Why Words of Limitation Cannot Be Added Under the Guise of Policy Construction
/Why Words of Limitation Cannot Be Added Under the Guise of Policy Construction
By David A. Gauntlett*
Introduction
A growing trend in insurance denials (and subsequent litigation) is arguing that policies should be interpreted in a manner belied by the actual language. This runs contrary to governing law, which actually allows policyholders to attack restrictive interpretations by demonstrating that alternative language would have readily achieved the insurer’s preferred reading.[1] A policyholder’s burden is not to promote the most reasonable interpretation. A court must accept any reasonable construction promoted by the policyholder.[2]
Pension Trust Fund v. Federal Insurance Co.
In Pension Trust,[3] the Ninth Circuit had to determine whether the underlying action involved an alleged breach of fiduciary duty that triggered Federal's duty to defend.[4] Federal argued for several coverage limitations, including (1) restricting coverage to fiduciary duties arising out of ERISA and other pension-related laws and (2) only covering claims brought by fiduciary beneficiaries.[5]
The court rejected both arguments, noting that the broad language of the policy could not be circumvented via construction because “the onus was on the drafter of the policy to convey any limitations.”[6] The court emphasized that, as the drafter of the agreement, Federal’s intent was irrelevant; only the insured’s reasonable expectations should be considered when interpreting the scope of coverage.[7]
Why an Insurer’s Reasonable Expectations Are of No Moment
In United Fire & Cas. Co. v. Prate Roofing & Installations, LLC,[8] the Chief Judge of the Seventh Circuit wrote a dissent that failed to properly adhere to principles of coverage law. She argued that the underlying complaint evidenced no potential coverage. An agency theory of liability was required for coverage, and she asserted that the complaint only contained “boilerplate allegations of agency and general assertions of construction negligence.”[9]
Her dissent highlighted the low price and industry customs associated with the endorsement providing coverage for vicarious liability. She concluded that, based on those factors, the policyholder should not expect coverage because they “got what they paid for.”[10] In short, she viewed potential coverage through the lens of the insurer’s expectations.[11] Notably, at no point in her analysis did she refer to or engage with the actual policy language to justify her conclusion.
That conclusion also contradicted established Illinois coverage law, which requires insurers to defend any allegation potentially falling with the policy’s coverage regardless of how poorly articulated they might be.[12] The majority opinion highlighted this principle:
Nothing in the estate's allegations made it impossible for Prate Roofing to be held liable for actions or omissions of [the other defendants]. The estate's allegations against Prate Roofing were phrased so as to straddle the line between holding it liable for its own actions and omissions and holding it vicariously liable . . . . That straddle should not be surprising, especially at the pleading stage of the estate's lawsuit.[13]
The majority also relied on decisions from Illinois appellate courts, noting that federal courts traditionally follow the conclusions of such state courts absent guidance from the state’s highest court.[14] The dissent, by contrast, recognized two Illinois Appellate decisions under virtually identical facts but chose not to follow them on the belief that the Illinois Supreme Court would disagree with their conclusions.[15]
State Supreme Court Certification as a Remedy
Many improper decisions stem from insurance disputes often being litigated in federal court, where judges make their best guess as to how a state’s supreme court would rule on the issues. This leads to mistaken analysis like that of the Prate Roofing dissent. One straightforward solution to this problem would be to simply stop guessing.
An example of this process occurred in Yahoo! Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa.[16] There, the Ninth Circuit was uncertain how to rule on an issue of California law and certified the following question to the California Supreme Court:
Does a commercial liability policy that covers “personal injury,” defined as “injury . . . arising out of . . . [o]ral or written publication . . . of material that violates a person's right of privacy,” trigger the insurer's duty to defend the insured against a claim that the insured violated the Telephone Consumer Protection Act by sending unsolicited text message advertisements that did not reveal any private information?[17]
Key to the resolution of this issue was whether “‘publication of material that violates a person’s right of privacy’ applies to the right to secrecy, seclusion, or both.”[18]
Rather than guessing and potentially misinterpreting California law, the Ninth Circuit responsibly asked for assistance. Unfortunately, the response did not come for over three years.[19] To avoid such delays, a streamlined system should be made for Federal Courts of Appeals to provide direct access to certification of an issue to the states’ supreme courts for review. To avoid additional delays, the federal court should agree in advance to rule in accordance with the result of certification. If the federal case requires reassessment of underlying facts based on the state court decision, it can be remanded to the district court to address such facts within a 90-day period.
