Is insurance coverage becoming illusory?
Broadly speaking, insurance is a form of risk management, used by people and organizations to distribute and allocate risk.
In exchange for payment of a premium, an insurer guarantees compensation where a policyholder incurs a specified loss (provided such loss is not specifically excluded). However, in recent decades, insurers have increased the number and breadth of exclusions. Coupled with aggressive policy denial practices, this has acted to negate coverage and to in effect, render coverage illusory.
A. The grant of coverage
Homeowner’s and commercial general liability (CGL) policies typically provide for coverage for claims where:
- “personal injury or property damage” was caused by an “accident or occurrence (or a named peril or specified peril, if you have a really poor insurance policy);”
Professional liability insurance policies typically provide coverage arising out of an:
- “errors, omission or negligent acts in the performance of professional services for others;”
Title insurance typically provides coverage for:
- “actual loss resulting from the Covered Title Risks set forth in the policy.”
B. Policy exclusions
- The rest of the insurance policy is basically comprised of policy exclusions. Exclusions act to narrow the coverage provided, by eliminating coverage for some types of risk that would otherwise be covered. With broadly drafted exclusions and enough of them, coverage becomes illusory (the policyholder believes they have coverage and paid a premium for same, but in fact, that risk, and most other risks, have been excepted away), potentially creating an ‘ambiguity.’
C. Attempts at illusory coverage in practice
This recent case is illustrative of an attempt by the insurer to avoid coverage (or having to pay to defend the action on its insured’s behalf). In that case, an insurance agency hired an appraiser to conduct an appraisal of residential property. The appraiser valued the property at $225,000, after which the insurance agency loaned $170,000 against the property. The loan went into default, after which the insurance agency sued the appraiser for professional negligence, along with another appraiser, alleging that they were vicariously liable as his employer.
Under a strained interpretation of the policy, the insurer argued that coverage extended to the appraiser, but not to his employer (despite defining an insured as “an Employer, but solely for its vicarious liability arising out of Professional Services rendered, or alleged to have been rendered, by a Member). This interpretation was rejected by the court, which held that the employer “had coverage for a legal claim arising from his own actions and also when it flows from his legal status as an employer of the alleged wrongdoer.”
This case is perhaps more illustrative. In that case, which I have blogged about here, a homeowner ran into problems when he discovered structural defects to his cottage, which were the result of unpermitted construction. The homeowner reported the loss to his title insurer, which denied coverage based upon the ‘Governmental power’ exclusion. In analyzing that provision, the court agreed that it would take his matter outside of coverage, for the reason that it was:
“so broad as to exclude all risks, including those that otherwise mentioned in the policy.”
Accordingly, the exclusion was held to be vague (ambiguous) and hence inapplicable.
D. The takeaway
If you have suffered significant losses (or been sued and denied a defence), and your insurance company has denied coverage, the above cases illustrate that insurance companies often get it wrong in denying coverage.