Is the Exclusion Identified on the Declarations Pages?

Are policy exclusions that are not identified on the declarations pages of a policy enforceable under New Jersey law? There is an emerging trend in New Jersey courts that when an exclusion is not listed on a personal line policy’s declarations pages, it may be unenforceable if the exclusion conflicts with the insured’s reasonable expectations of coverage.

Generally, the doctrine of “reasonable expectations” holds that an insured’s reasonable expectations upon reading the policy should guide interpretation. The doctrine can, and often does, conflict with the rule that policies are construed as they would be perceived by a reasonable person in the position of the insured. This is because the doctrine of reasonable expectations calls for a determination of the insured’s subjective expectations regardless of whether they are consistent with that of a reasonable person.

A recent New Jersey case, Dela Vega v. Travelers Insurance Co., is the latest development in this pattern muddying the waters of New Jersey law on the issue. After an auto accident, an insured sought coverage from the insured’s automobile carrier. The insurer denied coverage based on an intra-family exclusion listed in the policy. The exclusion barred coverage for injuries caused by the insured to family members. Relying on a unique series of New Jersey cases, the court determined that the exclusion was unenforceable because it “was a hidden pitfall in [the] policy contrary to [the insured’s] reasonable expectations as to coverage[.]”

Dela Vega’s and its predecessors’ holdings are concerning. First, these cases violate established New Jersey law that contracting parties have read and understood the terms of the policy upon receiving it.

Second, the cases undermine the generally accepted way that insurance contracts work. Although the declarations pages may summarize certain key pieces of coverage, they are not the full terms of the policy. The result of this line of case law is that insurers may now carry the burden of managing their insureds’ expectations. Specifying exclusionary language on their policies’ declarations pages might help insurers manage an insured’s “reasonable expectations,” but such action is impractical and hardly foolproof.

Third, the cases involve personal lines policies, including auto policies, and insureds who are purportedly unsophisticated in insurance and cannot understand the key terms of the policy, except for the declarations pages. That factual scenario has little bearing on insurance policies issued to sophisticated policyholders, including by surplus lines insurers, represented by brokers who assist insureds in understanding what policies cover and often negotiate the contours of coverage. The New Jersey Supreme Court has held that the reasonable expectations doctrine has minimal relevance when interpreting policies issued to sophisticated insureds.

History of the “Reasonable Expectations” Approach to Exclusions

The doctrine applied in Dela Vega was first established in the mid-1990s, when the New Jersey Superior Court Appellate Division decided Lehrhoff v. Aetna Casualty and Surety Co.

That case involved an automobile policy. The insured made a claim for coverage following an accident in which the named insured’s adult son was hit by an unidentified car. Although the son was listed as a driver on the policy’s declarations pages, he did not qualify as a covered “family member” because he did not reside with his parents. Subsequently, the son sued the insurer, arguing that he reasonably expected to be covered because his name appeared on the declarations pages. The New Jersey Supreme Court Appellate Division agreed.

The court held that an insured’s “reasonable expectations of coverage raised by the declaration page cannot be contradicted by the policy’s boilerplate unless the declaration page itself clearly so warns the insured.” The court reasoned that, because most insureds do not read and may not understand the terms of insurance policies and because the declarations pages are the only part of a policy that is specifically tailored to each insured, it is the section of the policy that sets an insured’s expectations regarding coverage. According to Lehrhoff, if an exclusion is not listed in the declarations pages or is contradicted by specific language in the declarations pages, it will not apply unless the insured is given a clear warning explaining otherwise.

Shortly after Lehrhoff was decided, the New Jersey Supreme Court limited Lehrhoff’s reach in Zacarias v. Allstate Insurance Co. The Zacarias court held that “we do not, however, interpret Lehrhoff to require an insurer to include an intra-family exclusion on the policy’s declarations sheet in all cases.” Instead, the Zacarias court held that failure to present an exclusion on the declarations pages could potentially make an otherwise unambiguous policy ambiguous. But that was not the case in three potential circumstances: where (1) the declarations pages stated that coverage was subject to other policy provisions, (2) the exclusion was unambiguous, and (3) the exclusion was easy to find and identify.

In Zacarias, the court applied the exclusion for the following reasons:

The policy’s language is direct and ordinary. Large and bold type is used, and the contract provisions are clearly spaced. In our view, the [] exclusion does not require an entangled and professional interpretation to be understood. The definitions page clearly describes “insured person” to include any relative living in the household. The policy explicitly disclaims coverage for injuries to insureds.

