Insurance Interpretation Principles
In interpreting an insurance policy, words are to be given their plain and ordinary meaning, regardless of whether or not a term or phrase appears in a coverage grant or a policy exclusion.[1]
Ambiguities. “[I]f an ambiguity exists [in a policy], it must be construed against the insurer.”[2] An ambiguity exists when the language “is capable of more than one reasonable meaning.”[3] “Exclusionary language in an insurance policy will be construed most strongly against the insurer and the burden is upon the insurer to prove that an exclusion applies.”[4] Further, “it is incumbent upon the insurer to employ exclusionary language that is clear and unambiguous.”[5] Accordingly, “ambiguous language in an insurance policy will be given an interpretation which grants coverage, rather than one which withholds it.”[6]
Reasonable expectations. Importantly, provisions in an insurance contract are construed in accordance with the reasonable expectations of the insured.[7] An insurer should not be permitted to rewrite policy language to disclaim coverage.[8]
All-Risk Policies
When a policy is an “all risk” policy, traditional coverage interpretation principles have even greater coverage consequences. Ordinarily, a policyholder has the burden of proving that a policy is triggered and that its losses fall within a coverage grant. However, under an all-risk policy, all losses are deemed covered, and the onus is put on an insurance company to articulate and support a policy exclusion. Accordingly, insurance companies are reluctant to admit that the policies they sold are “all risk” when that term does not appear in the policy. Still further, insurance companies seek to interpret exclusions as broadly as possible, because if an exclusion does not apply, there is coverage for the loss.
“All risk” policies are as broad in scope as the name implies, insuring not just specifically listed perils, but all potential risks, other than those specifically excluded.[9] Accordingly, coverage for all losses is available “unless the loss is excluded or limited.” An insurance policy can qualify as an “all risk” policy even if the term “all risk” is not explicitly stated. For example, the below provision is analogous to an all-risk coverage grant:
When Special is shown in the Declarations, Covered Causes of Loss means direct physical loss unless the loss is excluded or limited in this policy.
This language dictates that the policy provides “all risk” coverage even though the phrase “all risk” is not stated.[10]
When faced with an all-risk policy, insurance companies are incentivized, even more than usual, to apply very broad meaning to terms and phrases that appear in policy exclusions in an effort to limit their coverage obligations because all losses are considered covered losses until proven otherwise.
Plain and Ordinary Meaning Dictates Coverage
Policy exclusions. When applying policy exclusions, insurance companies may attempt to apply broad meaning to terms and phrases in an effort to limit their coverage obligations.
Pollution exclusion. Insurance companies have repeatedly sought to construe pollution exclusions broadly, and exceptions to exclusions narrowly, in an effort to reduce their liability. In a recent Eastern District of Virginia case, Allied Property and Casualty Insurance Co. v. Zenith Aviation,[11] a policyholder’s policy contained a pollution exclusion, which stated the following:
B. Exclusions
2. We will not pay for loss or damage caused by or resulting from any of the following:
l. Discharge, dispersal, seepage, migration, release or escape of “pollutants” unless the discharge, dispersal, seepage, migration, release or escape is itself caused by any of the “specified causes of loss”. But if the discharge, dispersal, seepage, migration, release or escape of “pollutants” results in a “specified cause of loss”, we will pay for the loss or damage caused by that “specified cause of loss”.
Accordingly, to the extent that a purported pollution event is “caused by” or “results in” a “specified cause of loss,” the pollution exclusion does not apply. Smoke was a “specified cause of loss” under the policy, but it was not defined:
. . . fire; lightening; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire-extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.
Allied attempted to apply a broad meaning to the pollution exclusion, but a very narrow meaning to smoke.[12] Allied asserted that the smoke exception did not apply because smoke requires the existence of combustion. To support its position, Allied relied on Wikipedia’s definition of “smoke.” The court found Allied’s position unconvincing and instead relied on a variety of dictionary definitions that defined smoke as “the visible phenomenon of particulate suspended in a gas.” The court recognized that smoke did not necessary require “combustion” and held that by the policy’s express terms, the policyholder’s damages were covered under the policy.
The Eastern District Court of Virginia’s approach was not novel. Courts have consistently relied on the dictionary definitions of undefined terms to understand how insurance contracts should be interpreted. Courts have specifically reviewed dictionary definitions of “smoke” to understand how it should apply to the pollution exclusion.[13] What’s more, a Massachusetts court already analyzed the very same pollution exclusion and also found coverage, based on similar facts.[14]
In Zenith Aviation, Judge Trenga held that there was coverage for the policyholder’s loss because “[t]he text and structure of the Policy (including the other ‘specified causes of loss’) are insufficient to conclude that the parties intended to adopt the more narrow definition of ‘smoke’ for the purposes of the Pollution Exclusion.”[15] Rather, “[w]ell-settled principles of Virginia insurance law . . . require the Court to adopt the interpretation favoring coverage; ‘smoke’ as used in the Policy refers to any visible suspension of particles in a gas, including the concrete dust suspended in ambient air in [the policyholder]’s warehouse.”[16]
Coverage grants. When faced with what is seemingly straightforward, plain language in a coverage grant, unlike policy exclusions, insurance companies may attempt to apply much more narrow meaning to various words and phrases.
