Hole-ly Cow: Must, Must Read Coverage Case

Hole-ly Cow: Must, Must Read Coverage Case

I’m a big fan of cases involving disputes over the prizes awarded to golfers who make a hole-in-one. You know how this works. A golf tournament, such as a corporate outing or charity fundraiser, will designate one hole where any participant who gets a hole-in-one will win a big prize, such as a car or large sum of money. There is a great chance that nobody will get a hole-in-one. But, just in case, the prize will often be insured. In other words, the sponsor pays a few hundred dollars to an insurance company, and on the off chance that someone actually gets a hole-in-one, the prize will be paid by the insurer.

But, just like many weekend golfers’ swings, sometimes it doesn’t always go as planned, and coverage litigation ensues. These cases don’t arise too often, but when they do they are, not surprising, usually interesting. I looked at hole-in-one prize cases in depth in the June 5, 2013 issue of Coverage Opinions, where I also interviewed Mark Gilmartin, co-owner and President of Reno-based Hole In One International and Odds On Promotions, a company that arranges insurance for the prizes awarded in hole-in-one contests, as well as lots of other interesting contests used for promotional purposes.

A Washington federal court recently had a hole-in-one coverage case before it in Servco Pacific Insurance v. AXIS Insurance, No. C15-0563 (W.D. Wash. Sept. 4, 2015), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance]. The court’s decision is absolutely fascinating – and with a rationale that could extend well-beyond cases that arise on the links. It is like no other coverage case I’ve seen. And it offers a valuable lesson for insurers.

Servco is a brief and simple case and I’ll give myself a gimme and describe it using some generous verbatim text from the opinion.

“On September 8, 2014, the Everett Golf and Country Club hosted the Lynwood Rotary Golf Tournament. As a charitable donation to the Lynwood Rotary, Servco purchased an insurance policy covering four hole-in-one prizes that could be earned at the tournament. If a golfer made a hole-in-one at the designated ‘Target Hole,’ he or she would win a new Acura car valued at $30,000. . . Servco paid Axis a premium of $638.”

Regarding witnesses, the Policy stated: “The Insured shall provide responsible, non-playing adults (over the age of 18) as witnesses on the Target Hole at all times during the tournament. If the Prize Value is equal to or less than $25,000, only one (1) witness is required by this policy. If the Prize Value is greater than $25,000, two (2) witnesses are required by this policy.”

The policy stated that the hole yardage could not be less than 130 yards for men and 110 yards for women.

“Servco’s application indicated that the Target Hole was Hole 15, with a minimum yardage of 150 yards for men and 140 yards for women. On the day of the tournament, participant Gigi Jacobsen made a hole-in-one on Hole 15.”

“It was later discovered that the Club had mistakenly set the women’s tee box at 112 yards. In addition, due to a misunderstanding, only one witness was designated at the Target Hole. As a result, Axis denied Servco’s claim under the Policy. Ms. Jacobsen did not receive her prize for sinking the hole-in-one.”

As is wont to happen in situations like this, coverage litigation ensued: “The sole dispute is whether Servco is entitled to coverage under the Policy for the value of the prize owed to Ms. Jacobsen.”

Axis’s case looks like a strong one, right? Its argument was not higher math: The insurer denied “coverage based on two perceived failings by Servco. First, Ms. Jacobsen scored a hole-in-one from 112—not 140—yards. Second, only one witness—not two—was present when Ms. Jacobsen did so.”

The Washington federal court saw it differently. It is worth reading the court’s entire analysis:

“Hole-in-one insurance reflects th[e] principle [that] the more expensive the prize and the easier the shot, the greater the risk in providing the insurance. Thus, to properly compensate Axis for the risk it assumed, Servco paid a premium ‘based on the yardage of the hole, number of Attempts, and the Prize Value.’ The Policy included another safeguard for Axis: the limitation that no yardage could be less than 130 yards for men and 110 yards for women. The Policy also required Servco to provide an additional witness in the event that Axis was liable for a prize that exceeded $25,000 in value.

In other words, Servco and Axis agreed to allocate to Axis the liability for a hole-in-one prize, in exchange for a premium from Servco that addressed the amount of risk Axis assumed. Servco, by way of the Club, then placed the tee block at a closer distance than the premium addressed and provided only one witness where the prize exceeded $25,000. Although these deviations impacted the risk assumed by Axis, they are not inconsistent with the parties’ intent in entering this agreement. The Policy was based on a sliding calculation of risk: Axis demanded a premium from Servco that corresponded with various distances and prize values. According to Axis itself, ‘Servco would have been charged a higher premium to insure a Target Hole with a distance of 112 yards instead of 140 yards.’ And, 112 yards is within the limits of yardage that Axis indicated it would insure. Axis also indicated that it would insure a prize valued at $25,000, provided that one witness was present. Thus, the Court finds that reformation is appropriate so that the terms of the Policy reflect the intent of the parties to provide protection to Servco for a price that acknowledges the risk Axis assumed. See Denaxas v. Sandstone Court of Bellevue, L.L.C., 148 Wash.2d 654, 63 P.3d 125, 132 (Wash.2003) (‘Reformation is an equitable remedy employed to bring a writing that is materially at variance with the parties’ agreement into conformity with that agreement.’), [subscribers can access an enhanced version of this opinion: lexis.com | Lexis Advance].

Due to the presence of only witness at the Target Hole, Axis’s liability under the Policy shall not exceed $25,000. This amount shall be offset by the value of a premium to insure a Target Hole of 112 yards—the reasonable amount of which shall be determined by the parties—less the premium already paid by Servco.”

Essentially, the court gave Servco a mulligan. A policy requirement was not satisfied and the insured did not do what it promised in the application. But, instead of concluding that, on account of these breaches, coverage was not owed, the policy was reformed to provide coverage based on the things that Servco got right. And Servco just pays some extra premium to compensate for the things it got wrong.

The implications of this ruling, and the slippery slope, are easy to see. All insurance is an allocation of risk in exchange for a premium. Under the Servco court’s rationale, anytime a policy requirement is not satisfied, or an insured does not comply with something it says in its application, the policy can simply be adjusted to provide coverage that reflects the bits and pieces that were satisfied, and the insured simply pays additional premium for the additional risk imposed on the insurer. But if an insured can fix its mistake, by paying some extra premium after the fact, then only the insurer was taking a true risk in the transaction. That’s just not how insurance works.

The case was wrongly decided. That the court’s entire legal support for its decision was a case involving a dispute over the square footage in a lease speaks volumes on that point. If this were truly how insurance operated I would have expected to see at least one insurance-related case cited by the court for support. I can’t imagine that this case won’t be appealed once the premium offset issue is determined. But the case should stand as a lesson to insurers that, no matter how strong their arguments, nothing can prevent a where-there’s-a-will-there’s-a-way decision.

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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