In 2010, I authored an article on the dangers of absolute exclusions.1 That article was prompted by an appellate decision in Florida, James River Ins. Co. v. Ground Down Eng’g, 540 F.3d 1270 (11th Cir. 2008). In that case, an engineering firm that was providing consulting services on whether land had become polluted found that its errors and omissions (E&O) policy, which covered it as an environmental consultant, didn’t cover pollution! Since then, the problem has become even worse, resulting in my four-part series, published by the International Risk Management Institute (IRMI), “Possible Dangers Lurking in Claims-Made Policy Forms.” Part 42 of said article revisited the problem of absolute exclusions. The Professional Liability Insurance section on common features pointed out the following.
There are four general kinds of exclusions contained within professional liability policies.
- Exclusions for uninsurable exposures
- Exclusions removable or modifiable by negotiation, with or without additional premium
- Exclusions for exposures better suited to other types of coverage
- Exclusions for exposures pertaining to a specialized type of work within a given profession
The problem has become epic in that some hazard classes of specialty lines policies today are written with a significant number (if not all) of their exclusions on an absolute basis. Worse still is the fact that the courts are liberally interpreting these exclusions to apply to situations where the insured has little or no connection with the person who committed the activities giving rise to the application of the absolute exclusion. In essence, they are holding that causation is not a factor to be considered over “clear and unambiguous” policy language.
Yet, at all times prior to these absolute exclusion developments, the exclusionary categories above applied to the conduct or resultant harm as caused by the “insured(s).” That is no longer the case and, in my opinion, is an unfair trade practice.
Since publication of my 2010 article on absolute exclusions, I have lectured and given webinars on the fact that the basis for many of the “absolute” exclusions is that the excluded exposure is supposed to be covered under other policies or not at all as to the insured’s conduct. In other words, if you have an E&O policy, insureds should not look to the policy to cover them for typical directors and officers exposures, employment practices liability exposures, or even technology exposures, unless the policy is a package policy with several different hazards covered under the same form. (This is irrespective of whether the limits are segregated or aggregated together.) It should come as no surprise that almost every liability policy (except a workers compensation policy) excludes from coverage those claims that should be covered by a workers compensation policy. That is how exclusions traditionally were categorized. The evolution of absolute language, however, has changed the dynamic to the detriment of the insured and the insurance broker, who may be more likely to become the target of an E&O claim. A.
As As referenced in an article published in Coverage Opinion,3 the language “arising out of” is policy language that can cut both ways. If such language is found in an insuring agreement, it is going to be broadly interpreted, as rare as it is to find it there (for obvious reasons). What has become common, however, is the fact that “arising out of” language now appears in exclusionary language, especially with respect to specialty lines, and in a vast majority of policies today (with lawyers professional liability being a common exception). More on that potentially discriminatory practice later. Exclusions themselves, rather than being “narrowly construed,” are being broadly interpreted beyond what anyone, in my opinion, would reasonably expect until too late (i.e., when a claim is submitted and denied).
Specifically, in the article, the author cited two cases, one in favor of the insured, the other for the insurer. Note the difference, the favorable-for-the-insured case stating,
While an insurer benefits from the broadly interpreted “arising out of,” when the phrase appears in an exclusion, the free lunch gets paid for when “arising out of” appears in an insuring agreement. In Shamoun & Norman, LLP v. Ironshore Indemnity, Inc., No. 14-1340 (N.D. Tex. Oct. 28, 2014), the court held that a professional liability insurer was obligated to provide a defense to a law firm for a fee dispute, rejecting the insurer’s argument that this was not the rendering or failure to render professional legal services. The court noted that a legitimate argument existed that non-specialized tasks, such as billing and fee setting, do not fall under the definition of professional legal services. But, in the case before it, a different outcome was possible, on account of the language of the insuring agreement: “arising out of the rendering of or failure to render Professional Legal Services.” As the court put it: “While billing and fee setting may not be acts constituting ‘professional services,’ this does not answer whether they are acts ‘arising out of professional services.’" The court held that, given the breadth of the phrase “arising out of,” a defense was owed: “Under Texas law, the phrase ‘arising out of’ means that there is simply a causal connection or relation, which is interpreted to mean that there is but for causation, though not necessarily direct or proximate causation.” Therefore, despite being a fee dispute, if the claim had a “causal connection or relation” to the provision of professional legal services, a defense was owed.
Yet, for the benefit of the insurer, the author noted,
the Florida federal court addressed a breach of contract exclusion, stating that the insurer “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured … alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement.”
The court noted that “arising out of” has been defined to preclude coverage for claims originating from, having its origin in, growing out of, flowing from, incident to, or having connection with a specified excluding circumstance. From there, the court held that “consistent with Florida case law, this Court finds that the phrase ‘arising out of’ as used in [the breach of contract exclusion] is unambiguously broad and precludes coverage for purported tort claims that depend on ‘the existence of actual or alleged contractual liability’ of an insured ‘under any express contract or agreement.’"