Debris removal. Consider an insurance policy that provides coverage for personal property and business interruption, but the policy does not provide separate coverage for the building where the personal property is stored. The policy contains the following provision:
4. Additional Coverages
a. Debris Removal
(1) Subject to Paragraphs (2), (3) and (4), we will pay your expense to remove debris of Covered Property and other debris that is on the described premises, when such debris is caused by or results from a Covered Cause of Loss that occurs during the policy period. The expenses will be paid only if they are reported to us in writing within 180 days of the date of direct physical loss or damage.
If a policyholder suffered damage to its personal property, such that it became necessary to clean both its property and the floor of the warehouse where the property is kept, would the above provision provide coverage for the floor clean-up costs? The simple answer is yes. While the “Building” itself may not be covered, the associated clean-up costs are.
“Property insurance policies often contain an express provision insuring the costs and expenses associated with cleaning up and removing debris on the policyholder’s property resulting from damage to that property.”[17] “The rationale for such coverage is straightforward: the property damage cannot be repaired or replaced until any debris is removed.”[18] Moreover, “[t]he expenses need not be incurred directly or solely to remove damaged covered property itself. Expenses that are necessarily incurred as a result of the removal efforts also are insured.”[19]
Although “debris” may be undefined in a policy, its plain and ordinary meaning is clear. For example, it is defined by Merriam-Webster’s Dictionary as follows: “1. the remains of something broken down or destroyed; 2. an accumulation of fragments of rock.” Debris removal coverage applies to “debris of Covered Property” and “other debris.”
Courts have rejected the “no building coverage” argument, finding instead that debris removal provisions provide coverage for removal of debris necessary to remediate the covered property. For example, in McGrail Associates, Inc. v. Universal Underwriters, Inc., the replacement of a basement tank required the insured “to dig a trench next to the foundation wall and to cut through that foundation wall.”[20] The insurer argued that no coverage existed under the “Buildings Coverage” provision. The court held that the “ordinary and reasonable meaning” of the debris removal provision provided coverage for “removal . . . of parts of the foundation necessary for replacement of the [underground] tank,” regardless of whether there was direct coverage for the foundation under the “Buildings Coverage” provision.[21]
There is nothing ambiguous about the debris removal provision, and its plain and ordinary meaning governs—yet, insurance companies have still attempted to minimize their liability by narrowly interpreting this coverage grant.
Mitigation coverage. Most, if not all, policies contain an explicit provision requiring a policyholder to mitigate its damages in the event of a loss.[22] For example, policies often have a provision requiring a policyholder to
[t]ake all reasonable steps to protect the Covered Property from further damage, and keep a record of your expenses necessary to protect the Covered Property, for consideration in the settlement of the claim. This will not increase the Limit of Insurance. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss. Also, if feasible, set the damaged property aside and in the best possible order for examination.
Some courts have held, to the chagrin of insurance companies, that such policy language requires insurers to pay the mitigation expenses incurred by a policyholder, when such expenses are necessary to prevent further damage to covered property.[23] The insured can “recover expense items that can be shown to have, or to have likely, inured to the insurer’s own benefit by preventing or minimizing a loss for which the insurer would have been liable.”[24] Therefore, costs that an insured is required under an insurance policy to incur to “protect the Covered Property from further damage” must be reimbursed by the insurer.[25]
Under general contract interpretation principles, where a policy requires a policyholder to prevent further damage to its personal property, an insurance company should reasonably reimburse those mitigation costs as covered losses—whether an insurance company will do so on its own accord is an entirely different story.
Fight for Your Coverage Rights
Insurance coverage is an asset, and to secure that asset, policyholders spend a significant premium and often significant time. When faced with a catastrophic loss, however, policyholders do not always get the coverage they bargained for when it comes time for an insurance company to pay out on a claim. Even after paying significant annual premiums and having a clean loss record for years, a stunning number of policyholders decide not to pursue a claim after receiving a denial, no matter how incomplete or baseless. A policyholder’s expectation of what its insurance policy covers is important, and commonsense meanings of words and phrases should be applied. When an insurance company tries to erroneously limit its obligations (either by applying broad or narrow meaning to terms and phrases when it suits the company), fails to consider all available coverages under a policy, or neglects to review exceptions to policy exclusions, policyholders should consider fighting back.
