No insurance policy covers every possible risk faced by a person or business. Liability insurance policies are written to cover certain risks faced by a person or entity at a price the person or entity finds affordable. Some risks can be easily avoided by operating honestly and in good faith. Others are more difficult to avoid like accidents or errors of judgment. In Interline Brands, Inc., Interline Brands, Inc., V. Chartis Specialty Insurance Company, f.k.a. American International Specialty Lines Insurance Company, (Eleventh Circuit, No. 13-10025, April 15, 2014), [enhanced version available to lexis.com subscribers], the Eleventh Circuit dealt with a case where, after a loss, the insured contended that an exclusion made the policy illusory and that it was so ambiguous it should not be enforced.
Interline Brands (“Interline”) purchased a series of commercial general liability policies from Chartis Specialty Insurance Company (“Chartis”). The policies Interline purchased contained an exclusion for violations of any statute that addresses transmitting any material or information (the “Exclusion”). During the policy period, Interline was sued for violating the Telephone Consumer Protection Act (the “Act”). Chartis denied coverage based on the Exclusion. Refusing to accept Chartis’s position that the policy did not cover violations of the Act, Interline filed suit. The district applied the exclusion and granted Chartis’s motion for judgment on the pleadings.
Interline is a corporation that distributes and markets products. Chartis (then known as American International Specialty Lines Insurance Company) issued Interline a series of commercial general liability policies. Each of the policies provided coverage for bodily injury and property damage liability, personal and advertising injury liability, medical payments, and pollution legal liability. The coverage included an exclusion that states: “Personal and advertising injury arising out of or resulting from, caused directly or indirectly, in whole or in part by, any act that violates any statute, ordinance or regulation of any federal, state or local government, including any amendment of or addition to such laws, that includes, addresses or applies to the sending, transmitting or communicating of any material or information, by any means whatsoever.”
During the policy period, Interline was sued for sending unwanted “junk” faxes in violation of the Act. Chartis denied coverage, stating that the suit fell within the Exclusion in Interline’s policy.
Interline sued Chartis alleging breach of contract.
Because this is a diversity suit, the Eleventh Circuit applied the law of the forum state, Florida. Under Florida law, a clear and unambiguous policy provision should be enforced according to its terms whether it is a basic policy provision or an exclusionary provision. Interline contends that the Exclusion is void because it is ambiguous and against public policy.
Under Florida law, a provision is ambiguous if, after resort to the ordinary rules of construction, the relevant policy language is susceptible to more than one reasonable interpretation, one providing coverage and the other limiting coverage. In addition courts may not rewrite contracts, add meaning that is not present, or otherwise reach results contrary to the intentions of the parties.
Any reasonable interpretation of the language of the exclusion elliminates coverage for violations of the Act. Interline also contended that the Exclusion is ambiguous because it uses broad terminology to define its scope instead of clearly setting forth which particular laws it applies to. The Eleventh Circuit was not convinced that a list of particular laws, as contended by Interline, would be an improvement. Interline estimates that this exclusion relates to “hundreds of thousands of laws, ordinances and codes,” although there is no such information in the record. A list of hundreds of thousands of laws would be painstakingly difficult to analyze and would likely provide the insured with less, not more, meaningful notice. And, it would be difficult for a specific list to account for laws that are amended, renamed, or enacted after the policy is signed.
Although it is obvious that the language of the Exclusion is broad and excludes coverage for violations of many laws, a broadly written provision is not the same as an ambiguous one. In this case the Eleventh Circuit concluded that there is no construction that would provide coverage for violations of the Act. Accordingly, it concluded the statute is not void due to ambiguity.
The Exclusion Is Not Void for Being Against Public Policy
Interline also contended that the Exclusion is against public policy and void because it leads to an absurd result. Under Florida law, if one interpretation looking to the other provisions of the contract and to its general object and scope would lead to an absurd conclusion, such interpretation must be abandoned, and that adopted which will be more consistent with reason and probability. When limitations or exclusions completely contradict the insuring provisions, insurance coverage becomes illusory.
Interline overstates the extent to which the Exclusion limits coverage. Even with the broad Exclusion, the policy still contains extensive coverage. The policy provides a wide range of coverage for bodily injury and property damage liability, personal and advertising injury liability, medical payments, and pollution legal liability. The Exclusion only applies to the personal and advertising injury coverage. Furthermore, the Exclusion only excludes from coverage violations of a statute, ordinance, or regulation, therefore, not common law. The Exclusion only applies to “sending, transmitting or communicating of any material or information.” While this is a significant Exclusion (especially in light of Interline’s business), it does not render the policy absurd or completely contradict the insuring provisions.
Exclusions are not necessarily harmful. Exclusions allow creation of a policy that provides the insured the coverage it needs at a price it can afford. Without such exclusions, coverage would undoubtedly be more expensive. A company primarily needs insurance for risks it may be ill equipped to anticipate or prevent (e.g. property damage). Without an exclusion, a company would also have to pay for coverage of risks it can easily anticipate and avoid (e.g. violations of laws related to its business). And, coverage for violations of law creates a moral hazard that could substantially increase insurance costs, especially when the coverage is closely related to the company’s business.
Accordingly, the Exclusion is sensible and not void for being against public policy.
Interline bought an insurance policy that provided it broad coverage for bodily injury, property damage and personal injury for a premium they were willing to pay. Chartis, recognizing the business of Interline, decided it was not willing to insure against the risk that Interline would be sued for sending messages in violation of federal, state or local statute in effect at the time of loss.
An insurance company is entitled to determine for itself what risks it will accept. It has the unquestioned right to select those whom it will insure. (Robinson v. Occidental Life Ins. Co. (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39]) [enhanced version available to lexis.com subscribers].
Chartis determined that it would not accept the risk of Interline sending messages, like the sending blast faxes to people not willing to receive them, a violation of federal law. Interline could have avoided the risk, and the subsequent litigation, by obeying the law. With a clear and unambiguous exclusion Chartis was entitled to deny the claim since it resulted from a risk of loss it did not agree to accept.
Since any coverage can be bought for the right price, if Interline wanted the coverage it claimed it the court should provide it the market place would have made it available for a price. Courts should never change the wording of an insurance policy to provide coverage the insured did not buy but determined, after a loss, it needed.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2014, 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 Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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