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By Barry Zalma, Attorney and Consultant
Insurance is, and has always been a contract. In modern practice insurance policies are written in easy to read language that requires nothing more than a fourth grade education to understand. Regardless, the public still believes they are difficult to read and understand. Insurance agents and brokers are also obligated to read the policy as issued to determine that they have obtained for the insured the coverage ordered and promised. Because everyone failed to do their due diligence with regard to a policy unnecessary litigation followed.
Sometimes, as this case shows, an insured will claim that the failure to read the policy as issued binds the insurer to the wording of a sample form which was broader than the policy as issued; failure to provide a policy as ordered; and failure to explain the coverages available will lead an insurer to wrongfully deny a claim and lead to unnecessary litigation.
Because of a series of errors the Supreme Court of Appeals of West Virginia was asked to resolve the dispute between the insurer New Hampshire Insurance Company ("New Hampshire") and RRK, Inc. ("RRK"). New Hampshire contended that the circuit court's order wrongfully reforms the subject policy and that it is against public policy in New Hampshire Insurance Company v. RRK, Inc., D/B/A Showboat Marina, 2012 W. Va. LEXIS 787, No. 11-1099 (W.Va. 11/09/2012).
At about the same time the property was purchased, RRK sought insurance coverage for the property from a local insurance agent, Insurance Systems, Inc. ("Insurance Systems"). Insurance Systems then solicited an application for insurance and dealt directly with an Ohio insurance agency, Norman Spencer Agency, Inc. ("Norman Spencer"). Norman Spencer, in turn, dealt directly with Maritime General Agency, Inc. ("Maritime"). Maritime performed the underwriting services for the issuing insurer, the petitioner in this case, New Hampshire.
RRK dealt solely with Insurance Systems. During negotiations regarding the coverage sought, RRK requested that Insurance Systems provide it with a copy of the coverage forms of the proposed policy. In response, on September 20, 2007, Insurance Systems sent via facsimile a seventeen page document ("17-page fax") addressed to Rudy Lee which stated, "Per our phone conversation of this morning, attached you will find the coverage forms you requested."
It was the understanding of RRK and Insurance Systems that any policy issued would cover the barge and its contents and the two docks. Subsequent to receiving and reviewing the 17-page fax, Rudy Lee completed the application to purchase insurance coverage from New Hampshire and provided payment. The policy was set to be effective from September 28, 2007, to September 28, 2008. Several weeks after purchasing insurance coverage, RRK received in the mail a copy of their insurance policy from Insurance Systems. As with almost every member of the general public, neither of the Lees read the mailed copy.
The content of the mailed policy differed from the 17-page fax. Notably, at the top of the first substantive page of the mailed policy, language was included in boldface and capital 12-point font excluding coverage of property damaged by "wear, tear, and/or gradual deterioration."
In April of 2008, Insurance Systems realized that New Hampshire had failed to list the barge as covered property under the insurance policy. In an e-mail dated April 28, 2008, an Insurance Systems agent informed New Hampshire of the omission and requested that the barge and its contents be added to the policy. In September of 2008, Rudy Lee and an Insurance Systems agent met to discuss property insurance coverage. It was discussed and agreed upon at the meeting that the insurance coverage should include coverage of the barge and its contents. The agent assured Mr. Lee that he would ensure that the barge and contents were covered under the policy.
On February 23, 2009, after the policy was renewed, the barge sank into the Ohio River. RRK filed a claim with New Hampshire for the barge and its contents. On February 25, 2009, New Hampshire denied RRK's claim. New Hampshire stated that it denied RRK's claim because the barge and its contents were not listed in the policy as covered property. On April 3, 2009, Insurance Systems e-mailed New Hampshire confirming that Insurance Systems had represented to RRK that the barge and its contents would be covered property under the policy. After investigation, New Hampshire determined that the barge and contents should have been covered property but renewed its denial because the wear-and-tear exclusion applied.
The trial court granted RRK's motion for partial summary judgment and found that the barge and its contents were covered under the policy because RRK had a reasonable expectation that they would be covered. It further found that New Hampshire failed to meet its strict burden of proof with regard to the exclusionary language so as to make the wear-and-tear exclusion legally operable.
The circuit court's June 22, 2011, order which granted partial summary judgment in favor of RRK found that RRK "had a Reasonable Expectation of Insurance Coverage for the subject Barge and Contents." The record demonstrated, without question, that RRK was repeatedly assured that the barge and its contents were covered property under the insurance contract.
However, whether the wear-and-tear exclusion contained in the mailed copies of the policy, but not in the 17-page-fax, is valid is a different situation. This case involves a discrepancy between materials provided to RRK prior to purchasing the policy and the policy that was actually issued. Finding that the doctrine of reasonable expectations applied to this case, the trial court found that the wear-and-tear exclusion was not placed in a way as to allow RRK to reasonably expect the existence of the exclusion. New Hampshire argued the wear-and-tear exclusion was conspicuous, thus making RRK's reliance on the 17-page fax unreasonable. Exclusionary clauses must be conspicuous, plain, and clear, placing them in such a fashion as to make obvious their relationship to other policy terms, and must bring such provisions to the attention of the insured. The parties did not dispute that the exclusion at issue was conspicuous in the policy. RRK argues, however, that because the wear-and-tear exclusion was not placed in the 17-page fax, it was not placed in such a way as to bring the exclusion to RRK's attention and ignores the fact that they did not read the policy where the would have seen the exclusion on the first page.
There is no question of fact regarding whether the renewal policy was mailed to and received by RRK. Therefore, the circuit court did not err in finding, as a matter of law, that the renewal policy was mailed to and received by RRK.
The appellate court affirmed, in part, the circuit court's order finding that the barge and its contents were covered property under the insurance contract as a matter of law. It also affirmed the circuit court's finding that the renewal policy was mailed to and received by RRK. However, it reversed the circuit court's order with regard to its finding that the wear-and-tear exclusion is invalid, and remanded the case for proceedings consistent with the opinion.
This case is a comedy of errors. The insurer issued the wrong policy and denied a claim based on its error. When the error was pointed out the insurer accepted coverage and then denied the claim anyway because it concluded the sinking of the barge was caused by wear and tear. The insured was wise enough to seek a draft policy wording before agreeing to insure with New Hampshire yet, as wise as they were, when the policy was delivered they averred that they never read the policy when it was delivered and when it was renewed. Only the insurance agent noted the error and convinced New Hampshire that the barge and contents were covered property only to have the insured claim the exclusion did not exist because it wasn't part of the form they were provided before the policy was issued.
Professionalism on the part of the insured, the insurer, the brokers and agents would have avoided this litigation had they not acted with sloth, ignorance or lack of diligence.
Reprinted with Permission from Zalma on Insurance, (c) 2012, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, "Zalma on Insurance;" "Murder and Insurance Don't Mix;" "Heads I Win, Tails You Lose - 2011," "Zalma on Rescission in California," "Zalma on Diminution in Value Damages," "Arson for Profit" and "Zalma on California Claims Regulations," and others that are available at Zalma Books. Mr. Zalma can also be seen on World Risk and Insurance News' web based television program "Who Got Caught".
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma's Insurance Fraud Letter.
Zalma on Insurance is a LexisNexis Insurance Law Community Top Insurance Blogs winner.
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