Joseph D. Jean and Janine M. Stanisz are with Pillsbury Law, New York City.
[1] Pa. Nat’l Mut. Cas. Ins. Co. v. Block Roofing Corp., 754 F. Supp. 2d 819, 823 (E.D. Va. 2010); Hartford Underwriter’s Ins. Co. v. Estate of Turks, 206 F. Supp. 2d 968, 976 (E.D. Mo. 2002); Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 175 (1992) (under New Jersey law, “an insurance policy should be interpreted according to its plain and ordinary meaning”).
[2] Block Roofing Corp., 754 F. Supp. 2d at 823; Voorhees, 128 N.J. at 175 (“When the meaning of a phrase is ambiguous, the ambiguity is resolved in favor of the insured and in line with an insured’s objectively-reasonable expectations.” (citation omitted)).
[3] Block Roofing Corp., 754 F. Supp. 2d at 823.
[4] Am. Reliance Ins. Co. v. Mitchell, 238 Va. 543, 547 (1989); Hartford Underwriter’s Ins. Co., 206 F. Supp. at 975 (“Where provisions of a policy are ambiguous, they are construed against the insurer.”).
[5] Mitchell, 238 Va. 543 at 547.
[6] Mitchell, 238 Va. 543 at 547; see also U.S. Fid. & Guar. Co. v. Annunziata, 67 N.Y.2d 229, 232 (1986) (an insurance policy “must, of course, be construed in favor of the insured,” and any ambiguities “are to be resolved in the insured’s favor and against the insurer”); Hastings Dev., LLC v. Evanston Ins. Co., 701 F. App’x 40, 42–43 (2d Cir. 2017).
[7] See Morrow Corp. v. Harleysville Mut. Ins. Co., 110 F. Supp. 2d 441, 451 (E.D. Va. 2000) (“An ambiguous term must be accorded the meaning that a reasonable person in the position of the insured would have given to the term and that is consistent with the reasonable expectations of a person in the insured’s position, for it is well-settled in Virginia and in all other jurisdictions that ambiguities in meaning are resolved in favor of the insured.”); Gen. Star Indem. Co. v. Driven Sports, Inc., 80 F. Supp. 3d 442, 461 (E.D.N.Y. 2015) (“This Court is obliged, under New York law, to interpret the Policy as it is written in keeping with an average insured’s reasonable expectations[.]”).
[8] See Metro. Apartments v. Nat’l Sur. Corp., No. 1:14-CV-107, 2016 U.S. Dist. LEXIS 123215 (E.D. Va. Mar. 22, 2016) (enforcing insured’s appraisal award because the insurer’s “position would effectively rewrite the Policy to expand the exclusions enumerated in the Policy”); ABM Mgmt. Corp. v. Harleysville Worcester Ins. Co., 112 A.D.3d 763, 764 (N.Y. App. Div., 2d Dep’t 2013) (“the plain language of the policy is determinative, [and a court] cannot rewrite the agreement by disregarding that language”) (alteration in original).
[9] Marc J. Shrake, “The Causation Question in Property Insurance,” in 5 New Appleman on Insurance Law Library Edition § 44.06 (Jeffrey E. Thomas et al. eds., 2018) (“An all risk policy provides a special type of coverage extending to risks not usually covered under other insurance. Coverage is available for all loss . . . unless the policy contains a specific provision expressly excluding the loss from coverage.” (internal quotation marks omitted)); Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 41 (2d Cir. 2006) (“Under an all-risk policy, losses caused by any fortuitous peril not specifically excluded under the policy will be covered.”); Int’l Multifoods Corp. v. Commercial Union Ins. Co., 309 F.3d 76, 83 (2d Cir. 2002) (holding that an insured making a claim under an all-risk policy has a “relatively light” initial burden to establish a prima facie case for recovery); Scottsdale Ins. Co. v. Lynnhaven Inlet Fishing Pier Corp., 113 F. App’x 526, 528 (4th Cir. 2004) (all-risk policies cover “all risks of direct physical loss unless specifically excluded or limited by the policy terms”).
[10] See, e.g., Freeway Drive Invs., LLC v. Emp’rs Mut. Cas. Co., No. 16-12677, 2017 U.S. Dist. LEXIS 207165, at *4 (E.D. Mich. Dec. 18, 2017) (concluding that the policy was “all risk” because it covered “direct physical loss unless the loss is excluded or limited”); Easy Corner, Inc. v. State Nat’l Ins. Co., 154 F. Supp. 3d 151, 154 (E.D. Pa. 2016) (same); Gerawan Farming Partners, Inc. v. Westchester Surplus Lines Ins. Co., No. CIV F 05-1186 AWI DLB, 2008 U.S. Dist. LEXIS 4511, at *13 (E.D. Cal. Jan. 4, 2008) (same).