Conclusion
There is no doctrine that implements an “insurer’s reasonable expectations.” As the drafter of the policy, insurers bear the responsibility to write policy language that reflects coverage they are prepared to extend to their policyholders if a potentially covered claim is asserted against them. Policy construction rules help alleviate uncertainty caused by ambiguous policy language or provisions that render some portions of the policy language superfluous or illusory. If insurers wish to limit their coverage, they need to write exceptions to coverage that are intelligible to the policyholders to whom they wish to sell their policies rather than hope that courts will rewrite them after a claim arises.
*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed. Appx. 596, 601 n.4 (7th Cir. (Wis.) 2007) (“We note, however, that if St. Paul intended the Policy’s “advertising injury offense” definition to include only disparaging comparison in which the other producer’s product is named, it could have elected to draft its definition more narrowly.”)
[2] Lebas Fashion Imports of USA, Inc. v. ITT Hartford Ins. Group, 50 Cal. App. 4th 548, 566 n.13 (Cal. Ct. App. 1996) (“Those draftsmen had it within their power to make clear the full scope of the coverage offered as well as any limitations they wished to place thereon. Their failure to do so cannot justify our rejection of an insured’s objectively reasonable expectations as to coverage which arise from the words chosen by the drafters.”)
[3] Pension Tr. Fund v. Fed. Ins. Co., 307 F.3d 944 (9th Cir. (Cal.) 2002).
[4] The policy language provided coverage for “any claims first made against the Insured during the Policy Period as a result of any actual or alleged Breach of Fiduciary Duty committed by any Insured.” Id. at 949. “Breach of Fiduciary Duty” was defined as “the violation of any of the responsibilities, obligations or duties imposed upon fiduciaries by the Employee Retirement Income Security Act of 1974 or amendments thereto or by the common or statutory law of the United States of America or of any state or other jurisdiction therein.” Id. at 950.
[5] Id. at 950, 953.
[6] Id. at 953.
[7] Id. at 950 (“It was reasonable for PTF to expect that fiduciary duties arising out of its commercial transactions as an investment trust would be covered under the policy. The burden was on Federal to clearly describe any limitations on its broad grant of coverage, and it could have easily drafted the provision to plainly limit coverage to ERISA-type fiduciary responsibilities.”)
[8] United Fire & Cas. Co. v. Prate Roofing & Installations, LLC, 7 F.4th 573 (7th Cir. (Ill.) 2021).
[9] Id. at 586–88 (The “boilerplate” allegations included the assertion that the tortfeasor acted “individually and through its agents,” and the negligence claims included allegations that Prate “participated in coordinating the work being done and designated various work methods”; “schedule[d] work”; “had the authority to stop the work”; “had a duty to exercise reasonable care in the control of [the] construction site”; and “[f]ailed to supervise the work.”)
[10] Id.
[11] Id. at 590 (“When United Fire added this rider to All Seasons' policy, it did not agree to assume any new risks arising from Prate's own conduct.”)
[12] Ill. State Bar Ass'n Mut. Ins. Co. v. Cavenagh, 368 Ill. Dec. 55, 64 (Ill. App. 2012) (“[T]he false or frivolous nature of the third-party complaint does nothing to advance the [insurer’s] duty-to-defend [argument]. As a general matter, when the underlying complaint alleges facts within or potentially within the policy's coverage, the insurer's duty to defend arises even if the allegations are groundless, false or fraudulent.”)
[13] Prate Roofing, 7 F. 4th at 582.
[14] Id. at 583.
[15] Id. at 589 (citing decisions in Pekin Ins. Co. v. Centex Homes, 411 Ill. Dec. 143 Ill. App. 2017) and Pekin Ins. Co. v. Lexington Station, Ltd. Liab. Co., 416 Ill. Dec. 572 (Ill. App. 2017) and labeling them as “poorly reasoned.”)
[16] Yahoo! Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 913 F.3d 923 (9th Cir. (Cal.) 2019).
[17] Id. at 926.
[18] Id. at 925.
[19] Yahoo Inc. v. Nat'l Union Fire Ins. Co. etc., 14 Cal. 5th 58 (2022).