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Risk Management

Extreme denials

Say what? Some insurers will go to great lengths to avoid paying a claim

By Donald S. Malecki, CPCU

Unless an insurance issue is litigated, it is not likely that producers will be introduced to, or hear of, the legal doctrine that whether or not coverage applies depends solely on a court to decide.

This does not mean that producers do not have to be concerned about whether an insurance policy or other coverage document covers a given exposure. One reason is that not all questions of coverage are litigated (even though it may seem that way).

More important, it is the anticipation that how a court decides an issue is heavily influenced by what the producer has come to learn through experience and knowledge passed down by a variety of educational means, including the experience of producers' peers.

Even if issues are litigated, producers and others can be helpful witnesses in explaining to the courts the genesis, rationale and how certain coverages are perceived to apply in custom and practice.

Unfortunately, the outcome of an insurance dispute does not always turn out as producers may expect based on what they were taught. In fact, what some claims people and their legal counsel think policy provisions mean can best be described as "off-the-wall" opinions, which show nothing more than an attempt not to want to pay claims.

A bitter pill to swallow

A case that comes to mind in this category is a company (FSI) that provided intermodal storage for loaded and empty shipping containers. As a consignee for these containers, FSI had liability for which it sought coverage, while the containers were kept at its premises.

One of the coverages maintained by FSI was a legal liability coverage form, and that included property of others for a limit of $200,000. At the time this coverage was purchased, an agent for the insurer, QBE, visited the premises to review the security measures and operations.

Sometime later, thieves broke into FSI's premises and stole an intermodal shipping container filled with 1,920 computer monitors. Although the container was found, the monitors never were. When FSI submitted a claim for its loss, it was denied.

The issue was whether the coverage FSI had purchased extended coverage for the loss of cargo that was stored in the open on FSI's premises. The insurer maintained that no coverage applied because the contents of the container were "not in the open."

The legal liability coverage form stated that the insurer would pay those sums that the named insured became legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to covered property, caused by accident and arising out of a covered cause of loss. Personal property of others in the open also was listed under the description of covered property.

The insurer's key argument for denying coverage was that cargo contained inside the shipping containers stored on the grounds of the insured's premises was not covered because it was not "in the open." In other words, the cargo was not in the open because it was inside the shipping containers.

The named insured (FSI) admitted that the stolen cargo was stored inside a large intermodal shipping container, which was locked, sealed and weather-tight. But FSI maintained that the policy words "in the open" were words of inclusion and should therefore be construed in its favor.

The named insured also pointed out that an e-mail exchange between its broker and the insurer's underwriter, if admissible, would have shown that coverage for the contents of the containers was contemplated. The insurer, however, countered by stating that the e-mails had not been presented in an admissible form and that the alleged writers of those e-mails had not been deposed.

Referring to the Merriam-Webster Dictionary, the U.S. District Court for the western district of North Carolina, in this case of QBE Specialty Insurance Company v. FSI, Inc., No. 3:09cv435 (W.D.N.C. 2011), noted that the term "open," in relevant parts, meant "having no enclosing or confining barrier: accessible on all or nearly all sides" and also as "completely free from concealment: exposed to general view or knowledge."

The court also stated that this dictionary definition was consistent with the definitions found in other cases. None of those cited cases, however, dealt with the same fact pattern as that which confronted FSI. Nonetheless, the court sided with the insurer.

In doing so, the court held that when the phrase "in the open" was applied to the facts, it was apparent that the policy provided no coverage, duty to defend, or indemnification for this loss.

This decision may leave some producers and others speechless. Some people will go so far as to say it was the result of a "creative" attorney, which seems to be rampant at the expense of others.

Now that the cat is out of bag, so-to-speak, other insurers may try to deny coverage for similar situations, so producers need to careful in declaring what property is specifically intended to be covered. Unfortunately, insureds in this same situation cannot assume that coverage will apply if contents of containers are totally visible either. The reason is that a business that leaves its contents visible most assuredly will invite thefts and insurer denials based on expected losses.