[11] Allied Prop. & Cas. Ins. Co. v. Zenith Aviation, Inc., 336 F. Supp. 3d 607 (E.D. Va. 2018).
[12] See Zenith Aviation, Inc., 336 F. Supp. 3d at 613–14.
[13] See Farmers Elevator, Inc. v. Hartford Fire Ins. Co., No. A-09-005, 2009 Neb. App. LEXIS 189, at *5 (Neb. Ct. App. Nov. 3, 2009) (“The word ‘smoke’ has been defined as ‘the visible vapor and gases given off by a burning or smoldering substance,’ ‘a system of solid particles suspended in a gaseous medium,’ or ‘to send forth steam or vapor, dust, or the like.’ Webster’s Encyclopedic Unabridged Dictionary of the English Language 1345 (1989).”); see also Williams v. Emp’rs Mut. Cas. Co., 845 F.3d 891, 906 (8th Cir. 2017) (taking “judicial notice of the fact that smoke is a mixture of solid and liquid participles suspended in gas”).
[14] See Andrew Robinson Int’l, Inc. v. Hartford Fire Ins. Co., No. 030353, 2006 Mass. Super. LEXIS 236 (Mass. Super. Ct. Feb. 6, 2006).
[15] Zenith Aviation, Inc., 336 F. Supp. 3d at 613–14.
[16] Zenith Aviation, Inc., 336 F. Supp. 3d at 614.
[17] See Michael Raibman & Paul Walker-Bright, 5 New Appleman on Insurance Law Library Edition § 45.01A (LexisNexis, database updated 2018).
[18] Raibman & Walker-Bright, New Appleman on Insurance Law Library Edition, supra note 17, § 45.01A.
[19] Raibman & Walker-Bright, New Appleman on Insurance Law Library Edition, supra note 17, § 45.01A (emphasis added).
[20] McGrail Assocs., Inc. v. Universal Underwriters, Inc., No. 995671, 2001 Mass. Super. LEXIS 468, at *5 (Mass. Super. Ct. Oct. 2, 2001).
[21] McGrail Associates, 2001 Mass. Super. LEXIS 468, at *6. See also Manduca Datsun, Inc. v. Universal Underwriters Ins. Co., 106 Idaho 163, 168 (Ct. App. 1984) (holding that the plain meaning of a debris removal provision covered the “cost of clearing the fire site of debris so reconstruction can begin,” including “any asphalt damage actually and necessarily caused by [the use of heavy equipment during] debris removal”).
[22] See Raibman & Walker-Bright, 5 New Appleman on Insurance Law Library Edition, supra note 17, § 45.02(1) (“Courts have long held that policyholders have a common law duty to mitigate covered losses by taking reasonable steps to prevent loss and to preserve property after a loss.”); see also Spurgeon v. Certain Underwriters at Lloyd’s, London, No. 3:05-cv-100, 2008 U.S. Dist. LEXIS 146, at *3 (N.D. W. Va. Jan. 2, 2008) (“Thus, a common law duty on the part of the insured to mitigate covered losses, either by preventing them or minimizing their extent, and a corresponding common law right to recompense from the insurer for the cost of these efforts have often been recognized, even though the items involved may be ones as to which there is no express policy coverage.”).
[23] See, e.g., Phoenix Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 829–31 (S.D. Iowa 2015) (insurer should be liable for any costs incurred in protecting damaged property from “further damage. . .”); Raibman & Walker-Bright, 5 New Appleman on Insurance Law Library Edition, supra note 17, § 45.02(1).
[24] Steven Plitt et al., 12A Couch on Insurance § 178:10 (Westlaw, database updated June 2018); see also Raibman & Walker-Bright, 5 New Appleman on Insurance Law Library Edition, supra note 17, § 45.02(6) (“In other words, the intent must be to prevent or reduce a loss that the insurer would be liable to insure.”).
[25] See Spurgeon, 2008 U.S. Dist. LEXIS 146, at *4 (holding that insurer was liable under protection of property clause for expenses incurred by insured in storing damaged tractor-trailer pending outcome of the claim); see also Slay Warehousing Co. v. Reliance Ins. Co., 471 F.2d 1364, 1369 (8th Cir. 1973) (holding that insurer was liable to insured for insured’s efforts and costs in protecting a third party’s property that was stored in the insured’s warehouse from damage due to exposure following the collapse of the warehouse wall); Am. Fin. Corp. v. Seneca Ins. Co., 850 N.E.2d 1114, 1116 (Mass. App. Ct. 2006) (holding that insurer was liable under protection of property clause for expenses incurred by insured in hiring security team to protect its building from vandalism and further fire damage after fire originally caused extensive damage to premises).