An Exclusion That Is Interpreted Differently
The purpose of the unattended auto exclusions is twofold:
- to curb what is called “moral hazard” and
- to limit coverage in high-risk settings even when there is no moral hazard.
Moral hazard refers to the effect of insurance in causing the insured to relax the care he takes to safeguard his property because the loss will be borne in whole or part by the insurance company. Even if there were no moral hazard, an insurer might want to exclude coverage in especially risky situations; more precisely, the insured might agree to accept less coverage in exchange for a reduced premium.
Jewelers, and their counsel, must be aware that the jewelers block policy, although it still insures against almost all risks of physical loss, insurers will not take certain specified risks. Because of the risks attendant on high value property, the jewelers block policy contains a strict exclusion concerning theft losses from vehicles.
For example, a jeweler traveling with a case full of diamonds stops at a self-service gas station to fill his car with gasoline. He locks his car, leaves his case in the car, and walks fifty feet to the attendant to hand in his credit card. As he turns to return to his car, he sees a thief break the window of his car, snatch the case, and run away. The jeweler confidently reports the theft to his jewelers block insurer. He is shocked to learn that the loss is not insured.
The clause comes in various guises, including the following examples:
Unattended Auto — We do not cover theft of property in or on a vehicle that is not attended. An attended vehicle has a person actually in or on the vehicle. This person must be you, your employee or a person whose sole duty is to attend the vehicle. Jewelers Mutual Insurance Company Jewelers’ Block Policy.
This Policy does not insure loss of or damage to property:
(i) while in or upon any automobile, motorcycle or any other vehicle unless, at the time the loss or damage occurs, there is actually in or upon such vehicle, the Assured, or a permanent employee of the Assured, or a person whose sole duty it is to attend the vehicle. Lloyd’s for O(L) (U.S.A.) NMA 2612 (9/3/95). Form approved by Lloyd’s Underwriters’ Non-Marine Association Limited.
The case law on the subject is not extensive. The case law that exists, however, almost universally supports the exclusion and adopts the positions taken by the insurers. That the exclusion in a theft policy for loss from an unattended and unlocked vehicle is proper, has been recognized in insurance policies and insurance law since before the invention of the automobile.
In E.M.M.I. Inc. v. Zurich American Insurance Co., 84 P.3d 385, 393 (Cal. 2004) the California Supreme Court, apparently rejecting its own, well-established, rules of construction of insurance policies, re-wrote the wording of a jewelers block policy. In what appears to be a case of reasoning backwards to provide insurance coverage for a jewelry salesman who was exceedingly stupid—he left his jewelry in his car with the keys in the ignition and the engine running to check on a clanking noise—only to have a thief jump in the car and drive away with the jewelry, the Supreme Court has compelled insurers to make their coverage more restrictive.
The Supreme Court majority, finding an ambiguity in the word “upon” has redefined an exclusion requiring an insured to be “in, on or upon” the automobile at the time of a loss for coverage to apply to mean “in close proximity.”
As Justice Kennard stated in her dissent “The majority’s holding misreads the plain meaning of the language, and is contrary to the holdings of the overwhelming majority of courts in other jurisdictions. We should enforce the contract between the parties as it is written, not rewrite its terms.”
Until the policy wording changes to comport with the holding of the California Supreme Court, stupid, lazy, or incompetent jewelers who—for more than 100 years knew there was no coverage for a theft unless they were in, on, or upon the vehicle, now can get coverage if they walk away—as long as they don’t walk too far away. The “close proximity” definition chosen by the California Supreme Court is so loose and ambiguous that it may result in hundreds of lawsuits to determine if two, four, ten or twenty feet from a vehicle is “close proximity.” Intelligent insurers will modify the language to provide less coverage and to avoid arguments of ambiguity by merely eliminating the words “on or upon” and require the insured to “actually be in” the automobile at the time of the theft for the loss to be covered.
The provision at issue exempted jewelry stolen from a vehicle from coverage unless the insured was “actually in or upon such vehicle at the time of the theft.” The question presented to the Supreme Court was whether the exception to that exclusion applies when the insured is not in the vehicle but is in close proximity to the vehicle and is attending to it when the theft occurs. The Supreme Court concluded the vehicle theft exclusion, as a whole, is ambiguous and fails to plainly and clearly alert insureds that there is no coverage if a theft occurs when the insured has stepped out of the vehicle but remains in close proximity and is attending to it.
In this case, Brian Callahan, a jewelry salesman, left his home with two “hard cloth garment bags” containing jewelry (some of which belonged to E.M.M.I. Inc., a manufacturer and marketer of jewelry) in the trunk of his vehicle. Shortly after driving away from his home, he heard a clanking noise emanating from the rear of the vehicle. Callahan stopped on the side of the road to investigate the source of the noise, got out of the car and closed the car door but left the engine running. He walked to the rear of the vehicle and, as he crouched down to visually inspect the exhaust pipes, he felt someone pass quickly by him. When he looked up, he saw an individual get into his car and drive away. Callahan was no more than approximately two feet from the car during the entire time he was outside the vehicle until the time of the theft. The police subsequently found the vehicle, but the jewelry was missing. In this case, two feet from the car, where he was too far away to stop the thief from entering his car and driving it off, is “close proximity” and therefore not excluded.
