Coverage ceases but policy is not cancelled?Article added by Christine Barlow on February 23, 2010
Christine Barlow

Christine Barlow

Erlanger, KY

Joined: October 06, 2008

My Company

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In an interesting case from Kansas, the U.S. District Court ruled, in effect, that even though coverage under a policy has ceased, the policy itself was not cancelled or terminated. This seemingly contradictory ruling is in Columbian Financial Corporation v. Bancinsure, Inc., 2009 WL 4508576 (D.Kan.).

This case involved a directors and officers (D&O) liability insurance policy with a policy period of May 11, 2007 through May 11, 2010. One of the conditions in the policy read as follows: if after the effective date of this policy, the company shall cease to engage in an active banking business or cease to accept deposits for any reason, coverage shall cease as of the date of the cessation of such business. The company did, in fact, cease to engage in an active banking business on August 22, 2008. In September 2008, the insured received written notice of circumstances that could give rise to potential claims against the former directors and officers for mismanagement. The insureds then sought a declaratory judgment against its insurer seeking to determine whether claims covered by the D&O policy may be reported to the insurer at any time prior to the actual expiration date of the policy.

So, the key question facing the court was whether the insurance policy automatically cancelled upon the cease of business by the company; more specifically, said the court, was whether "coverage shall cease" means the same thing as "the policy automatically cancelled" or the "policy effectively terminated." Put plainly, did the word "coverage" mean the same as "policy"?

The District Court reviewed the policy language and declared that the use of different terminology that clearly identifies situations in which the policy is cancelled indicated that "coverage shall cease" does not mean that the policy is cancelled or terminated. The court ruled that coverage ceased when the insured ceased doing business but the policy itself did not effectively terminate or automatically cancel. The policy period continued until the date of expiration, May 11, 2010.

*Note: This decision makes the point that policy language is always subject to judicial interpretation, and that interpretation may be in direct opposition to how the insurer views the policy. Still, the decision begs the question: if coverage ceases, what difference does it make if the policy is not considered to be cancelled? If coverage ceases or the policy is terminated, does the insured reasonably expect claims to still be covered?

Hired driver, permissive driver, insured?

Federal Insurance Company v. Executive Coach Luxury Travel, 2009 WL 3720556 (Ohio App. 3 Dist.) is a case wherein the Third District Court of Appeals of Ohio had to interpret the language of an auto policy in order to decide a question of coverage. This matter arose out of a bus crash that resulted in multiple deaths and injuries.

Bluffton University hired Executive Coach Luxury Travel to provide coach bus transportation for the university's baseball team; the team was going to Florida for a series of games there. While driving through Atlanta, Georgia, the bus was involved in a deadly crash. Among the victims were the bus driver (Niemeyer) and his wife. At the time of the crash, Bluffton had insurance policies with three companies: Hartford (an auto policy), American (commercial umbrella policy), and Federal Insurance (commercial excess follow-form policy).

American and Federal filed declaratory judgment actions to determine their coverage for any claims. The insurers said that they do not owe excess liability insurance as to any bodily injury or wrongful death claim or lawsuit because neither Executive Coach nor Niemeyer qualified as insureds under the primary auto policy or the excess policies. The trial court agreed with the insurers and this appeal followed.

The appeals court handled some assignments of error that included the claim that the trial court erred when it determined that Niemeyer was not operating the Executive bus coach with the permission of the university, and that the court erred when it determined that the bus was not "hired" by Bluffton as that term is used in the underlying auto policy.

The court noted that Bluffton arranged, contracted, and paid for the charter of the bus and driver with Executive Coach. Furthermore, Bluffton approved the specific driver and the specific type of bus. American and Federal argued, however, that none of these considerations are determinative because within the context of an insurance contract, the terms "permission" and "hire" implicitly require a substantial, if not exclusive degree of authority and control over the bus and driver; this, the insurers argued, the university did not have. Even though Bluffton may have had some authority and discretionary control and direction over the bus and driver pursuant to the contract, and even though Bluffton may have negotiated for and consented to certain terms of the arrangement, this did not rise to the level of substantial or exclusive authority and control over the bus and driver sufficient to constitute a grant of permission or the hire of the bus and driver by Bluffton.

