Short Takes on Sundry Topics II: The $750 Million Comma; Assault & Battery Exclusions; A Written Contract Required to be an AI; Theft By Tenant—Is It Covered?; & Certificates of Insurance Legislation

My “possible topics” basket is still overflowing and new items come in all the time, so here’s another round of Short Takes.

The $750 Million Comma

BP is claiming that an exclusion in a contractor’s policy is ambiguous because a comma is missing in its agreement with the contractor. The missing comma may cost insurers $750 million. The dispute grows out of liability coverage for the Deepwater Horizon oil well blowout catastrophe in the Gulf of Mexico in 2010. Here’s BP’s position as summarized by Bloomberg News:

(BP asserts that) …the clause in the drilling agreement reads that BP,…would be “named as additional insureds” in Transocean’s policies “except Workers’ Compensation for liabilities assumed by [Transocean] under the terms of this contract.”

BP contends that because there’s no comma after the words “workers’ compensation,” this leaves open liability coverage for oil discharged from the well. Insurers could have inserted “standard language” to restrict coverage and “cannot rewrite the policies to add those restrictions now,” BP said.1 It’s a convoluted case heard by three courts so far. The first case was decided in the insurers’ favor, the second in the insureds’ favor and the third court punted— it referred the case to the Texas Supreme Court to make the decision. The Texas court hasn’t issued its opinion yet. There are more than a dozen law firms representing the various insureds and insurers, so my thoughts won’t settle the argument.

Whichever way it turns out, the lesson for us is: ambiguities are bad news; they can really bite insurance companies. The accepted rule is that ambiguities are resolved in the insured’s favor if the interpretation it proposes is reasonable. It doesn’t have to be the best interpretation, only a reasonable one. That leaves the court with a lot of leeway in making its decision. And when you need a battalion of lawyers to fight for you, the insured may not be a winner either.

There is one safe harbor for insurers: large insureds may not get the benefit of  the doubt. The theory is that such insureds are well-represented and have the knowledge, power and sophistication to negotiate the language in their contracts; they don’t face the “take-it-leave-it” options of typical insureds.

This may become an issue in the BP case—BP is certainly a large and sophisticated insured. Courts in some states have ruled in favor of the insurer. A New Jersey court took a more nuanced view. It wrote: “The dispositive question is not whether the insured is a sophisticated corporate entity, but rather whether the insurance contract is negotiated, jointly drafted, or drafted by the insured. In such instances, we conclude that the doctrine of contra preferentum (that’s legalese for “resolving ambiguities against the drafter”) should not…benefit…the insured.”2

Lesson for insureds: Don’t depend on ambiguities for coverage. If you see an ambiguity, try to clarify it before the loss. And for all of us: mean what you say and say what you mean.

Assault & Battery—an Exclusion that Can Beat Up the Insured

The “assault and battery” exclusion is finding its way into more and more insurance policies. From an insurance perspective, assault and battery may be a business risk for some businesses that insurers are unwilling to cover. That’s certainly true for boisterous events with a liquor or drug fueled audience. But the exclusion doesn’t belong in a policy covering a standard risk. There’s no standard ISO exclusion for assault and battery that I could find, but a typical one used in the excess/surplus market reads:

This insurance does not apply to any claim arising out of an assault and/or battery…whether caused by the insured, an employee, a patron or any other person  (emphasis added).

This exclusion applies to all causes of action arising out of an assault and/or battery including, but not limited to…any act, error, or omission relating to an assault and/or battery.3

This is a dangerous exclusion. It’s an “arising out of ” exclusion: that means that insureds lose coverage when the claim is based on an alleged assault or battery by anyone.

In a case that shows how troublesome this exclusion can be, a fire in an apartment building resulted in death and serious injuries to tenants. The fire was caused by an arsonist unconnected to the insured in any way; nevertheless the insurance company denied coverage to the building owner because the arsonist’s acts, which resulted in deaths and injuries, fell within the definition of assault and battery. Despite what we might think of him (or her), the arsonist is certainly “any other person.” The court ruled against the insured.4

New York courts have regularly enforced this exclusion. In February, the NY Court of Appeals decided that the exclusion would apply in a case where an employee threw a glass at a patron.5

Don’t accept this exclusion in a policy covering an apartment building owner. You should be able to find a market that will provide the coverage the insured needs.

Get it in Writing—A Written Contract Required to be an AI in Many Policies

The automatic addition insured endorsement (CG 20 33 04 13) is becoming standard. It’s a logical way to save work for everyone. Why issue an endorsement every time the insured has to provide an additional insured with coverage? Insurers don’t underwrite that coverage, they don’t even want to know about it in most cases. They’ve delegated the task of issuing the certificates to agents and brokers. There’s a trap for the supposed additional insured. The full title of the endorsement is: “Additional Insured – Owners, Lessees or Contractors – Automatic Status When Required In Construction Agreement With You.” (“You” means the insured.) The last seven words make it not as automatic as we often think. Additional insured status is only triggered when there’s a written contract between the insured and the party to be added as an additional insured. The classic case illustrating this is memorable because it involves Hard Rock Café. We always assume that large organizations have the staff and procedures to avoid these traps, but apparently they are mortal just like us and our clients.

