Personal Comments on the Comparison of the Interpretation of All Risk Insurance Policies in a Global Insurance Market: The United States v. England & Wales
April, 2005
The papers within this brochure discuss only a small sample of the complexities involved in the interpretation of an insurance policy in both the United States and England, primarily in the context of one specific publicized litigation topic - mold. We recognize that there is a competitive insurance market looking for certitude in policy language that is demonstrated by uniform interpretation by the courts. We also understand that this insurance market seeks to satisfy the multi-national insured with a master policy that works effectively across borders. The pressure on brokers and underwriters alike is to provide a simplified broad coverage within a single document that satisfies the particular insurance needs of an individual insured.
The challenge to brokers and underwriters, therefore, is to derive the benefit of the experience of language in the marketplace when drafting policy forms while, at the same time, making a careful assessment of judicial precedent interpreting the pertinent language so as to reach a high level of confidence in the application of the wording. Just as the other papers within this brochure reflect the common development of rules of interpretation, the diverse results nevertheless suggest that the challenges continue for both brokers and underwriters to craft language that presents the highest probability of a uniform result in multiple jurisdictions. All parties - insured, broker and underwriter - seek maximum certitude to the written word.
In this context, it is helpful for the underwriter to consider the input of both claims personnel and claims counsel. The insurer’s individual claim manager will have a good grasp of the particular risks and language issues that present the day to day difficulties. Outside claims counsel also has insight to offer, including the ability to analyze the effect of potential language changes and opine on legal trends within the pertinent jurisdictions.
Often, claims counsel in the United States work in a very limited geographic area. Some claims counsel, however, maintain both a national U.S. practice and an international practice. While almost all outside claims counsel work for a number of different insurers across various lines of business, there are only a few claims counsel who have experience working for a number of insurers in multiple lines of business, both internationally and in various U.S. jurisdictions. The claims counsel who has had the opportunity to work for a variety of insurers in a number of classes of business across both state and international borders garners immense experience in multiple markets that is useful to both the underwriter and claims professional assessment of policy language application.
Some examples of issues to consider in the analysis of any given case might include the following. In the context of mold litigation, a number of policy specific issues develop. First, there is the initial question of whether the policy insuring provision includes the word “direct” when insuring for all risks of physical loss or damage. The presence or absence of “direct” in the insuring language may make a difference to a court’s analysis.
Secondly, the prefatory exclusionary language has regularly been the subject of discussion by courts that are inclined to point to the presence or absence of particular prefatory language as dispositive. For example, does the prefatory language merely say that the policy “does not insure” for a specified peril, or does the policy recite that it does not “insure for loss to property caused by any of the following,” or does the policy provide that it “does not insure against loss caused by, resulting from, contributed to or aggravated by . . .” Furthermore, if the policy contains anti-concurrent causation exclusionary language applicable to a specific exclusion, the force of the anti-concurrent causation language is likely to be considered in comparison to less restrictive prefatory language that might be employed in another exclusion within the same policy. While the prefatory language is important, the mere absence of an exclusion ordinarily utilized by an insurer may also be argued by an insured to demonstrate an intent to cover. Notwithstanding the above, the specific language of the given exclusion is, of course, paramount.
As discussed by Mindy Medley in her paper on ensuing loss, the U.S. courts have at times reached divergent results in the application of similar or identical ensuing loss provisions. In the often cited Acme Galvanizing Co. v. Fireman's Fund Ins. Co., 221 Cal. App.3d 170, 270 Cal. Rptr. 405 (Cal. App. 1990) case, the ensuing loss provision read, “unless loss by a peril not otherwise excluded ensues and then the company shall be liable only for such ensuing loss . . .” The Acme Galvanizing clause specifically referred to an ensuing “peril” causing damage.
However, where the word “peril” does not explicitly appear in the ensuing loss language, the underwriter’s attorneys may have to argue that the exclusionary language coupled with the ensuing loss provision intends that only damage caused by a separate or new and independent peril (as opposed to the excluded peril) would fall within the ambit of coverage. Said another way, the exclusionary language is intended to apply to all loss that is the natural and probable consequence of the excluded peril. This exclusionary effect applies to all damage that naturally and probably flows from the excluded peril. This submission is intended to give effect to the exclusionary language, as well as avoid a court’s construction that reads “ensues” to mean coverage for any damage that simply follows the occurrence of the excluded peril. Such a reading would narrow the application of the exclusion and read “ensue” to cover damage that simply follows the excluded peril in time, regardless of whether the damage was the natural consequence of the excluded peril.
