The Problem With Easy to Read Policies

By Making Insurance Companies Write “Easy to Read” Policies Ambiguities Are Created

In an attempt to protect people from insurance companies almost every state has enacted statutes or regulations that require all policies be written in “easy to read” language rather than the precise language used in earlier policies. In so doing the statutes and regulations eliminated hundreds of years of appellate decisions interpreting insurance policies. As a result, insurers writing “easy to read” policies find that courts will interpret them in a way the insurer did not intend.

Preferred Contractors Insurance Company Risk Retention Group, LLC (“PCIC”) appeals the district court’s judgment, entered January 29, 2016, resolving the underlying insurance action in favor of plaintiff-appellee Certified Multi-Media Solutions, Ltd. (“Certified”) and intervenor-plaintiff-appellee St. Paul Fire & Marine Insurance Company, Travelers (“Travelers”) (together, “plaintiffs”). The parties dispute the scope of certain contractual provisions that purportedly limit the amount of insurance coverage provided by PCIC to $10,000.

In Certified Multi-Media Solutions, Ltd., St. Paul Fire & Marine Insurance Company, Travelers, v. Preferred Contractors Insurance Company Risk Retention Group, LLC, United States Court of Appeals, Second Circuit 2017 WL 28419, 16-140-cv (January 3, 2017) the Second Circuit was faced with a dispute over the meaning of the easy to read word “you.”

FACTS

In 2008, non-party Getronics USA Inc. (“Getronics”) hired Certified, an electrical contracting company, to provide electrical services at a shopping mall in the Bronx, New York. Getronics was insured under a commercial general liability policy issued by Travelers. On March 14, 2009, PCIC issued to Certified an insurance policy (the “Policy”) consisting of (1) a commercial general liability policy containing a standard set of provisions and (2) a specific set of provisions known as the Manuscript Policy Provisions, which included Endorsement 23.

On March 19, 2009, non-party Anthony Balzano, an employee of Certified, was injured while performing electrical work at the shopping mall. He sued the mall owner, the lessee of the premises, and the general contractor in New York state court. Every agency and contractor involved sued each other. Certified sought coverage under the Policy for its defense and directed Travelers, which was defending Getronics in litigation, to seek indemnification from PCIC as well. PCIC informed Certified in January 2012 that, pursuant to Endorsement 23 in the Policy, it would provide only up to $10,000 of coverage, rather than the full coverage of $1 million, for the claims arising from Balzano’s injuries.

Certified filed this diversity action against PCIC in September 2014 seeking a declaratory judgment that the Policy provides up to $1 million in coverage and that PCIC is required to defend and indemnify it in the state court litigation. Travelers intervened and sought a declaratory judgment requiring PCIC also to pay its defense and indemnity costs in the state court litigation. In December 2015, the district court awarded summary judgment in favor of Certified, holding that, based on the unambiguous and plain meaning of the Policy, the $10,000 cap on insurance coverage in Endorsement 23 does not apply to the claims arising from Balzano’s injuries. The court entered judgments for Certified and Travelers shortly thereafter.

POLICY WORDING

In this case, the disputed language is contained in the coverage-limiting provisions in Endorsement 23, which is entitled “Action Over”: “Notwithstanding the limit of coverage shown in the Declarations and/or Section III …, $10,000 only is the most we will pay as damages for any and all claims, including any claim for contractual indemnification, arising from or related to any “bodily injury”, “property damage” or “personal injury” sustained by an employee of an insured while injured, harmed or damaged in the scope of such employment. ¶ In any action brought by such employee, if you are impleaded into said action, or if any third party action over is commenced against you, irrespective of the claims or theories set forth therein, the $10,000 limit of coverage as provided in this endorsement shall apply when: ¶ 1. The injury sustained by the employee is a “grave injury” as defined by Section 11 of the New York State Workers’ Compensation Law, as follows: [list of qualifying injuries]; and ¶  2. You are required by contract, regulation or law to be insured under a workers’ compensation policy providing liability coverage for claims arising from injuries to employees. ¶ The words “we” and “our” refer to the company providing this insurance. ¶ The words “you” and “your” refer to the Named Insured shown in the Declarations, and any other person or organization qualifying as a Named Insured under this policy.”

Although the parties agree that the second paragraph in Endorsement 23 does not apply in this action because Balzano did not suffer a “grave injury,” they dispute whether the first paragraph, read in tandem with the second, imposes a $10,000 cap on damages for claims arising from Balzano’s bodily injuries. The crux of the parties’ dispute is whether the phrase “an insured” in the first paragraph extends to the “Named Insured,” which in this case is Certified. PCIC contends that “an insured” includes the “Named Insured,” and that therefore the $10,000 cap applies as Balzano was an employee of Certified. Plaintiffs counter that the phrase “an insured” cannot be read to include the “Named Insured” because such a construction would render the second paragraph superfluous.

ANALYSIS

The district court agreed with plaintiffs, concluding that (1) the plain meaning of the language in the Policy was clear, (2) the Policy used the phrases “an insured” and the “Named Insured” to refer to different sets of entities, (3) the first paragraph in Endorsement 23 applied the $10,000 cap to claims involving an employee of “an insured,” and (4) the second paragraph applied the $10,000 cap to claims involving the “Named Insured.” When the provisions [in an insurance contract] are unambiguous and understandable, courts are to enforce them as written.

The district court’s reading makes sense.

The first paragraph of Endorsement 23 covers claims arising from injuries or property damage sustained “by an employee of an insured,” while the second paragraph applies “if you are impleaded into said action” or “if any third party action over is commenced against you.” As noted, “you” refers to the “Named Insured shown in the Declarations,” which is Certified. The use of “you” indicates that the second paragraph applies specifically to Certified, while the first paragraph applies generically to any insured. In addition, throughout the Policy there are references to the “Named Insured,” “Insured,” and “Named Insured and/or Insured,” suggesting that the two are distinct and not the same entities.

As the district court concluded, PCIC’s reading of the Policy would render the second paragraph superfluous. If “an insured” in the first paragraph included the Named Insured, there would be no need for the second paragraph. And PCIC’s reading would create a contradiction, as the first paragraph would impose a $10,000 cap with respect to Certified generally, while the second paragraph would impose a $10,000 cap with respect to Certified only when there was a “grave injury.” Plaintiffs’ reading of the Policy avoids this contradiction and gives ready effect to both paragraphs in Endorsement 23.

Accordingly, because Balzano was an employee of Certified and did not suffer grave injuries, the $10,000 cap did not apply to claims arising from his injuries and plaintiffs are entitled to up to $1 million in coverage under the Policy.

ZALMA OPINION

The Second Circuit read the policy as written and concluded that “you” meant only the named insured and that although a named insured is “an insured” it can only be dealt with as a named insured and not “an insured.”  The lesson learned is that an insurer must be very careful when writing an insurance policy. It is hard but because PCIC was not careful in preparing the wording its exposure increased by $990,000.

ZALMA-INS-CONSULT                      © 2017 – Barry Zalma

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 theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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