Policy Language: Sweat the Small Stuff

By Randy J. Maniloff

In his popular book, Don’t Sweat The Small Stuff...And It’s All Small Stuff, Richard Carlson, Ph.D. provides prescriptions for coping with the stress of a variety of life’s encounters. Dr. Carlson’s advice, summarized in the title of his run-away best-seller, is undoubtedly sage—as long as it is not followed by an insurer in the midst of a coverage dispute. When it comes to insurance coverage, insurers need to sweat the small stuff—profusely.

A Recent Illustration

In July, 2004, the Texas Supreme Court held that a general liability insurer had to defend a physicians group against claims by patients who had contracted Hepatitis C. The injuries in Utica National Insurance Company v. American Indemnity Company, et al. were caused when an infected scrub technician employee used a syringe to steal anesthesia from glass ampules, injected himself with the drug, and then used the same syringe to inject saline back into the ampules to hide his theft. The medical group sought coverage under its general liability policy. The difficult issue was causation—the injuries were caused by negligent storage of the anesthesia, which the insurer conceded was covered under its general liability policy, followed by the later performance of an allegedly excluded professional service when the patients were injected with the anesthesia.

The Texas Supreme Court ruled against the general liability insurer based on imprecise policy language. It held that the general liability policy’s exclusion for “bodily injury…due to rendering or failure to render any professional service…[including but] not limited to…any health service or treatment” did not serve to preclude it from an obligation to defend the physicians group. The Court explained, “The policy language supports the conclusion that the exclusion can be reasonably read to preclude coverage only when the plaintiff’s injury is caused by the breach of a professional standard of care.” It concluded that since the insurer used different wording—“arising out of ” versus “due to”—in parallel exclusions, the phrases should have different meanings. The Court ruled that “due to” requires a more direct type of causation than “arising out of.” The Court concluded: “To us, the different wording in these exclusions is significant.” Id. at *11.

Utica National and cases like it—and there are many—show the value of “sweating the small stuff ”—that is, paying close attention to policy subtleties. They provide valuable guidance for insurers faced with coverage disputes involving fine-point distinction in policy language. These cases remind us that coverage disputes are frequently won or lost based on hair-splitting distinctions in such language.

All Policyholders Speak Latin

In any coverage dispute, insurers are swimming against the tide. After all, to prevail, the insurer typically must overcome contra proferentem—the certain-to-be-invoked rule of construction that if the policy language is ambiguous, it must be construed against the insurer, as its drafter. This Latin axiom, meaning “against the offeror,” is a staple in the policyholder arsenal. It is frequently relied upon by courts to resolve coverage disputes in favor of policyholders. Indeed, over the past five years, a state or federal court in virtually every state in the country has cited this principle of construction in the context of an insurance coverage dispute.

Considering this built-in disadvantage, an insurer could hardly be blamed for an unwillingness to pursue litigation in which its case rests upon a distinction to be made between the terms “arising out of ” and “due to.” Further, when it comes to coverage litigation of any type, the insurer is often viewed as the less-sympathetic party in court. Against this backdrop, it is not surprising that some insurers eschew coverage litigation, even with a strong case on paper. It is too easy for an insurer to imagine the court thinking to itself: They took premium for all those years and this is the best argument they can come up with? The policy must be ambiguous. Still, sometimes to the chagrin of policyholders, time and again courts demonstrate a willingness to reach decisions based on the absence or presence of what could be called “technical” policy words. A decision like Utica National suggests that care in drafting the language of an insurance policy can make the difference, one way or the other.

An example in which an insurer did well to sweat the small stuff is Allstate Insurance Co. v. Kenney, et al., a 2003 decision from the United States District Court for the Eastern District of Pennsylvania. Kenney addressed coverage for an underlying action involving an alleged assault by one minor against another. The Court concluded that the injuries resulted from intentional conduct, and, thus, were precluded from coverage. However, the Court was also required to address coverage for a claim of “negligent supervision” against the mother of the defendant minor, for allegedly failing to exercise reasonable care to control her son and prevent him from intentionally harming others. Focusing on the subtleties of policy language, the Court reasoned that no coverage was available for the negligent supervision claim. The Court explained, The policy provides that “we do not cover any bodily injury or property damage intended by…any insured person.” Pennsylvania courts have held that where an insurance policy specifically excludes coverage for loss resulting from the intentional actions of “any” or “an” insured, as opposed to “the insured,” the insureds’ obligations under the policy are joint, and the prohibited acts of one insured bar all others from coverage.

Policyholders will likely argue that it is unfair to deny coverage to an “innocent insured” simply because they happened to be covered by a policy that uses the term “an” instead of “the”—surely an irrelevant distinction at the time of the purchase of the policy. Still, the Kenny Court was unfazed, noting that “Where the language of the contract is clear, a court is required to give the words their ordinary meaning.”

What About “Bad Faith”?

Unfortunately, insurers which take positions in coverage litigation that rest on the making of a fine-point distinction in policy language can expect to be met with an accusation of “bad faith” by their policyholder. If it is any consolation, such allegations seem more likely to do with the present state of the tort system than the merits of the policyholder’s accusation. Consider that a justice of the Supreme Court of Texas, in a cynical description of the state of the law in this area, characterized as “incompetent” any lawyer that sues an insurer without including a count for bad faith. Policyholders argue that the taking of an erroneous position by an insurer automatically gives rise to “bad faith.” Due to unpredictability, even baseless allegations of “bad faith” remain a large hammer for policyholders. In reality, however, “bad faith” is much more difficult to prove. It requires unreasonable conduct or a dishonest purpose on the part of the insurer, and sometimes even much more egregious behavior. For example, Pennsylvania courts have frequently held that bad faith will not be found where the insurer’s conduct was in accordance with a reasonable but ultimately incorrect interpretation of the insurance policy and law. An insurer defeated in a coverage suit which turns on fine-point distinctions of language may defend against a “bad faith” argument by demonstrating that its argument was a reasonable, albeit unsuccessful, interpretation of its policy. The insurer’s position, even if incorrect, does not give rise to bad faith.

Conclusion: Sweat the Small Stuff

Insurers are well cautioned to pay keen attention to minute subtleties of policy language. Close observation of coverage decisions in the state and federal courts can guide an insurer both in electing litigation and in re-wording a policy.

Randy Maniloff is counsel in the Commercial Litigation Department and concentrates his practice on the representation of insurers in coverage disputes over primary and excess policy obligations for various types of claims. He can be contacted at 215-864-6311 or maniloffr@whiteandwilliams.com .