In this regard, the decision in Narob v. INA, 631 N.Y.S.2d 155 (N.Y. 1995), is instructive wherein it said the exception for ensuing or resulting loss should not be allowed to swallow the exclusion. Thus, in New York, the ensuing loss provision does not provide coverage for losses that are directly related to the original excluded risk. Likewise, on the other side of North America, in Oregon, a federal district court in Prudential v. Lilliard-Roberts, 2002 U.S. Dist. LEXIS 20384 (Dist. Ct. Ore., 6/14/02), said, “An ensuing loss provision does not cover loss caused by the excluded peril, but rather covers loss caused to other property wholly separate from the defective property itself.” Prudential v. Lilliard-Roberts applied this philosophy to hold that mold was excluded as a natural consequence of an otherwise excluded water event, saying:
Though not inevitable, mold is a natural event that often manifests after and as a direct result of the entry of water caused by some other peril, such as a roof opened by a hailstorm, a leaky pipe or defectively installed roof flashing. Because mold cannot exist or sustain itself without some moisture source, such as water intrusion, it may be covered “direct” and “physical” loss if the initial event that causes a water intrusion event is covered . . . . When water intrudes into a residence mold, unlike fire, is not a surprise particularly in the damp northwestern United States. Because mold is a natural and foreseeable result of water damage, it cannot be an ensuing loss. An ensuing loss requires an unexpected loss due to an intervening or contributing cause other than the mere passage of time. Mold does not occur separately and independently from a source of moisture. Id., at 7.
Thus, in the mold situation it is incumbent upon skilled claims counsel to convince a court to enforce the exclusion as written while, at the same time, avoid the emaciation of the exclusion by mere reference to ensuing or resulting loss coverage.
Following 9/11, the New York courts have generated significant decisions relating to the definition and application of the terms “occurrence,” “civil authority,” “ingress and egress,” and “terrorism.” In other jurisdictions, courts are considering markedly different fact patterns. There, the same policy language may be tested before outcome or result-oriented judges who may ignore precedent generated by New York courts. In these cases, identical language risks differing interpretations.
Every day experience within a particular jurisdiction may also affect a court's approach to a coverage analysis. Florida has regularly produced interpretations of “wind driven water,” “windstorm,” “wave wash,” and “hurricane.” While a Florida court referred to Hurricane Andrew as the “ultimate windstorm,” State Farm Fire & Cas. Co. v. Goldstein, 674 So.2d 880, 881 (Fla. Ct. App. 1996), an entirely land bound state court (Arizona) concluded that “windstorm” included only wind, not wind driven rain in Koory v. Western Cas. & Sur. Co., 153 Ariz. 412, 416, 737 P.2d 388 (1987). Similarly, California has regularly addressed “earthquake,” “subsidence,” and “mudslide” issues, while Florida has addressed its own subsidence issues in relation to the recurring sinkhole phenomenon. However, such judicial experience may not be influential for West Virginia, Pennsylvania or Illinois courts when they address subsidence or earth movement caused by collapsed coal mine shafts and tunnels.
When it comes to policy interpretation in the business interruption context, one of the more frequently encountered issues involving a multi-national insured maintaining a locale in the United States is the determination of the period of indemnity. An English form will measure the period of indemnity as defined in the policy:
Indemnity Period: The period beginning with the occurrence of the incident and ending not later than the maximum indemnity period thereafter during which the results of the business shall be affected in consequence thereof.
The English form will also measure loss in terms of lost turnover (sales) as defined in the policy in recognition of the rate of gross profit and the respective reduction in turnover. Cover may also be had for the increased cost of working.
The U.S. form will typically provide compensation on the basis of the actual loss sustained defined by the reduction in gross earnings for the period of interruption. The compensable period is typically predicated on the due diligence and dispatch repair of the covered damage. An international insured may have a worldwide policy predicated on the English standard form measuring loss on the basis of turnover while, at the same time, insuring loss on facilities within the United States under a stand alone U.S. form. The typical U.S. standard business interruption form would exclude all business interruption loss incurred for delays due to lost uncovered property. The U.S. form would measure the period of interruption predicated on a due diligence requirement. The due diligence/period of interruption language would also typically exclude any period of repair attributable to uncovered losses, whether due, for example, to a design defect or environmental compliance. Moreover, the U.S. form might not cover for the period of time from the date of the theoretical physical damage due diligence repair to the time that gross earnings are restored to the level that the insured previously enjoyed.
In contrast, the English form ends with the date that “the business shall be affected in consequence of the loss.” While in many cases the multi-national insured has been able to exercise economic leverage to obtain extended period of indemnity coverage in the U.S. market and the narrowing of various exclusions, the fact remains that the period of indemnity within the U.S. form is determined on a basis different than that typically provided by the standard English form.
When attempting to deal with the knotty problems of the interpretation of both an English form and a U.S. form, it is helpful to have counsel who is experienced in the interpretation of each form in a wide variety of circumstances in order to present the best possible assessment of the likely result. Experience in a multitude of jurisdictions is therefore an invaluable asset in the assessment of potential policy language, as well as in the analysis of existing language for resolution of an individual claim.•
Back to CM Report Focus on Property Insurance (2005v1) 2005 Spring Table of Contents
