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Insurance Law

Principles Have An A.L.Eye On The “Innocent Co-Insured” Rules: Set Sights On Adoption Of The Minority Position

Lately I’ve been using the forum that Coverage Opinions provides me to take issue with certain draft sections of the American Law Institute’s “Principles of the Law of Liability Insurance” Project. In general, my beef has been that some draft Principles in chapter 3 constitute a shift in the law. In doing so, they do not comport with the ALI Principles’s stated mandate to develop “coherent doctrinal statements based largely on current state law, but also grounded in economic efficiency and in fairness to both insureds and insurers.” I’ve looked at this situation in the context of the Principles’ possibly opening the door to coverage for intentional (sometimes very much so) conduct and pre-tender defense costs.

I am mindful that, if all I ever do is criticize the ALI Principles, then at some point it loses credibility. It starts to sound like Chicken Little. [This is why my wife, every once in a while, acknowledges that I’m right about something.] So in the next installment of this ALI Principles series I plan to examine some instances where I believe that the Project achieves its objectives.

But for now I look at another draft ALI Principle in chapter 3 that I believe constitutes a shift in the law -- §46 Severability of Exclusions. Section 46 says that “When the applicability of an exclusion to a claim depends upon the conduct of an insured, an interpretation is preferred that the exclusion applies only to claims against an insured whose conduct meets the requirements of the exclusion, not to claims against other insureds.” (italics added). Section 46 goes on to state that this interpretation is preferred, even if the policy contains a separation of insured’s clause (or some similar term). [In fact a separation of insured’s clause is not needed if this is the rule from the outset; it would only serve to bolster such a rule.]

In a nutshell, Section 46 favors a policy interpretation that preserves coverage for a so-called “innocent co-insured,” a person seeking coverage for the bad/excluded conduct of another insured. Think of parents that are insureds under a homeowner’s policy, with an exclusion for the “criminal acts of ‘an insured,’” who are seeking coverage for negligently failing to prevent their son (also “an insured” under the policy) from assaulting the next door neighbor. Under Section 46, the parents would be covered because they themselves did not commit a criminal act, even though “an insured” did.

Is this the majority rule nationally on this issue? No. Just the opposite in fact. By my count, courts in 24 states hold that when an exclusion applies to “an insured” or “any insured,” coverage is precluded even to a person who did not commit the excluded conduct (the innocent co-insured) and, it is important to note, this remains so even if the policy contains a separation of insureds clause. Eleven states go the other way; in fourteen states the rule is inconclusive; and one state has not addressed the issue in any manner.

The ALI drafters acknowledge in the Comments to §46 that the rule proposed “is not universally accepted.” 24-11. That’s for sure. And it’s just as much of a rout when you consider only states where its highest court has spoken. Nonetheless, the Comments go on to state several rationales for adopting this approach because “the reasoning of the courts adopting this position is more persuasive than that of the courts that do not and more consistent with the approach to liability insurance contract interpretation adopted in these Principles.” In more specific terms, the Comments justify the adoption of the minority view on the following bases (among others):

“[B]ecause the absence of liability insurance often makes it impossible, as a practical matter, to bring a claim, denying liability insurance coverage to the innocent members of insured groups interferes with the deterrence, compensation, civil recourse, and other purposes of liability itself.”

“Applying conduct-based exclusions to insureds who did not engage in the wrongful conduct does not promote the primary purposes of the exclusions. Because these insureds did not engage in the wrongful conduct, there is no concern that the presence of insurance changed their incentives to engage in that conduct, nor is there anything inappropriate about using the resources of the insurance pool on their behalf.”

“[I]n contrast to the comparable situation in the property-insurance context (for example an innocent spouse whose partner intentionally burned down their house), there is little likelihood of collusion and, because any liability insurance payments will go to the victim, there is no possibility that the more blameworthy party will receive the benefit of any insurance payment.”

“While the purpose of any insurance-policy term is an important factor to be taken into account in the interpretation of that term, the purposes at issue here are especially important. If there is any subject in liability insurance that justifies the application of the otherwise rejected strong version of the doctrine of reasonable expectations, pursuant to which the reasonable expectations of the insured will control even in the face of a clearly stated policy provision to the contrary, severability is that subject.”

There is no doubt that the drafters believe that they are setting forth legitimate reasons why they adopted the rule that they did, despite its clear minority status. You can hear a passion that comes though their written words. But there is also no doubt that courts that declined to find coverage for innocent co-insureds were presented with some of these very arguments why coverage should be provided. Yet it wasn’t.

The Comments to §46 make some valid points. But 24-11 is a Globetrotters – Washington Generals score. If the score were closer, then §46 would be easier to swallow, even if still a minority rule.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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