The court also noted that “the exclusion itself is written in direct and ordinary terms.” So the court held there was “no ambiguity, inconsistency, or contradiction between the declarations sheet and the body of [the] policy.”

Since Lehrhoff and Zacarias were decided, New Jersey courts have been split in their approach. Many courts used the factors outlined in Zacarias and apply unambiguous exclusions by their terms even if not referenced in the policy’s declarations pages. For example, in Evanston Insurance Co. v. A&R Homes Development, LLC, a subcontractor’s employee working on a construction project fell off construction equipment, suffered injuries, and subsequently sued multiple parties, including the general contractor. The general contractor’s insurer initially provided a defense but later sought a declaratory judgment that no defense or coverage was owed because the policy contained an exclusion for bodily injury to subcontractors. In disputing coverage, the injured employee argued that he had a reasonable expectation of coverage because the declarations pages of the insurer’s policy did not refer to any exclusion limiting the coverage. The appellate court affirmed the lower court’s ruling that the declarations pages “did not create any reasonable expectations of coverage” and the exclusion’s language was “clear, unambiguous, and thus, enforceable.” The court also noted that the declarations pages stated that coverage was subject to other policy provisions and the form schedule noting the endorsement directly followed the declarations pages.

Similarly, in Katchen v. Government Employees Insurance Co., the court reversed a lower court’s ruling that an exclusion not listed on the policy’s declarations pages did not bar coverage. In Katchen, the plaintiff sustained injuries while operating his motorcycle. Although he had insured different motor vehicles on different insurance policies, he submitted claims to all three of his various motor vehicle policies: a motorcycle policy, a commercial auto policy, and a personal auto policy. His personal auto insurer disclaimed coverage based on an exclusion precluding coverage for accidents involving motor vehicles not described in the declarations. The court held that the exclusion unambiguously barred coverage and that an insured’s reasonable expectations “only matter when the court finds the relevant language ambiguous.”

Several other cases also hold exclusions not listed on declarations nevertheless apply to preclude coverage. For instance, the court in Morrison v. American International Insurance Co. concluded that an exclusion applied because (1) it was clear and unambiguous, (2) the language was listed under a clear heading and was not hidden, (3) the typeface of the provision was the same size as other provisions in the policy, and (4) there was no other evidence that the provision was listed with the intent to deceive or mislead the insured. The Shah v. GEICO Insurance Co. court similarly concluded that, even though the declarations pages did not list any exclusion, the applicable provisions were clear and straightforward and the exclusions were clearly stated in a section with the capitalized heading “EXCLUSIONS,” such that “a simple reading of the policy would have alerted plaintiffs to this exclusion.” Although these cases held that the doctrine of reasonable expectations did not create coverage, they fail to address that the reasonable expectations doctrine has created otherwise nonexistent coverage, which is the crux of the issue.

But others, especially more recent rulings like Dela Vega, relied on Lehrhoff to refuse to enforce an exclusion that would otherwise bar coverage. In Dela Vega, the insurer appealed the trial court’s summary judgment order refusing to enforce the policy’s intra-family step-down exclusion, which acts to limit intra-family liability. The appellate court stated that even though the exclusion was unambiguous, it “was not mentioned on the declarations sheet . . . and it was buried in the policy. Thus, we agree with the trial judge the intra-family step-down here was a hidden pitfall in plaintiff’s auto policy contrary to her reasonable expectations as to coverage, rendering it unenforceable.” Ultimately, the court allowed the wife to recover from her own policy’s liability coverage after she was injured as a passenger when her husband, who drove, caused an accident.

Other cases similarly hold that an exclusion not identified on the declarations pages does not apply. For example, in Long v. Mercury Insurance Group, the court held that an exclusion did not apply because (1) it was not prominently presented in the policy, despite its importance; and (2) the exclusion was ambiguous when compared with other policy provisions addressing the availability of coverage. Similarly, in Pizzullo v. New Jersey Manufacturers Insurance Co., the court held that the exclusion missing from the declarations pages was ambiguous because it directly contradicted specific advice given to the insureds when they purchased the policy. The court proceeded to award the insured “double coverage” because, given the ambiguity, the insured reasonably believed it had purchased “double coverage.” Like the cases applying exclusions not listed on the declarations pages, these cases examine the facts in order to discern the insured’s reasonable expectations.

