Two mutually exclusive goals are beginning to result in apparently unintended results within the executive and professional liability markets. The quest for underwriting profits and the desire to develop clear (to whatever extent possible) coverage language have rapidly changed the coverage landscape within these two lines of coverage.
We recently received an employment practices liability (EPL) quote which did not include specimen forms and endorsements (not out of the ordinary). Once the necessary forms were received, a review of the policy forms found the customary bodily injury (BI) and property damage (PD) exclusionary language along with the usual and customary “carve back’ for emotional distress (giving back coverage for “emotional distress” arising from “wrongful employment acts”). Such “carve back” is expected and necessary given that greatest amount of damages awarded in EPL claims are for the emotional distress arising from employment-related wrongful acts. But our curiosity was aroused by the inclusion of new exclusion, the “Absolute BI/PD Exclusion,” eliminating the “carve back.”
The addition of such exclusionary wording might lead some to opine that coverage for “emotional distress” is made “illusory” (an illusion, not real) and that an ambiguity now exists in the definition of a “workplace tort.” Since the definition of workplace tort includes, in part, “wrongful infliction of emotional distress, mental anguish or humiliation …,” this opinion appears to be correct. Unfortunately, recent court decisions have found such “absolute exclusions” to be “clear and unambiguous.” The result is a finding of no coverage (leading to errors and omissions claims against the broker). Interestingly, such a finding would seem to confirm that coverage was indeed “illusory.”
To complicate matters even further, the broker’s E&O carrier may be able to escape if their policy includes an exclusion for any claim “arising …indirectly… from any claim involving wrongful employment practice acts.” That too might trigger a claim against the broker providing the E&O policy and so the endless chain begins.
There is no real concern over this one event or within this purely academic exercise. The real threat is the current trend towards the use of “absolute exclusions,” the consequences of which are real. Depending on the context, one’s opinion, or whether it is the underwriting department or claims department making the decision, the resulting denial of otherwise covered claims may be unintended or intended despite the evolution of how the exclusionary endorsements came into being.
The Development of Absolute Exclusions
It would require the services of an archivist to determine when, how and why this trend towards the use of “absolute exclusions” got started. Such trends generally begin with court decisions and then morph beyond what was intended. Most likely the Montrose Chemical decision was the impetus behind the creation of such broad exclusionary wording. Montrose led to the development of the absolute pollution exclusion that became the norm in almost all commercial general liability (CGL) and other liability policies. Once the use of “absolute exclusions” find traction in one area (and withstand court scrutiny), they generally find their way into other arenas.
Exclusionary language has evolved over the last 40 years. Many exclusions from the 1970′s contained language that read, “Coverage does not apply to ….;” or “…to any claim for…;” or “…to any claim based upon….” Courts found that such language lacked specificity. As a result, by the late 1970′s into the 1980′s, exclusionary language adopted the “arising out of…” mantra and exclusions began to read “…based upon or arising out of….” A degree of concern and uncertainty remained which gave rise to language that eventually evolved into “…based upon or arising out of or in consequence of…,” with the hopes this would make the intent clear.
Variations of this exclusionary language included: “The insurer shall not be liable to make any payment for loss in connection with any claim made against the insureds for ….” No doubt courts might have struggled with the “…in connection with…” language, giving rise to even more exploratory language.
What is clear at this point in insurance history is the fact that most historical exclusions used one of the following as their basis:
- “to any Claim for…”
- “to any Claim based upon or arising out of the…”
- “to any Claim based upon, arising from, or in consequence of…”
Environmental liability cases were no doubt a (if not the) driving force behind the search for clear and unambiguous exclusionary language that could withstand court scrutiny. These cases created the desire among insurers to have policies that would not expose them to loss unless the policy was, in fact, designed to cover those types of claims. As a result the breadth of the absolute exclusions expanded as exampled here:
- “Directly or indirectly, based on, attributable to, arising out of, resulting from, or in any manner relating…” or
- “…based upon, arising out of, or attributable to any wrongful acts where all or any part of such acts…”
Thus began the era of absolute exclusion language “enjoyed” today.
Professional liability carriers began using this type of language to exclude a myriad of claims the policies were not intended to cover, such as the insured’s own employment practice claims, environmental and or pollution claims, etc. This use is not unexpected. What is or should be unexpected is that forms applying such “absolute exclusion” wording may be giving rise to unintended results. Worse yet is the possibility that claims departments may now be deciding to take the position that these new results are in fact intended. If so, such conscious decisions may give rise to significant differences among insurers in today’s marketplace.
Series to Follow
This is the first part of a three-part series exploring exclusionary wording in insurance policies. The remaining installments explore examples of the impact of exclusions on claims and the dangers to agents.
The series ends with solutions to policy exclusions.
About the Author
Frederick J. Fisher, J.D. is the CEO of E.L.M. Insurance Brokers and is the executive vice president of Insurance Specialty Group’s Professional Liability Practice. For the past 35 years, Fisher has been actively involved in underwriting and placing professional liability accounts or in the adjustment, investigation, and resolution of professional liability claims. He has spent his entire career working with “claims-made” insurance policies and their evolution.
Fisher, a founding member of the Professional Liability Underwriting Society (PLUS), has been the senior technical advisor for The Professional Liability Manual published by the International Risk Management Institute since 1989. He testifies regularly as an expert witness in cases dealing with the duties and obligations of professionals as well as on coverage and “claims-made” issues.
He will be teaching two upcoming courses for the Insurance Journal Academy:
Fisher can be reached at 310-322-1301, email: firstname.lastname@example.org