January 2018  |  Volume 30, Number 1

CLARITY, AMBIGUITY AND TERMS IN AN INSURANCE POLICY

As we explain to every new associate at our law firm, no matter how carefully an insurance policy is drafted, no matter how many ISO committees pore over the language of a form, when it comes time to apply this language to real-world situations, interpretation often creates confusion when processing a claim. Is it covered or is it excluded?

Those scenarios give rise to coverage litigation and broker/agent E&O claims and lawsuits. Based on certain cases we handled during the last year, please accept this cautionary note on problems to avoid or, at the least, issues for which to be on the lookout.  

Often, fighting alongside the insured to get coverage is the best defense to an E&O action. During this past year, we had two cases with similar coverage-related fact patterns requiring interpretation of an insurance policy. While the underwriter crafts the contract of insurance and determines what language, words and terms are to be used, the claims adjuster decides what meaning to put on those terms, regardless of what the underwriter may have intended.

It should come as no surprise that the claims person may often interpret those terms to support a denial. With that, we have started to see a disturbing trend in the drafting of insurance policies and endorsements that gives that claims person even more latitude to deny claims by improperly defining terms with the breadth to cover many scenarios, including those that should be covered. Here are two real-world case examples where we have encountered this problem.

The Contractors Liability Policy Case

We are currently litigating a case involving a liability policy issued to a General Contractor (“GC") with an exclusion endorsed to the policy for any accidents arising out of work if performed by the Insured as a Construction Manager (“CM"). A serious accident occurred and the GC was sued. The complaint was broad enough to trigger coverage as it said that the GC was “supervising" the work as a contractor. “Supervising" is, as a matter of law, one of the things that differentiates a GC from a CM.[1] However, the definition of “Construction Manager" in the exclusion actually defined CM in a way that included the work of a GC, negating the very thing the policy was to cover.

“Construction management" means the planning, coordinating, supervising or controlling of construction activities while being compensated on a fee basis by an owner or developer."

“Coordinating", “supervising", or “controlling of construction activities" exactly describes what a GC does on a project. Would any broker have thought to read that definition tucked away in the bottom paragraph of the second page of an endorsement that should not affect coverage in the first place? Of course not. But the denial was based on that language, with the carrier taking the position that as a contract term, it could define “Construction Manager" any way it liked, including to cover the acts of its Insured as a GC.

Through our litigation, we became aware of several other cases in which this same insurer, with this same exclusion, had denied similar claims against their GC Insured essentially for the same reason.

The Lessors Risk Liability Case

In another case, a broker procured a Lessor's Risk policy for a 6–story office building with retail stores at the street level. The policy specifically stated that it covered any accidents arising out of “operation, maintenance and use" of the building. The owner was about to lease space to the City of New York, which required the sprinkler system be brought up to the most current code and extended to all the space the City was going to lease. An employee of the sprinkler company was hurt and brought a lawsuit. The insurer denied coverage based on a “Designated Operations" exclusion for “construction, renovation or excavation".

Nowhere in the policy were the terms “operation", “maintenance", “use", “construction", “renovation", or “excavation" defined. It was up to the whim of the claims adjuster, post loss, to make that call. With no limitation on those terms the claims person was free to deny the claim as he could of any and all personal injury claims at the building except for the most basic slip and fall. He admitted this recently when we deposed him and asked him if fixing the stairs was covered under “operation, maintenance and use" of the building. He said it would be covered. Then we asked him if fixing the stairs was also, at the same time, excluded as it was “construction". He said it would be excluded. Thus, the poor wording of the policy, not caught by the broker, (nor should the broker be expected to make that kind of coverage determination in a vacuum), gave rise to a lack of coverage and to date, 3 years of litigation with no end in sight.

Conclusion

What we should take away from the examination of these two cases is the following: At one end of the spectrum, we have an exclusion specifically worded as to be all-inclusive, even as to what the policy was intended to cover. At the other end of the spectrum is a policy exclusion so devoid of specificity that it can be applied by the claims adjuster to deny almost any claim. In both cases, the broker was sued for allowing their inclusions in the insurance policies.

The prudent insurance agent or broker should always be mindful of any undefined critical terms, or any terms that are defined, other than those standard terms contained in the “Definition" section of the CG 00 01, in an endorsement. While it is often impossible to read a term or phrase through the “What If" lens, it may avoid claims like those described above. In the end, you should remember that as members of the Big I New York, you can always contact us for guidance if you are facing this type of situation. ​

Howard S. Kronberg, Esq.
Keidel, Weldon & Cunningham. LLP.

[1]               Walls v. Turner Const. Co., 4 N.Y.3d 861 (2005) Russin v. Picciano & Son, 54 N.Y.2d 311, 318 (1981); see also, Blake v. Neighborhood Hous. Servs. of N.Y. City, 1 N.Y.3d 280, 293 (2003); Comes v. New York State Elec. & Gas Corp., 82 N.Y.2d 876, 878 (1993)