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By William T. Barker, Partner, SNR Denton LLP
The Millers purchased a home with severe preexisting water and mold damage which they and their home inspector failed to detect. In Miller v. Safeco Insurance Co of Am., the Seventh Circuit held that the loss had not manifested itself until after the policy took effect and that State Farm could not rely on exclusions in the policy because the Millers had not been notified of those exclusions before discovering the loss. This commentary criticizes that result.
The Seventh Circuit reasoned that:
Wisconsin law provides that an insurer cannot rely on a policy's exclusions when it fails to inform the insured of those terms. If an insurer does "not provide the insured with a copy of the policy or some other documentation of its terms," the "insurer may not deny coverage based on an exclusion in the policy." Allowing an insurer to take premiums "and then deny liability based on an exclusion of which the insured was not aware because the insurance company had not informed him or her of the exclusion or given him or her the means to ascertain its existence" would be unjust.
Wisconsin's rule that an insurer cannot preclude coverage based on exclusions unknown to the insured doesn't rest on estoppel. Safeco's failure to provide the Millers with the exclusions goes to the legal question of whether the exclusions were part of the agreement in the first place. Safeco failed to tell the Millers about the exclusions-whether by delivering the policy or by any other means-until after the Millers discovered the damage. And just as an insurer couldn't amend a policy's terms to exclude a loss after the insured discovers that loss, an insurer cannot refuse coverage by pointing to an exclusion that the insured didn't know about until after the insured discovered the loss.
The commentary points out that the Seventh Circuit ignored the general rule governing coverage under an insurance binder:
Because binders are, by definition, not full documents sufficiently complete to create binding agreements, courts must often look beyond the plain terms of the binder to discern the precise scope of the liabilities and obligations under the insurance plan in the event that a loss occurs prior to issuance of the final policy ... . To ensure that the binder comports with the intent of the parties, courts will consider: "(1) the specific terms contained in the binder or incorporated by reference, and (2) to the extent necessary as gap-fillers, the terms included in the usual policy currently in use by the insurance company or those required by statute."
The commentary argues that the Seventh Circuit misconstrued Wisconsin law and that the rule it adopted disrupts a useful mechanism used by insurance markets to provide temporary coverage until a policy can be issued and delivered.
William T. Barker is a member of SNR Denton's Insurance Litigation & Coverage Practice Group and practices in the firm's Chicago office. He has a nationwide practice in the area of complex commercial insurance litigation, including coverage, claim practices, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is the co-author, with Ronald D. Kent of The New Appleman Insurance Bad Faith Litigation, Second Edition and with Charles Silver of the forthcoming Professional Responsibilities of Insurance Defense Counsel; he has written over 100 published articles on insurance and litigation subjects. He has been described as "[t]he leading lawyer commentator" on the relationships between insurance and civil procedure. Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 & n.4 (1995). He is an Adviser to the American Law Institute project on Principles of the Law of Liability Insurance. He is a member of the Editorial Board of The New Appleman on Insurance Law Library Edition and The New Appleman Insurance Law Practice Guide. He is Editorial Board Director and Senior Contributing Editor of Insurance Litigation Reporter and a member of the Board of Editors of Defense Counsel Journal.
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