Discussion

Lehrhoff is not the first court to deviate from existing case law, but the holding is unusual because its reasoning does not offer a satisfying explanation for the deviation. Lehrhoff and its progeny rely on the “reasonable expectations” doctrine to afford coverage that is otherwise excluded by unambiguous policy language. The underlying facts typically involve horrific violence or injuries and personal lines policies issued to individuals. Courts are hesitant to apply those exclusions because doing so can leave injured claimants with no meaningful recovery and because the policyholders are usually unsophisticated individuals.

Lehrhoff puts this concern in action by focusing on the interplay between the insured’s reasonable expectations of coverage and the express policy language on the declarations pages. When the declarations pages do not list the exclusion, the insured can have a reasonable expectation of coverage for a claim otherwise barred by a plain and clear exclusion identified in the policy form, even if the exclusion is unambiguous.

The first problem is how New Jersey courts assess the “reasonable expectations” of insureds. At least some New Jersey courts have reasoned that, due to the highly technical and complex nature of insurance policies, unsophisticated insureds can be expected to read and understand only the declarations pages of a policy, not the entire contract. This reasoning violates one of the basic tenets of contract law—that if a party accepts a contract, it is assumed that the party read and understood it. The holdings of these courts have effectively given insureds carte blanche to ignore policy provisions that bar coverage because they are not identified in the declarations pages, on the excuse that the insureds did not—and were never expected to—understand it.

Even if the reasoning in Lehrhoff and its progeny was sound, the application of the precedent to coverage disputes involving sophisticated insureds contradicts New Jersey precedent that the expectations of sophisticated policyholders should not be afforded any deference. In Nunn v. Franklin Mutual Insurance, the Appellate Division held that the reasonable expectations doctrine was relevant in interpreting a homeowner’s policy but not a commercial policy because “the justification for treating the former [homeowner] more liberally than the latter [business entity] is based upon the relative sophistication of the insureds: a homeowner is a less sophisticated consumer than a commercial insured.” For the same reasons, the New Jersey Supreme Court has held that contra proferentem—the doctrine requiring ambiguities to be interpreted against the insurer as the drafter of the policy—does not apply to sophisticated insureds because they are usually represented by a broker and have relatively equal bargaining power with an insurer.

The second problem with Lehrhoff’s reasoning is the burden it imposes on insurers. Although Lehrhoff itself only requires insurers to “clearly warn” the insured about the potential application of an exclusion, generic caveat language directing the insured to other policy provisions may be deemed by a court to be insufficient if the insured is an unsophisticated individual and not represented by a broker.

The third problem with the trend toward permitting a plaintiff’s reasonable expectations dictate policy terms, even when a policy contains unambiguous terms addressing the issue, is that a plaintiff’s reasonable expectations are highly fact-specific and subject to 20/20 hindsight of the claim. For instance, the Dela Vega court, in determining the plaintiff’s reasonable expectations, addressed claims adjuster communications and communications in the sales process, and it noted that auto policies, unlike home insurance policies, typically do not contain an intra-family step-down provision (a distinction most insureds would not reasonably be aware of). These fact-specific inquiries necessary to determine a plaintiff’s reasonable expectations will only serve to encourage litigation and pressure insurers to settle otherwise uncovered claims when facing the prospect of increased litigation.

Furthermore, although this issue is currently isolated, it is beginning to spread as other jurisdictions have begun to adopt Lehrhoff’s holding. This provides another motivation for insurers to consider revising their policies—to mitigate the effects of Lehrhoff for all exclusionary provisions and to keep other jurisdictions from potentially adopting it.

So what can insurers do in response to the “reasonable expectations” cases? The case law suggests that insurers can present a comprehensive list of every exclusion in a policy in the declarations pages, which is impractical. However, the carrier can ensure that the declarations page clearly and conspicuously directs the policyholder to terms and conditions of the policy form because those terms and conditions, not the declarations page, sets forth the coverage available. Insurers can also ensure that exclusions have the same the font size and headings as other sections of the policy. If coverage litigation occurs, insurers can also take discovery on the insured’s purportedly “reasonable expectations” of coverage to gauge whether the insured had any expectation of the extent and scope of coverage, whether the insured was represented by a broker, and whether the communications between the broker and the insured concern the scope of coverage being procured.

Conclusion

In New Jersey, an insured’s “reasonable expectations” of coverage may trump the clear and unambiguous language of the policy. Despite the New Jersey Supreme Court’s efforts to mitigate the effect of Lehrhoff and its progeny, courts in recent cases are applying its reasoning in personal lines cases and affording coverage for claims that are excluded by unambiguous exclusionary language.