Upon reviewing the policy, the appeals court found that it did not specifically define the terms "permission" or "hire". Therefore, the court looked to the dictionary and concluded that, while ordinary definitions and common understandings of "permission" and "hire" seem to include the concepts of mere agreement, consent, or even acquiescence to a matter, it is clear that definitions of these terms in any legal context (such as an insurance contract) commonly refer to the requirement of having the authority to grant the permission and/or exert a substantial control over a matter or thing hired as well.

The trial court determined that, based on a review of the facts, Bluffton neither hired nor gave permission for the bus or driver within the meaning of those terms in the insurance contract. That court assessed that Executive Coach and not Bluffton had predominate authority and control over the bus and driver. The appeals court concurred with this finding.

That court said that reasonable minds could not differ in concluding that Executive Coach and not Bluffton had predominate authority and control over the bus and driver. Thus, reasonable minds could not differ in concluding that the bus and driver were hired by Executive Coach and not Bluffton and were operating with the permission of Executive Coach and not Bluffton within the meaning of those terms as used in the auto policy. The ruling of the trial court was affirmed.

* Note: It is common knowledge that someone using a covered auto, even a hired auto, with the permission of the named insured is considered an insured under the auto policy. But, since neither "hired" nor "permission" are defined words in the auto policy, courts are then free to look to the standard dictionary for help in interpreting the words. In this case, it could reasonably be said that the insured did hire the bus and did give permission for (or, at least, did not object to) Niemeyer as the driver. However, the trial court and the appeals court both looked beyond the dictionary definitions and found it was also reasonable to conclude that predominate authority and control over the bus and the driver were not in the hands of the named insured, and so, there was no permission or hiring on the part of the named insured.

It is interesting that this case revolved around parties other than the named insured. This point and the ruling of the courts could lead to some follow-up questions then: if the named insured did not hire the bus, is the bus considered to be a covered auto? If so, does the named insured have any coverage in case of a lawsuit being filed against it? If not, is the named insured left without any insurance coverage, or can the general liability policy apply?

Who is the policyholder?

The Court of Appeals of Oregon had to answer the question of who is the policyholder. Is it the named insured only? All listed drivers? Or anyone that uses the auto with permission? This case is Laird v. Allstate Insurance Company, 2009 WL 3837491 (Or.App.).

The widow of a pickup truck driver killed in a head-on collision with the insured vehicle brought an action against the auto liability insurer after the driver of the insured vehicle assigned his indemnity rights to the widow. The auto policy was issued in the name of the parents. The daughter of the named insureds was listed as a driver in the auto policy. The daughter gave permission to her boyfriend to drive the family car and then when he was deemed too intoxicated to drive, he gave permission to a friend to drive the car. The friend crossed the center line and collided head-on with the pickup truck driven by the deceased.

When the widow brought a wrongful death lawsuit against the boyfriend and the driver of the insured auto, they both sought protection under the named insured's policy. When the insurer refused defense and coverage, the widow filed this lawsuit against the insurer. The trial court found in favor of the insurer and this appeal followed.

The appeals court noted that the policy contained an omnibus clause that provides that the policy covers anyone using the car with the permission of the "policyholder". The plaintiff argued that the daughter was a policyholder and that her permission was sufficient to extend coverage to both the boyfriend and the ultimate driver. Furthermore, even if the daughter was not a policyholder, as a permissive user herself, she was, as a matter of law, able to give permission to others to drive the car. The insurer disagreed.

The court reviewed the policy language to discern the meaning of the word "policyholder." The policy did not define the term, so the court looked to the dictionary for its ordinary meaning. That definition suggested to the court that a policyholder was one who enters into a contract with an insurance company, one who purchases and has the right to control the policy. Moreover, the policy did define the word "you" as the policyholder named in the declarations and that policyholder's resident spouse. And as used throughout the policy, the word "you" indicated a reference to the persons who obtained the policy, not merely those who are insured under it. So, the court concluded that the only plausible construction of the policy is to read the word "policyholder" as referring to the named insureds. It followed then that the policy did not authorize the daughter to give permission to anyone to use the car.

