Defenses and Exclusions Commonly Used by Insurers to Deny Coverage - ABA YLD 101 Practice Series

By Frederick N. Salvo, III

The number of "defenses" available to insurers when faced with claims under varying types of insurance contracts are almost too numerous to list and are often included in vast treatises covering a multitude of issues in insurance coverage litigation. Although not typically referred to as "defenses", exclusions found in insurance contracts are, at least in the context of coverage disputes, essentially defenses to coverage in that they set forth those circumstances which are specifically excluded from coverage under the express terms of the policy of insurance at issue.

Whether an insurer writes disability, life, property, health or other similar policies and is often faced with "first-party" claims or whether an insurer writes general liability policies and is often faced with "third-party" claims, one of its first tasks is to evaluate whether the policy provides coverage for the loss or claim. In some instances, certain defenses are available which, if successful, may allow the insurer to avoid certain obligations under the policy or even void the policy entirely. In other instances, these defenses may not be available, although exclusions contained in the policy may operate to relieve the insurer of any obligation to provide coverage for the loss or claim. The below represents a non-exhaustive list of common defenses cited by insurers to avoid coverage and common exclusions found in insurance policies.

Misrepresentation Defense
The misrepresentation of a fact by an insured in his application for insurance is a potential ground upon which an insurer may void a policy. Although many policy applications and policies themselves contain provisions providing for policy avoidance in the event of a misrepresentation by the insured, many states impose this obligation on insureds regardless of whether such an obligation is explicitly imposed under the language of the application and/or policy. Although often raised in the context of varying types of policies, the misrepresentation defense is extremely common in insurance coverage litigation involving disability, health and life policies as such policies, by their nature, require disclosure of the potential insured's medical history during the application process. Although insureds are not typically required to voluntarily divulge any and all aspects of their medical history on insurance applications, they are required to accurately answer any and all questions posed by the insurer. Failure to do so may give rise to a claim by the insurer that the insured misrepresented his answers to specific policy application questions.

As with misrepresentations in any area of law, however, certain elements must be present for the misrepresentation defense to be validly argued. For instance, the misrepresentation at issue must have been material to the insurer's decision of whether to cover the risk at issue and an insurer's reliance on the accuracy of the insured's application answer must have been reasonable. The misrepresentation defense is not without limitations as many policies contain incontestability provisions which restrict the time during which an insurer may raise as a defense any alleged misrepresentation by the insured in his policy application.

Late Notice Defense.
Almost all insurance policie contain a written requirement that insureds promptly notify their insurer of a claim or loss. Failure of insureds to do so is often raised as a defense to coverage by insurers. Such a notice requirement is contained in all types of insurance policies and failure of an insured to follow its terms can have far reaching consequences. The purpose of such a requirement is to let the insurer know that a claim exists and to allow the insurer to fully investigate and evaluate the claim in a timely manner. Obviously, the greater the delay in putting an insurer on notice, the more likely it is that an insurer's ability to evaluate the claim will be compromised. Minor delays in putting insurers on notice, even those that clearly breach the express terms of a notice provision (notice given on fifteenth day where policy requires that notice be given within ten days), are rarely the subject of successful notice defenses absent substantial prejudice to the insurer. For this reason, prejudice to an insurer is a fundamental requirement for a successful defense based on late notice. If successful, however, the defense may be used by an insurer to avoid some of its obligation under the policy and, in rare circumstances, can be used by an insurer to void the policy.

Known Loss Defense
The known-loss doctrine or defense simply states that coverage is not available for losses that already exist at the time the insurance contract is formed. The defense simply enforces a fundamental concept in insurance law that a policy cannot insure against a loss that occurred or started to occur prior to the time of contracting, as such losses are not uncertain. The defense is now commonly subsumed by a variety of exclusions contained in many policies although none are commonly identified as the "known loss" exclusion. However, even if not explicitly stated somewhere in a policy, it is available as a common law defense and has been used to varying degrees of success by insurers attempting to avoid coverage for losses which pre-date the effective dates of coverage. Not surprisingly, courts often focus on the extent to which a loss has totally manifested itself prior to contracting in determining whether the loss is covered by a policy of insurance. For example, the full extent of a loss may not be known at the time of contracting or a series of losses may be related although some pre-date and some post-date the inception date of a policy.

Intentional Act Exclusion
Found in virtually all general liability and property policies, the intentional act exclusion forbids from coverage those loses that were "expected or intended" from the standpoint of the insured. The fundamental principal underlying the intentional act exclusion is consistent with all general liability policies which typically provide coverage for bodily injury and property damage caused by an "occurrence." An "occurrence" is usually defined as an act or omission by the insured "expected or intended to cause" injury and is most often synonymous with an "accident." As may be obvious, the usual definition of "occurrence" and the presence of an intentional act exclusion, especially in the context of general liability policies, are consistent with the very nature of insurance in general, i.e. its role in providing coverage for losses that are fortuitous in nature. Although the issues associated with this exclusion are incredibly voluminous and beyond the scope of this article, one of the most common issues presented is the appropriate standard for determining whether an act is intentional "from the standpoint of the insured." Some courts take an objective approach and ask whether a reasonable person knew or should have known that injuries would follow from the conduct at issue while other courts take a subjective approach and ask whether the specific insured at issue intended to cause harm. Closely related to the intentional act exclusion but not separately listed herein are exclusions for claims alleging physical or sexual assault, abuse and molestation as well as claims based on conduct that resulted in a criminal conviction.