Hard Rock contracted with Regions Facility Services to do alterations in one of its restaurants. The contract called for Hard Rock to be named as an additional insured on Regions’ policy—so far so good—but the contract was never signed. There was a work order, but it was only signed by Regions. The Supreme Court for New York County had no problem deciding that Hard Rock was not, in fact, an additional insured. The ruling was upheld by the First Department Appellate Term.6  What about the doctrine that an unsigned contract may be enforceable if there is objective evidence that the parties intended to be bound by it? The argument works in many situations, but not for additional insured coverage according to a 2006 New York County Supreme Court summary judgment, also affirmed on  appeal.7  Finally, what if the contract is eventually reduced to writing and it states that it is to be valid retroactively? That argument too failed in the 2006 case.8  There was a written agreement in a case involving General Motors, but GM lost coverage anyway due to some sloppy wording. GM had contracted with B.J. Muirhead Company for maintenance services at its plant in Erie County, NY. The contract required Muirhead to purchase insurance for “liability arising from premises.” It did not say that GM was to be included as an additional insured. The appellate division of the Fourth Department, unanimously reversing a lower court, wrote that “a written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms.”

Translation: no coverage for GM.9

It’s clear; let clients know that they need written and signed contracts that require them to be added as additional insureds. And tell them to be sure the contracts are drafted and reviewed by someone who knows the ins and outs of additional insured law in NY. Don’t forget to suggest that the contract require the new ACORD addendum to the certificate 855 NY that I wrote about in the August 18, 2014 issue of the Insurance Advocate .

Tenant Steals Landlord’s Property From Apartment— Covered as Theft?

Classic New York Realty 2009 leased an apartment in Manhattan from Eminent Realty. Classic removed the kitchen appliances, cabinets, and fixtures to convert the space to a dormitory as it planned to use the apartment as a youth hostel. The hostel went out of business and Classic did not restore the kitchen when it vacated the premises. Eminent submitted a claim for theft under its property policy with Lexington. Lexington declined the claim citing the policy provision excluding losses due to dishonest or criminal acts committed by anyone to whom the owners entrusted the insured property for any purpose. Eminent sued Lexington. Eminent apparently admitted that theft of entrusted property was excluded. However, it argued that “entrustment” only applied to chattels (legalese for personal as opposed to real property) and therefore damage to real property was not excluded. The Supreme Court, New York County, rejected that argument saying the policy must be given its ordinary meaning and that therefore “entrustment” applied to all property. The decision was unanimously affirmed by the Appellate court for the First Department.10  Using the same line of reasoning, insurers exclude damage to houses that were used by the tenants as methamphetamine labs.11  A related type of loss is trashing of the apartment by an irate tenant, usually one who is in the process of being evicted.

There the difference in wording between Lexington and ISO might be significant. Deliberately damaging or defacing the landlord’s property may well be “dishonest or criminal” and therefore excluded under Lexington’s wording. ISO excludes “theft” rather than “dishonest or criminal acts.” Vandalism is not theft, so ISO’s wording might trigger coverage.

Update on Certificates of Insurance Legislation

The Governor hasn’t taken any action as yet (October 23, 2014) on the bill to control the abuse of certificates of insurance. The pending legislation would, among other things, make it illegal for anyone, including insureds and additional insureds, to ask for an expansion of coverage via a certificate. This might protect producers from the outlandish demands of some additional insureds.

The bill passed the Senate in May and the Assembly in June. (Similar legislation has been enacted in other states.) The governor’s office has not yet asked the Senate to send the bill to the governor. The guess is that some people in the governor’s office oppose the bill or are not convinced that there is a real problem.

The Agents Associations have had ongoing discussions with the governor’s staff for months now. Last year a similar bill did not go to the Governor until December and was then vetoed. There’s a fear that history may repeat itself. Stay tuned.

1 Margaret Cronin Fisk and R.G. Ratcliffe “BP Seeks Access to $750 Million Transocean Insurance” http://www.bloomberg.com/news/2014-09-16/bp-seeks-access-to-750-million-transoceaninsurance. html (accessed 9/24/14)

2 Scott G. Johnson “Resolving Ambiguities in Insurance Policy Language” Pittston Co. v. Allianz Insurance Co., 124 F.3d 508 (3d Cir. 1997) http://www.rkmc.com/~/media/PDFs/Resolving%20Ambiguities%20in%20Insurance%20Policy%20Language%20The%20Contra%20Proferentem%20Doctrine% 20and%20the%20Use%20of%20Extrinsic%20Evidence.pdf (accessed 9/24/14)

3 “Assault And Battery Exclusion” https://www.scui.com/concord/pdfs/Western%20World%20Insurance%20Company/Assault_and_Battery_Exclusion.pdf (accessed 9/26/14)

4 20-35 86th St. Realty, LLC v Tower Ins. Co. 2013 NY Slip Op 03413 May 14, 2013 http://law.justia.com/cases/new-york/appellate-division-firstdepartment/ 2013/10039-600805-10.html (accessed 9/26/14)

5 QBE Ins. Corp. v Jinx-Proof Inc. 2014 NY Slip Op 01100 Decided on February 18, 2014

6 Cusumano v Extell Rock, LLC 2011 NY Slip Op 05935 Decided July 14, 2011 Appellate Division

7 National Abatement Corp. et al., v National Union Fire Insurance Company 2006 NY Slip Op 07828 [33 AD3d 570] Appellate Division, First Department October 31, 2006

8 Ibid

9 General Motors, LLC v B.J. Muirhead Co., Inc. 2014 NY Slip Op 05720 Decided August 8, 2014 Appellate Division, Fourth Department

10 Lexington Park Realty LLC v National Union Fire Ins. Co. of Pittsburgh, PA 2014 NY Slip Op 05817 Decided August 14, 2014 Appellate Division, First Department. The policy in question was apparently not an ISO form. The ISO special form contains a similar exclusion, but it excludes “theft” instead of “dishonest or criminal acts.”

11 Neighborhood Investments, LLC v. Kentucky Farm Bureau Mut. Ins. Co., No. 2013–CA– 000375–MR (Ky. Ct. Ap. March 28, 2014)