The plaintiff also argued that the state financial responsibility law, under which any person given permission to use a vehicle may, in turn, for purposes of insurance coverage, permit another person to use the vehicle, ultimately gave coverage to the driver. In other words, just because the daughter had permission to use the car, her permission extended to the boyfriend and to the subsequent driver as well because of the state financial responsibility law. The appeals court disagreed with this contention. The court said that the state law did not mandate universal coverage and that certain persons may be excluded from coverage.

When an initial borrower allows a third person to use a vehicle despite having been told by the named insured not to do so (as was the case in this situation), the third person cannot be said to be using the vehicle with the consent of the named insured.

The decision of the trial court was affirmed.

* Note: The policy in this case used the word "policyholder" as opposed to an "insured" when giving permission to drive the covered auto. Since the daughter was an insured under the policy, it is conceivable that, if the parents had the standard auto policy in stead of this particular auto policy, coverage would have been forthcoming for this claim. Policy language can make a difference.

Last injurious exposure rule

The Supreme Court of Montana has answered a question on a matter of first impression in the state pertaining to the last injurious exposure rule. The case is Liberty Northwest Insurance Corporation v. Montana State Fund, 2009 WL 3769981 (Mont.). Note that this opinion has not as of this writing been released for publication in the permanent law reports; until released, it is subject to revision or withdrawal.

In 1994, Mitchell suffered an industrial injury to his low back in the course of employment with Washington Construction Company. Montana State Fund accepted liability for Mitchell's injury and paid appropriate medical and wage-loss benefits. In January 2006, Mitchell filed a claim with Liberty Northwest Insurance, alleging that he had suffered an occupational disease (OD) involving his low back while working for Industrial Services. Liberty denied the claim. In May 2006, Mitchell filed a claim with State Fund alleging he had suffered an OD to his low back in 2002 while working for Environmental Contractors. State Fund denied liability.

After the denial of his claims, Mitchell filed a claim with the Montana Workers Compensation Court (WCC), contending he suffered an OD while working for Industrial and that Liberty was responsible for his workers comp (WC) claim. After an investigation, the WCC determined that Mitchell's work for Industrial contributed to his low back condition; that Mitchell was last injuriously exposed to the hazard of his OD while employed with Industrial; and that Liberty is liable for the WC payments. Liberty appealed this decision.

Liberty argued before the Montana Supreme Court that under state law the last employer in a series of employers is liable for an OD only if the last employment materially or substantially contributed to the OD. Liberty said that the WCC erroneously concluded that last injurious exposure rule required only proof of some degree of OD causation during the claimant's last employment.

The court noted that traditionally courts applying the last injurious exposure rule have not gone past the original finding of some exposure to weigh the relative amount or duration of exposure under various carriers and employers; as long as there was some exposure of a kind that could have caused the disease, the last insurer at risk is liable for all disability from that disease. So after citing decisions on the subject from other jurisdictions, the Supreme Court concluded that the potentially causal standard is consistent with state law in Montana. The claimant who has sustained an OD and was arguably exposed to the hazard of an OD among two or more employers is not required to prove the degree to which working conditions with each given employer have actually caused the OD in order to attribute initial liability. Instead, the claimant must present objective medical evidence demonstrating that he has an OD and that the working conditions during the employment at which the last injurious exposure was alleged to occur, were the type and kind of conditions that could have caused the OD.

In this case, objective medical evidence established that while Mitchell's work with Industrial was not the major contributing cause of his OD, it was of the same type and kind that led to the development and eventual diagnosis of that OD. Thus, this exposure could have caused Mitchell's OD and under the court's application of the last injurious exposure rule, this evidence is sufficient to support the WCC's determination that Mitchell's last injurious exposure to the hazard of the OD occurred during his employment with Industrial.

The Supreme Court of Montana upheld the WCC ruling and declared that in Montana, for the purposes of the initial liability determination of an OD where two or more employers are potentially liable, the last injurious exposure to the hazard of the OD occurs during the last employment at which the claimant was exposed to working conditions of the same type and kind that gave rise to the OD.

* Note: The last injurious exposure rule has been called a rule that is rationally related to the permissible governmental goal of providing efficiency and certainty in the settlement of workers compensation claims. The rule is subject to individual state court interpretation since the subject is workers compensation and this opinion by the Montana Supreme Court establishes that state's position on the subject.

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