Entire Policy Must Be Read – Not Just Selected Parts
Since Tenth Circuit Judge Gorsuch has been submitted to the U.S. Senate to be confirmed to sit on the U.S. Supreme Court I thought it would be interesting to review one of his insurance decisions. In Western World Ins. Co. v. Markel American Ins. Co., Tenth Circuit, 677 F.3d 1266 (2012) Judge Gorsuch recognized and applied, with humor and skill, one of the most important rules of insurance interpretation: read the entire policy. I look forward to his opinions from the Supreme Court.
Haunted houses may be full of ghosts, goblins, and guillotines, but it’s their more prosaic features that pose the real danger. Tyler Hodges found that out when an evening shift working the ticket booth ended with him plummeting down an elevator shaft. But as these things go, this case no longer involves Mr. Hodges. Years ago he recovered from his injuries, received a settlement, and moved on. This lingering specter of a lawsuit concerns only two insurance companies and who must foot the bill.
The problems began at the front door of the Bricktown Haunted House in Oklahoma City. There Mr. Hodges was working the twilight hours checking tickets as guests entered. When his flashlight failed Hodges was aiming for the freight elevator, where (imprudently, it turns out) spare flashlights were stored. When he reached the elevator, Mr. Hodges lifted the wooden gate across the entrance and stepped in. But because of the brooding darkness, Mr. Hodges couldn’t see that the elevator was on a floor above him and he crashed 20 feet down the empty elevator shaft.
It is here the insurance companies enter the picture. Mr. Hodges sued Brewer Entertainment, the haunted house’s operator, for various torts. But no doubt wary of liability arising from its occult operation, Brewer had attended well to its insurance needs. It held two separate insurance policies, one with Western World Insurance Company and another with Markel American Insurance Company. Western World had thought far enough in advance to exclude from its haunted house coverage “any claim arising from chutes, ladders, … naked hangman nooses, … trap doors … [or] electric shocks.” But it hadn’t thought to exclude blind falls down elevator shafts, so it admitted coverage and proceeded to defend Mr. Hodges’s suit. Markel, however, balked, refusing to defend or pay any claim.
Western World wants Markel to fork over half the cost it incurred in defending—and eventually settling—Mr. Hodges’s claim. Markel directed the court to an “escape clause” that, it said, allowed it to elude the liability that would otherwise arise from the terms of its policy. Ultimately, the district court agreed with Markel, found the escape clause a viable escape hatch, and entered summary judgment in Markel’s favor—a decision, naturally enough, Western World now appeals.
The Oklahoma doctrine of equitable contribution, which “apportion[s] a loss between two or more insurers who cover the same risk so that each pays his fair share of a common obligation, and one co-insurer does not profit at the expense of the others. The only issue in this appeal, the parties agree, is whether the escape clause lets Markel escape liability.
Viewed in isolation, the clause seems to suggest as much. It provides that “[t]his insurance shall not apply to any entity that is already an insured under any other insurance provided by any company….” This seems a clear statement (or as clear a statement as one is likely to find in a densely drafted commercial insurance contract) disclaiming liability in the very circumstances we face.
But like so much else about this case, things are not always as they first appear. However appealing in isolation, Markel’s argument faces serious problems when viewed in context. The escape clause does not appear in Markel’s general commercial liability policy. Instead, the clause was added by a later endorsement.
If the immediate context casts a shadow over Markel’s reading of the escape clause, surrounding context darkens it. In Section IV of Markel’s policy there is a provision conspicuously titled “Other insurance,” addressing exactly the subject its heading suggests. The provision states (subject to various exceptions not relevant here) that Markel’s insurance provides “primary” coverage. And it adds that, if another insurance policy is also “primary” (as Western World’s is), the two carriers will share the cost of coverage according to a specified formula—either in equal shares or pro rata based on policy limits, all depending on the contents of the other policy.
This poses a problem for Markel because its reading of the escape clause renders its own “Other Insurance” provision a dead letter. Under Western World’s interpretation of the contract, Section IV’s “Other Insurance” provision states the general rule that Markel will provide co-insurance and the escape clause provides a limited exception for entities insured under Section II paragraph 2—certainly a plausible (if not metaphysically compelled) reading, one that at least gives some effect to every provision in the policy. Yet under Markel’s interpretation of the contract, the escape clause absolves it of all liability when another insurer is lurking about—an interpretation rendering Section IV’s “Other Insurance” provision more apparitional than corporeal. And that has to be a serious strike against Markel’s interpretation given contract law’s abhorrence of words without meaning and other superfluities. The whole of a contract is to be taken so as to give effect to every part, if reasonably practicable.
Even viewed in its best light, the applicability of the escape clause to an entity, like Brewer, insured under Paragraph 1 is far from clear. And in these circumstances, Oklahoma contract law tells us the tie must go to the insured. If (as here) the relevant limiting policy provisions are “unclear or obscure,” then the objectively reasonable expectations of a person “in the position of the insured” control. Put differently, when a policy’s escape hatch is less a clearly marked exit than it is a hidden trap door, the reasonable expectations of an insured who has read and become familiar with the policy language supplies the rule of decision. The plain terms of the contract are always the best evidence of the parties’ intentions and always control. But when the terms of the contract are unclear, or when the contract is susceptible to two reasonable interpretations, it is the expectations of the insured that control.
Applying the reasonable expectations doctrine to this case, we have no doubt a reasonable insured in Brewer Entertainment’s shoes would have expected coverage from Markel. Expected coverage in light of Markel’s general policy language promising Brewer coverage for accidents just like this one. Expected coverage in light of Section IV’s promise that Markel will shoulder the burden of co-insurance. Markel’s five page letter to Brewer explaining its decision to deny coverage rehearsed many other arguments—arguments it gave up the ghost on long ago—but the letter never once mentioned the escape clause. In fact, based upon the record the parties have presented to us it appears the first time Markel itself unearthed the escape clause from the depths of the contract and invoked it as a potential basis for evading liability was only after this litigation began.
Of course, few rules lack exceptions. And it’s at least conceivable Oklahoma might someday choose to create an exception to the reasonable expectations doctrine for cases where (arguably as here) both parties to the insurance contract are sophisticated and able to vindicate their interests without any extra help. But no such exception yet exists. When sophisticated insurers (like Markel) can much more easily and inexpensively avoid the sting of the reasonable expectations doctrine by the expedient of drafting clear and plain escape clauses that courts can enforce those that are not clear and plaint cannot be enforced.
Circuit Judge Gorsuch applied a rule of insurance contract interpretation carefully, correctly and with good humor. He placed light upon the haunted house and the policies insuring the risks of loss at the haunted house he made clear the need for an insurer to draft clear and unambiguous language and be careful when adding an endorsement that changes a contract and make some terms in other parts of the policy useless and inapplicable. Writing an insurance policy is hard and changes by endorsement, as did Markel, must be done carefully and avoid ambiguities or superfluities.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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