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Insurance Law

Why Failure To Read Policy Hurts Both Insured and Insurer – Per Claim Deductible Defeats Cover for Bad Faith Suit

It sees to me that no one reads an insurance policy until a claim is made. Even insurers fail to read or apply the terms and conditions of the policy to the facts of a loss. In Western Heritage Ins. Co. v. Asphalt Wizards, — F.3d —-, 2015 U.S. App. LEXIS 13263 (C.A.8 (Mo.) 7/30/2015), [subscribers can access an enhanced version of this opinion: | Lexis Advance], both the insured and insurer seemed to avoid reading the terms and conditions of the policy before the insurer asserted its rights.


Western Heritage Insurance Company (Heritage) was a Commercial general liability (CGL) for Asphalt Wizards (Asphalt) who, after defending Asphalt for four years, sued its insured and the company that had filed a class action lawsuit against Asphalt for allegedly sending unsolicited faxes in violation of the federal and state law. Heritage sought a declaration that it had no duty under the policies to defend or indemnify Asphalt in the underlying lawsuit. The company suing Asphalt brought counterclaims against insurer for supplementary payments, vexatious refusal to pay, and attorney fees. The trial court dismissed the counterclaims and found Heritage had no duty to indemnify Asphalt.

Asphalt , a parking-lot repair business, hired a company to fax advertisements to potential customers. From 2005 until 2008, more than 44,000 faxes were sent on Asphalt’s behalf. Fun Services of Kansas City (“Fun Services”), which received some of these faxes, filed a class-action petition in Missouri state court alleging that (1) Asphalt Wizards violated the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. § 227, by sending these faxes, and (2) that Asphalt Wizards committed conversion by commandeering the recipients’ fax machines. For the alleged TCPA violations, Fun Services and the class are seeking statutory damages of $500 for each fax.

Shortly after the lawsuit was filed, Asphalt notified its insurer, Heritage  about it.  Heritage had insured Asphalt through three sequential, year-long policies from May 18, 2004 until May 18, 2007, the time frame when roughly 33,000 of the faxes were sent. The policies covered property damage and personal and advertising injury. Each of the policies also contained a deductible endorsement that provided for a $1,000 “per claim” deductible amount for property damage and for personal and advertising injury. This deductible amount applied to “all damages sustained by one person or organization as the result of any one claim” as well as to “legal expenses incurred in the handling and investigation of each claim.”

Heritage responded to Asphalt’s request for coverage. Heritage reminded Asphalt of its policy limits, including the $1,000 deductible amount, and stated that Heritage had hired a law firm to represent Asphalt.  Heritage sent a second letter, four years later, to Asphalt  styled a “supplement” to the prior one, stated that Heritage now intended to defend Asphalt subject to a reservation of rights.

Heritage filed this action against Asphalt  and Fun Services seeking a declaration that it owed no duty to defend and no duty to indemnify in connection with the class-action lawsuit. With respect to the duty-to-indemnify issue, the court found that Heritage had waived its defenses to coverage by waiting four years to issue a reservation-of-rights letter. However, the court concluded that Heritage did not waive the deductible endorsements.


Heritage’s Duty to Indemnify

The key issue presented to the Eighth Circuit was Heritage’s duty to indemnify Asphalt. In granting summary judgment to Heritage, the district court determined that Heritage had waived its defenses to coverage by failing to issue a timely reservation of rights, that the deductible endorsements were not a defense to coverage, and that because no “claim” could exceed the $1,000 deductible amount, Heritage did not have a duty to indemnify.

Summary judgment is proper only if there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Fun Services first argues that the deductible endorsements amount to a defense to coverage and that because the district court found that Heritage waived its defenses to coverage, it necessarily waived the application of the deductible endorsements as well.

Under Missouri law, an insurer’s failure to mention a policy limit—i.e., the maximum amount of coverage—in a letter denying coverage does not preclude the insurer from later asserting that policy limit. A contrary rule would create coverage where none existed under the policy in the first place. Fun Services asks us to characterize the deductible endorsements as a defense to coverage, meaning that they can be waived. The deductible endorsements function as an apportionment of loss between the insurer and the insured.

Allowing the  deductible endorsements to be waived would, like barring an insurer from asserting policy limits, create coverage where none existed under the policy in the first place. As a result the Eighth Circuit agreed with the district court that Heritage did not waive its ability to enforce the deductible endorsements.

The district court determined that the term “claim” as used in the policy unambiguously connotes that the $1,000 deductible amount applies separately to each fax. The district court reasoned that damages and legal expenses from one fax could not exceed $1,000.
Although Fun Services’ briefs assert that a reasonable person could adopt this broader interpretation of “claim,” Fun Services fails to take the additional and necessary step of demonstrating a genuine dispute for trial about whether a class member actually received more than one fax in a policy year.

Fun Services has failed to come forward with specific facts showing that there is a genuine issue for trial. Even if an ordinary person could define “claim” to include multiple faxes sent to one class member during a policy year, Fun Services has not raised a genuine dispute of material fact about whether any class member received more than one fax in a policy year.

As a result, the grant of summary judgment to Western Heritage on the duty-to-indemnify issue was appropriate.


Heritage took four years to realize that the most that could be asserted against its insured, Asphalt, per claim was $500 a sum half the amount of the deductible. If it had conducted a thorough investigation and review of the policy before accepting the defense it would have saved four years of attorneys fees. If Asphalt had read the policy it would not have agreed to a per claim deductible but would have insisted on a per annum deductible.  Had Heritage properly reserved its rights it could have recovered the money it paid to defend the insured. The lesson: “read the policy before you buy it” and “read the policy before you provide a defense.”

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2015, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. 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 only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “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 be contacted at or, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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