arises during the policy period and alleges acts or omissions after the retroactive date would then be covered by the claims made policy. In effect, the tail coverage allows the claims made to go forward in time and the prior acts (or nose) coverage allows it to look back in time. Absent either of these coverages, a claim for a loss that stems from an act prior to the policy period may be denied under a claims made coverage.
Occurrence coverage provides coverage for any “occurrence” that took place during the policy period. This would mean that, assuming limits of liability have not been exhausted, if you have an occurrence policy from 2000 and a suit is brought against your company for something that allegedly occurred in 2000, that policy would provide coverage. The question of what policy is triggered and the number of occurrences can be a complex issue and is discussed further below. The important aspect of occurrence coverage is for the risk manager to keep record of all policies in place and maintain those records. Companies have been sued for acts that can date back thirty or forty years or even longer and a company who is unable to find the policy can be left without coverage.
As a general rule, most policies sold are claims made and those policies have lower premiums. However, the risk of future claims dating back to past events does expose the business to a higher degree of risk. For many businesses, occurrence coverage does provide greater protection, but the costs for occurrence coverage can be prohibitive and may not be worth the benefit.
Self-Consuming or Burning Limits Policies. Some insurance policies are called “self-consuming”, “burning limits”, or “defense within limits” policies. These policies, as the description applies, require that the costs of defense of an underlying claim erodes the limit of coverage under the policy. In other words, if the policy limit is one million and a case is brought against a policyholder and it costs two hundred thousand to defend, the effective limit of the policy for indemnification is now eight hundred thousand. Besides the obvious issue of limits quickly eroding, these types of policies creates an inherent conflict between the policyholder and the insurance company in selecting counsel, defending the case, and settling the case. Under such policies, the policyholder must be very aware of the defense of a case and not allow the defense costs to so totally erode the limits that the policyholder is left holding the bag at the end of the day.
Cancellation and Reinstatement. Laws provide very specific requirements for the cancellation of policies which include the specific reason, a warning prior to the cancellation, and generally a method to correct the reason for cancellation (assuming it is curable). See, e.g., 40 P.S. §3402-03. This statutory protection is designed to avoid cancellations simply to avoid coverage. Furthermore, a policy that is cancelled or otherwise terminated can be reinstated, normally after the policyholder cures a defect or compensates the insurance company for overdue premiums.
What Policy is Triggered. Trigger of coverage relates to the question of when a loss is deemed to have occurred so as to “trigger” an insurance policy. In discrete losses that only involve one policy period, this is not a major issue. For example, a first party claim for fire will likely only trigger the policy in effect at the time of the fire or a slip and fall case will likely only trigger the policy in effect at the time of the loss or the time the claim is brought, if a “claims made” policy. However, many claims are not discrete catastrophic events or single claims, but may take place over an extended period of time. In such cases, the determination of when the loss “occurred” and which policies must respond can result in complex fights between policyholders and their insurers and even between insurers.
Several different “trigger” theories have developed over time to address “occurrences” and what policies are triggered. As the examples below will show, states often apply different theories in different scenarios. In Pennsylvania, courts have applied both a manifestation trigger theory and a continuous trigger theory. In New Jersey, courts have mostly applied a continuous trigger theory, but, some cases, have implied an injury-in-fact or even manifestation trigger theory may apply in some circumstances. The four primary trigger theories that typically apply, with examples from different courts are:
· The Manifestation Trigger: Policies that are in effect when the loss becomes apparent or is discovered provide coverage. States that have applied this theory in certain circumstances include Pennsylvania and Florida.
· The Exposure Trigger: Similar to manifestation, this trigger attempts to link latent or progressive damage to a single period, namely the time of actual exposure to the loss-causing event or substance. States that have applied this theory in certain circumstances include Louisiana and Massachusetts.
· The Injury-In-Fact Trigger: Sometimes also called the “Actual Injury Trigger” theory, this theory contends that each insurance policy effective when any damage occurred is triggered, including any policies in effect from exposure to manifestation of the loss. States that have applied this theory in certain circumstances include South Carolina and Illinois.
· The Continuous Trigger: As the name implies, this theory avoids determining when injury occurred and triggers all policies in effect over a set span of time. Generally, this san of time is from first “exposure” to a loss-causing product or event and continuing throughout the latent injury until the injury manifests to the policyholder. States that have applied this theory in certain circumstances include Pennsylvania and New Jersey.
Under a “claims made” policy, the above “trigger of coverage” theories do not apply. For the most part, the policy when a claim was first made is the one that is triggered. However, there are situation when multiple claims are arguably related. Most “claims made” policies include a provision that all “related” claims, regardless of the number of claimants or lawsuits, shall be considered one claim. Furthermore, normally, this single claim “relates back” to the first such claim, meaning that the policy at the time of multiple claims would be triggered, even if the later claims are made outside the policy period.