Another absurd case

It is not unusual, in insurance circles, for producers and others to lament that commercial liability policies are so limited today in light of built-in exclusions, as well as those added by endorsement, that the only coverage provided is liability against trip and fall accidents.

That may be true in many instances, but in the case of American Western Home Insurance Company v. Donnelly Distribution, Inc., No. 11-1415 (U.S. Dist. Ct. E.D. Pa. 2011), the insurer did not want to pay for even a trip and fall claim. The named insured in this case delivered newspapers (newspaper deliverer). The bundles delivered were secured by plastic ties, which were removed at the delivery locations and strewn about the sidewalks.

This case arose following injury sustained by a pedestrian after her foot became entangled in one of the plastic ties causing her to stumble, fall and sustain severe injuries.

At the time of this claim, the newspaper deliverer maintained a liability policy with limits of $1 million per occurrence and $2 million aggregate. When a claim was submitted to the insurer, however, it was denied because of two exclusions. The first exclusion limited coverage for injury arising out of ownership, maintenance or use of a certain specified location, along with operations necessary or incidental to that premises.

Parenthetically, this kind of policy was in vogue prior to 1986 and was then referred to as the owners, landlords and tenants (OL&T) policy. Its primary purpose was to limit coverage to premises and operations liability, i.e., trip and fall cases.

The insurer attempted to deny coverage, stating that coverage was limited solely to the premises designated in the policy, which was the newspaper deliverer's business location. The court disagreed. In doing so, it explained that coverage was not limited solely to events that occurred at the described location. Coverage, instead, also applied to liability that arose out of the newspaper deliverer's activities related to that location.

Apparently in desperation to deny coverage, the insurer also relied on a professional services exclusion! The exclusion was for "designated professional services" with the schedule description containing a single entry for "Paper Distributor." Under this exclusion, no coverage applied to bodily injury, property damage, personal injury or advertising injury due to the rendering or failure to render any professional service.

Despite the insurer's attempt to deny coverage, the court felt that the claimant's allegations did not fall within the professional liability exclusion in light of the guidance of the Third Circuit, which stated that "professional services" involved the following:

"A 'professional' act or service is one arising out of vocation, calling or occupation, or employment involving specialized knowledge, labor or skill and the labor or skill involved is predominately mental or intellectual, rather than physical or manual. In determining whether a particular act is of a professional nature or a 'professional service', we must look not to the title or character of the party performing the act, but to the act itself."

From the court's frame of reference, the newspaper deliverer's activities were physical or manual, rather than predominately mental or intellectual. Even if, for the sake of argument, some activities could have been categorized as "professional, such as managerial activities," the court said, where a complaint alleges both covered and non-covered claims, the insurer must defend the entire action.

Because neither of the two exclusions applied, the insurer was held obligated to both defend and indemnify its named insured in connection with the lawsuit.


One has to wonder how much this litigation in the American Western Home Insurance Company case cost the insurer to try a case where the odds were definitely against it. Another puzzling question is why the insurers in both of the above discussed cases denied coverage in the first place.

Was it to give legal counsel something to do, or was it because of inexperienced claims people and those who supervise them? If one had to guess, it was probably the latter.

The policy issued by the insurer in the last case, by the way, has largely been replaced by a commercial general liability policy modified with a designated premises endorsement. In either case, the way coverage is written will invite problems for accidents away from premises. The designated premises endorsement, therefore, should be avoided whenever possible.

The bottom line is that producers need to exercise care in dealing with these kinds of insurers, unless there is no other alternative. Fortunately, producers cannot be faulted for this kind of insurer conduct because, in the event of litigation (in the absence of failing to obtain the appropriate coverage), whether coverage applies is not up to the producer or how the producer thought the coverage obtained should have applied.

The author

Donald S. Malecki, CPCU, is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.


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