Contractually Assumed Liability Exclusion
Almost all general liability insurance policies exclude from coverage any liability assumed by insureds under any contract or agreement with third parties. Such an exclusion is especially common in professional liability polices covering such professionals as doctors, dentists, architects and engineers, as well as liability policies insuring their businesses. The rationale behind such an exclusion is simple; insurers simply wish to provide coverage for named insureds pursuant to the terms of the policy at issue. Insurers are not interested in providing coverage for claims asserted against third parties for which the insured has assumed responsibility. The assumption of such liability usually takes the form of "hold harmless" provisions found in contracts executed by professionals. For example, doctors, dentists or other health care professionals may enter into contracts with HMOs or other similar organizations and engineers may enter into contracts related to the design and/or building of certain structures.

Close review of any contractually assumed liability exclusion is necessary as many policies provide exceptions to the exclusion. Perhaps the most common such exception is where the insured would have incurred liability anyway. For example, a doctor's contract with an HMO may contain a provision whereby the doctor agrees to hold the HMO harmless for any claims asserted against the doctor for medical malpractice. Such an agreement would fall squarely into the exception mentioned above. However, if the doctor agrees to hold the HMO harmless for claims asserted against the HMO arising out of conduct having nothing to do with the doctor, then any contractually assumed liability exclusion would likely operate to bar such claims from coverage under the doctor's professional liability policy.

Pollution Exclusion
To varying degrees, general liability policies have excluded from coverage damages caused by pollution for quite some time. The pollution exclusion found in earlier general liability policies prohibited coverage unless the contamination was "sudden and accidental." The sudden and accidental pollution exclusion was typically interpreted to mean that pollution occurring over long periods of time would not be covered whereas abrupt accidental exposures would be afforded coverage. For example, the exclusion would often be cited in denying coverage for liability arising from the long term leakage of underground storage tanks but would provide coverage for liability arising from the spilling of a toxic substance from a cargo container in transit. More recent general liability policies contain what is commonly referred to as the "absolute pollution exclusion" which attempts to exclude from coverage damages caused by pollution, including the "sudden and accidental" release of contaminants. Despite its title, many courts have found coverage in cases where insurers claim that the exclusion is applicable. The validity and applicability of pollution exclusions has been the subject of an incredible amount of coverage litigation especially in light of the potential exposure arising out of site cleanups mandated by federal law. Other frequently litigated issues include whether the exclusion applies to asbestos, silica, mold and other similar exposures.

Liquor Liability Exclusion
General liability policies typically exclude from coverage damages for which the insured may be held liable as a person engaged in making, serving, distributing or manufacturing alcoholic beverages. Even if the insured is not engaged in those activities, the typical alcohol exclusion also excludes claims against the insured as the owner of premises used for these activities as long as liability is imposed by virtue of the violation of any statute regulating alcohol. This exclusion was originally created in response to dram shop laws enacted by various states, which hold those who serve alcohol to minors or intoxicated customers responsible for any injury they may cause to third parties. Although the exclusion clearly operates to bar from coverage claims against businesses profiting from alcohol related activities, it often presents coverage questions related to social hosts who simply provide liquor to guests at a party. As a result, it is important to carefully review wording of any liquor liability exclusion along with the facts and circumstances of any given case.

Punitive Damage Exclusion
Perhaps one of the most important issues facing any party to a coverage dispute involving a general liability policy is whether the policy provides coverage for punitive damages. Clearly written punitive damage exclusions are almost always determined to be valid and enforceable. However, it is not uncommon for policies to contain no punitive damage exclusion. In these cases, it may be that punitive damages are not insurable pursuant to the public policy of the state whose law applies to the coverage issues. Perhaps the most popular exception to this rule involves cases of vicarious liability. For example, even in states where coverage for punitive damages is not allowed, an employer may be entitled to coverage for any punitive damage award arising from the conduct of its employee, assuming, of course, there exists no punitive damage exclusion.

The above is not intended to be an exhaustive list of all defenses and exclusions that are common to all insurance policies. Nor is it meant to be an exhaustive discussion of each defense and exclusion mentioned. However, these defenses and exclusions represent fundamental concepts in insurance law and are commonly used by insurers in the context of insurance coverage litigation.

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About the Author

Frederick N. Salvo, III is an associate in the Jackson, Mississippi office of Baker, Donelson, Bearman, Caldwell & Berkowitz P.C. Mr. Salvo can be reached at fsalvo@bakerdonelson.com.

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