Jewelers block insurance was conceived at the turn of the 20th century. It provides coverage under a single policy for the “various risks inherent” in the jewelry business. In the present case, the policy excluded from coverage theft from a vehicle unless the insured or a designated employee was “actually in or upon” the vehicle at the time of the theft. As the Minnesota Supreme Court has observed, “The [exclusion] was obviously intended to cover any situation where a loss occurred when the property was not protected by the presence of someone in or upon the car” [Ruvelson, Inc. v. St. Paul Fire & Marine Ins. Co. (1951) 235 Minn. 243, 251 (50 N.W.2d 629, 634).]
In Minnesota, the Supreme Court in Ruvelson upheld the exclusion and concluded:
The doctrine of substantial compliance has no application to the facts of this case. Where the words used in a contract of insurance expressly require actual compliance…
[I]t is difficult to conceive of a more effective deterrent to a potential theft than the presence of someone in or upon an automobile.
New York Courts held there was no coverage in Royce Furs, Inc. v. Home Insurance Co., 30 App. Div. 2d 238, 291 N.Y.S. 2d 529, and concluded coverage did not apply even when the car was left unattended for only five minutes and the entire vehicle was under surveillance through a window of the hotel.
In Hanover Insurance Company v. A. M. I. Diamonds, 397 F.3d 528 (7th Cir. 2005) the Seventh Circuit upheld the exclusion for the following reasons, to curb what is called “moral hazard” and to limit coverage in high-risk settings even when there is no moral hazard. Criticizing the California Supreme Court, the Seventh Circuit held:
E.M.M.I. is an outlier. To read “upon” to mean “near” would open a large loophole of uncertain limits, something the cases we’ve cited, and others as well, such as Thomas Noe, Inc. v. Homestead Ins. Co., 173 F.3d 581, 583 (6th Cir. 1999); Equity Diamond Brokers, Inc. v. Transnational Ins. Co., 785 N.E.2d 816, 819-20 (Ohio App. 2003), and Nissel v. Certain Underwriters at Lloyd’s of London, 73 Cal. Rptr. 2d 174, 181 (App. 1998), have refused to do…If “in or upon” is given the same meaning in both places, and “upon” means “near,” then the exclusion is inapplicable if the diamonds are merely near the vehicle, and not in it — which would be preposterous.
Most cases interpreting similar policy language have found the phrase “in or upon the vehicle” to be unambiguous. See Annotation, Construction and Effect of “Jeweler’s Block” Policies or Provisions Contained Therein (1994), 22 A.L.R.5th 579; Couch on Insurance (3d Ed.2003), Section 154:74.
Based on exclusions with nearly identical language, courts have consistently “denied coverage to insureds who were not literally in or upon their vehicles at the time of the losses, even though the insureds may have been only a short distance away from the vehicle, watching the vehicle, or absent from the vehicle for only a short period of time.” “No insurance policy insures against every loss, however. In this case, EDB specifically assumed the risk by declining unattended-vehicle coverage.” (Equity Diamond Brokers v. Transnational Ins. Co., 2003-Ohio-1024, 151 Ohio App.3d. 747, 785 N.E.2d 816)
The United States District Court for the East District of New York held in Seelig v. St. Paul Fire & Marine Insurance Co., 109 F. Supp. 277 (1953), that the purpose of the policy with regard to this exclusion was to cover a loss only if it occurred in connection with the hold-up of a motor vehicle while being operated by a permanent employee of the insured. It concluded that there was no coverage although the employee was only a short distance from the vehicle at the time the theft occurred.
It therefore appears to be the consensus of those courts that have considered the issue, except the California Supreme Court, that unattended automobile exclusions, like the three quoted above, are clear, unambiguous, and enforceable.
“Indeed, the use of the word ‘actually’ in the requirement that the assured or properly-designated person be ‘actually in or upon’ the vehicle at the time of loss belies any contention that constructive possession of the type urged by Plaintiff can avoid the exclusion. (JMP Associates v. St. Paul Fire & Marine, 345 Md 630, 693 A.2d 832 (1997))
All parties involved in a jewelers block policy should be cautious before concluding the contract. Failure on the part of any of the individuals involved to be totally frank can cause, after a loss, the policy to be declared void. Once a policy is voided or a claim rejected, it is inevitable, because of the extent of uninsured loss, that the insured will file suit against the insurer, the adjuster, and the broker. If, on the other hand, serious effort is expended in the acquisition of the policy, in determining that the insured (before issuance of the policy) maintains adequate records, and the protective safeguards warranted, unnecessary litigation will be avoided and the parties to the insurance will fulfill the true intent of insurance: to provide indemnity to the insured at the time of a legitimate loss.
This article is adapted from Zalma on Insurance Claims – Volume 4 now available on Amazon.com.
Read about this and other insurance books by Barry Zalma at http://zalma.com/zalma-books/