Florida’s broad interpretation of an exclusion is obviously not alone. As reported by David Thamann,4
Insurance policies abound with the use of the phrase “arising out of.” Some policies provide coverage for injuries and damage that arise out of a certain event; other policies exclude coverage for injuries and damages that arise out of a certain event.…
Given how broadly “arising from” is applied, few policies now use that language where it benefits the insured, yet routinely use it where it benefits the insurer.
This calls into question several significant maxims of insurance law, including the following.
- Whether or not such insurance policies should be enforced given the fact that it has long been held that insurance contracts are contracts of adhesion and may be unconscionable as a result
- Whether or not such insurance policies violate the doctrine of the reasonable expectation of the insured to be covered for something that should be covered, but due to the broad interpretation of the absolute exclusion, is now not covered
- Whether or not such insurance policies violate fair claim practice regulations universally prohibiting the misrepresentation of coverage and in turn constitute a violation of unfair trade practices
- While not specifically a maxim, “wrongful act” may no longer be limited to the actions of the insured or anyone for whom the insured may be responsible. Many definitions of “wrongful act” have been worded in a manner so as to broaden the definition to include anyone who is “connected with” the event in issue. Thus, the definition is not limited to the insured(s) but other third parties, possibly for no reason other than to trigger an absolute exclusion.
But, more on the above comes later.
This article will cite over 30 decisions that have been made throughout the United States regarding absolute exclusions, as reported and summarized by prominent law firms. We will explore whether or not the maxims noted above can or should apply to stop this trend. And, it should be noted, some of the cases decided have been in favor of the insured, or the exclusions were properly limited to the insured’s actions and/or uninsurable hazards, while, of course, many other cases differed.
It should also be noted that absolute exclusions are not limited to specialty line policies. The concept has also affected general liability and other commercial casualty hazards.
Some History of the Absolute Exclusion Discussion
I will not say that this trend started with an editorial in a major law firm’s monthly publication on appellate decisions of interest. That publication is Tressler, LLP’s Specialty Lines Advisory,5 an excellent monthly summary of important appellate decisions throughout the country. However, that editorial may have helped the concept along. Said commentary focused on a 2009 court decision enforcing a runoff exclusion, which provided,
for Loss on account of any Claim based upon, arising out of, or attributable to any Wrongful Acts where all or any part of such acts were committed, attempted or allegedly committed or attempted subsequent to [date]....
The aforementioned editorial stated,
The language that prevailed here should almost always be advocated by insurers and their counsel who assist them in the drafting process. One can only speculate whether the result would have been the same with the less absolute wording not containing the “where all or part of” phrase. Most assuredly, the insurer would not have fully prevailed using the simple “for” version of the exclusion. Nevertheless, in today’s market, perhaps putting aside the “hard” financial institution and financial services D&O (directors and officers)/E&O (errors and omissions) markets, astute brokers and policyholder counsel will resist vigorously the “super absolute” language. Beauty, however, is truly in the eye of the beholder and, as an insurer’s coverage lawyer, I prefer super absolute beauty!
Jump ahead 11 years to a guest article in D&O Diary,6 where another attorney suggested that the way to save money on D&O liability insurance is for the coverages to become more restricted and less broad. A lengthy list of 22 suggested limitations included,
Return to broader “based upon, arising out of” exclusion preamble language in lieu of “for” language…
New cases enforcing absolute exclusions are being decided even as this article is being written.
Phrasing One might ask, “What is the phrase that triggers the problem?” Some may think it is “directly or indirectly.” The courts and follow-up commentaries say otherwise, instead focusing on “arising from,” meaning “connected with.” From there, the broad application began, first in reviewing that language as used in an insuring agreement favoring the insured. As reported by the Claims Journal in 2012,7 “The ‘arising out of’ clause defines the required causal link between the uninsured vehicle and the injury. Insurers have consistently argued for a narrow interpretation of the phrase while policyholders have advocated for a broader reading.”
Insurers later opted to ask for broad interrelation of such exclusions and often got what they wanted.
Well over 30 case decisions have looked at and decided on the enforceability of these exclusions since at least 2008. Several have gone against insurance companies. That is not to say that there are not anymore, but this author is only aware of approximately 30-plus decisions. Certainly, there could be more that involve policies other than specialty lines (i.e., executive liability such as directors and officers, employment practices liability, fiduciary liability, as well as professional liability of all kinds and possibly even product liability).
The Three (General) Types of Phrasing Used
There are three general wordings to keep in mind (while noting that there will be variations). . .
. . .Continue to read rest of article and foot notes (PDF).