Another unique trigger situation is where a policyholder switches from an occurrence policy to a “claims made” policy (or vice versa). It is possible, in that situation, for multiple policies to be triggered, even if normally only one policy would be triggered under the relevant trigger theory, because the occurrence policy would be triggered under the controlling theory, while the “claims made” policy is triggered when a claim is filed. In such a circumstance, the determination of which policy controls may come down to the “Other Insurance” clause or similar language in the policy to determine which policy is deemed primary and which excess.
Number of Occurrences. If the loss at issue is potentially for coverage under an “occurrence” based policy, the question of number of occurrences is a highly important question. Two primary tests have been developed to determine the number of occurrences: the “cause” test and the “effect” test. A vast majority of jurisdictions apply the “cause” test, where courts look at the causes of the injuries to determine the number of occurrences. An example of this test is a case where a man shot and killed five people and severely injured a sixth person over a several township area in several different incidents. A claim was filed against the man and his parents, alleging, as to the parents, negligence in allowing a known dangerous person access to guns. The court concluded that, as to the parents, the cause of the negligence was a single act – the failure to prevent their son from having access to the guns. As such, the multiple shootings constituted a single occurrence. The “cause” test is greatly favored and most commonly used, including by Pennsylvania.
In comparison, the “effect” test, as the name implies, looks to the effects – effectively, the number of injuries. This test is rarely used at this point, but an example of this test’s application test’s application is a case where the court concluded that, even though the cause of loss was a single underground drainage canal, each of the 119 homes damaged constituted a separate occurrence. Even if a court seemed interesting in applying this test, most courts interpreting the modern definition of “occurrence” have concluded that the cause test better reflects the language of the policy.
Another variation that has been adopted to some extent in New York and Connecticut is the “unfortunate event” test, which is sort of middle ground between the above two tests. Under the “unfortunate event” test, the number of occurrences is based on both the cause of the injury and the “nature of the incident giving rise to damages.” Courts applying this test will look to several factors to determine the number of occurrences, including: “whether there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.”
For the purpose of calculating and proving a loss, determining the number of occurrence can be important and can cut both ways. Finding multiple occurrences, that each involves large losses that would reach per occurrence policy limits, would be better to prove. For example, following the 9/11 terrorist attacks, the World Trade Center owners contended that each tower constituted a separate occurrence, since the losses greatly exceeded the per occurrence limit. On the other hand, a single occurrence would be better where the total loss is below the per occurrence limit and multiple occurrences would mean multiple deductibles (possibly, none of which exceeds the deductible).
Eight Corner Doctrine. There is a basic legal principal that contracts and insurance policies should be limited to the language contained within the “four corners” of the policies, i.e. the words on the page. The “eight corner” concept is that the policy’s language in the “four corners” are compared with the language in an underlying complaint’s “four corners” to determine if the duty to defend is triggered. While this general principal applies, as discussed above, there are several circumstances when courts will go outside the “four corners” to determine the intent and meaning of a policy to determine if coverage applies.
Extrinsic Evidence. Extrinsic evidence is evidence not found within the policy itself, such as letters between the insurance company and policyholder, prior claims, and underwriting information. First, as a general rule, extrinsic evidence cannot be used to contradict the provisions of a contract, but, the text of a contract must be first interpreted in light of any evidence of trade usage and the performance of the parties under the contract. The classic example is if a contract says “cows” instead of cattle, but the industry used “cows” to mean male and female bovine and the parties had previously included bulls with the cows under the term “cows”, then the court should interpret “cows” as meaning cows and bulls, despite the plain meaning.
If, even after considering the extrinsic evidence, the intent of the parties remains unclear, evidence concerning the pre-contract negotiations may also be considered to resolve any ambiguities. In addition, extrinsic evidence can be presented to show a latent ambiguity, i.e. “facts which make the meaning of a written agreement uncertain although the language thereof, on its face, appears clear and ambiguous.” This extrinsic evidence must show that a specific term, not the general agreement, has a meaning different than the accepted “plain meaning.” The importance of extrinsic evidence should not be overlooked. In many cases, if a policyholder feels a denial of coverage is inconsistent with the understanding of the parties and the prior coverage, it is worth pursuing the claims and underwriting files to find out whether extrinsic evidence can support your claim.
Voluntary Payment Clause. The voluntary payment clause is a common clause that requires a policyholder to seek consent from the insurance company before making a payment to a claimant. In other words, if the insurance company is not notified ahead of time and you settle, you do so at your own risk and cost. In most courts, this provision is primarily viewed as a notice provision. If you notify the insurance company of a potential settlement offer and it remains silent, that will likely satisfy the clause. However, the Seventh Circuit recently concluded the voluntary payment clause is a consent provision, not a notice provision, and, therefore, silence is not enough. The party must receive consent from the insurance company to settle or otherwise make payments. The important warning here for policyholders is, even after a reservations of rights or denial, to keep the insurance company informed and continue demanding they deny coverage so they cannot hide behind this provision later.