In the last issue of Coverage Opinions I took a brief look at what’s up next for the American Law Institute’s “Principles of the Law of Liability Insurance” Project: Chapter 3. In particular I discussed the Principles’s proposed definition of “accident.” It is defined in §36 as, unless stated otherwise in a liability policy, and when used in an insuring clause: “an action or event that causes a result that the insured does not subjectively expect or intend.”
As I have previously written about, courts have long-been struggling with the meaning of the term “accident.” It is usually not defined in a liability policy. However, the ALI Principles depart from most liability policies and define “accident.” But, to do so as “an action or event that causes a result that the insured does not subjectively expect or intend” is likely to result in coverage for undeserving situations.
Courts have often been confronted with claims by insureds who did the most outrageously intentional acts, and then maintained that coverage was owed because, incredulously, they did not expect or intend the injury that resulted. So it was an “accident,” they assert. However, many courts have also long seen through these assertions of subjective intent as being implausible. Indeed, some judges even use language to suggest that they are snickering inside at the argument that someone could have engaged in such an outrageous act and then asserted: yeah, but I didn’t mean to cause that injury. Courts usually solve this problem by concluding that, despite the insured’s assertion otherwise, when an injury is substantially certain to occur (or some similar language), it was not caused by an “accident.” It couldn’t have been. In other words, common sense prevails.
But to specifically define “accident,” using a subjective test, is to take away courts’ power of common sense. It opens the door to coverage for an injury that, despite the substantial certainty that it was going to occur, may nonetheless be determined to have been caused by an “accident,” as that term is defined. While courts may find an insured’s self-serving assertion, that an injury was not subjectively expected or intended, to be ludicrous, they may nonetheless be constrained, if following the ALI Principle’s definition of “accident,” to rule in the face of incredulousness. After all, with policy language being the test for determining coverage, courts may be compelled to conclude that it trumps the common sense test, that would otherwise be at their disposal to define “accident,” had it not been defined as it was in a policy.
Here is another brief look at a draft Chapter 3 Principle: §37(1): “A liability insurance policy may cover defense costs incurred in connection with any claim, including but not limited to a criminal prosecution, an action seeking fines, penalties, or punitive damages, and a claim alleging expected or intended harm, fraud, criminal acts, or other acts involving aggravated fault.”
Does this really mean that a liability policy may cover defense costs for a criminal prosecution? I would have a better idea of the intent of §37(1) with the benefit of the Comments or Reporters’ Notes. [And in fairness I have not had such benefit.] But on its face here’s what I think §37(1) is getting at.
To be sure, §37(1) is not a pronouncement that a liability policy now, all of a sudden, presto, covers all of these sorts of intentional, even criminal, actions. Rather, my interpretation of § 37(1) is that a liability policy is not precluded from covering this list of intentional acts. In other words, if, under the terms of a liability policy, criminal acts are not covered, then they are still not covered, regardless of what § 37(1) may say. Also, §37(1) is specific that it only applies to defense costs. [The permissibility of indemnity for these types of intentional acts is addressed in §37(4).]
Liability insurers unquestionably do not set out to cover the types of intentional-based acts listed in §37(1). And insurers generally do a good job of making this point in their policies and convincing courts of it. Sometimes courts don’t even get to the policy language to conclude that coverage is not owed. Rather, they take a broader approach and hold that coverage for such conduct is precluded because it would violate public policy to hold otherwise.
But, admittedly, the victims of these sorts of intentional-based acts can often be sympathetic. A court that would like to see compensation awarded, and where insurer dollars are the only way to make that happen, may view §37(1) as a permission slip to do so. Section 37(1) may provide a court with a reason to avoid a decision that public policy precludes coverage. Courts prefer to stay away from deciding issues based on public policy anyway. And if a court is confronted with a close call on whether the policy language triggers a duty to defend for an intentional act, §37(1) may tip the scales in that direction. After all, the ALI says that the court is not precluded from such a finding. While §37(1) applies, on its face, to defense costs, the consequences for breaching the duty to defend are often times not so limited. Not to mention that, once a defense is triggered, the dynamics of the case can shift.
The draft definition of “accident” in §36 is clearly intended to make it easier for insureds to secure coverage for intentional conduct. Section 37(1) – not ruling out the availability of coverage for defense costs for very intentional conduct (even criminal) -- is in the same category. And there are still more draft provisions in Chapter 3 along these lines.
When it comes to liability insurance, a rule as black as coal is that the availability of coverage is tied to the concept of fortuity. That concept is at the very core of a liability policy. The entire bargain between the insurance company and its insured is based on this principle. However, the ALI Principles seem intent on altering this cornerstone of a liability policy. This isn’t just the Principles’s adoption of some particular coverage rule on which courts are split anyway. That’s important too. But the adoption of rules, that open the door to insureds securing coverage for intentional conduct, goes very far beyond that. Even state legislators, who would no doubt score points with constituents by widening insurance policies in this way, haven’t done so.
Does such a tectonic shift really qualify as “coherent doctrinal statements based largely on current state law, but also grounded in economic efficiency and in fairness to both insureds and insurers?” That is what the Principles are described to be in the April 5, 2013 Forward by the Director of the ALI.
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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