Words Matter

In my September 2020 column, I wrote an article called “Is It Covered? The Unimpeachable Case of What ‘Are’ Is.” The article was about a claim involving a Property Not Covered category for damage to vehicles in ISO’s CP 00 10 Building and Personal Property Coverage Form.

The primary learning point of that article was that coverage can hinge on the meaning and context of a single word. In the claim addressed in that column, coverage, in fact, hinged on the tense of a verb. Over the years, I’ve had scores of claims where coverage depended on the meaning of one word in an insurance policy. But, as best as I can recall, that was the first time I had gotten an inquiry about that particular policy provision in the ISO CP 00 10 … until recently.

A couple of months ago, I received an email from an agent about a claim denial he believed was improperly denied. The agency insures a trailer manufacturer. They receive an assembled chassis from a third party and then assemble the tires, wire the electrical, etc. The unassembled trailers are stored outside their building until the assembly process begins.

Several of the unassembled trailers were damaged by Hurricane Helene. The unassembled trailers were insured as business personal property under an ISO CP 00 10 10 12 – Building and Personal Property Coverage Form, and the attached covered perils include windstorm. However, the independent adjuster denied the damage based on this provision in the Property Not Covered section of the CP 00 10:

Vehicles or self-propelled machines (including aircraft or watercraft) that: (1) Are licensed for use on public roads; or (2) Are operated principally away from the described premises. This paragraph does not apply to: (a) Vehicles or self-propelled machines or autos you manufacture, process or warehouse; (b) Vehicles or self-propelled machines, other than autos, you hold for sale; (c) Rowboats or canoes out of water at the described premises; or (d) Trailers, but only to the extent provided for in the Coverage Extension for Non-owned Detached Trailers…

The first cardinal sin of this denial is the failure of the adjuster to explain WHY the damage is not covered. Simply listing an exclusionary provision is not an adequate, nor proper denial, unless the adjuster also explains HOW such insurance contract language serves to exclude coverage given the facts and circumstances of the occurrence.

California has codified this premise under Title 10, §2695.7 – Standards for Prompt, Fair and Equitable Settlements where paragraph (b)(1) of this regulation says [emphasis added]:

Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge. Where an insurer’s denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing.

The second issue with this denial involves the adjuster’s apparent lack of understanding of how exceptions in a contract work. For example, exclusions in a policy don’t matter if the insuring agreement to which the exclusion applies is never triggered. That’s what defeated most COVID-19 business income claims. It didn’t matter that there was no specific exclusion for alleged viral contamination because coverage was never triggered when the insured could not prove that the alleged contamination involved direct damage to tangible property.

A corollary to this when it comes to insurance contracts is that a coverage-granting exception to an exclusion is not triggered unless the exclusion itself applies. In the present case, the adjuster pointed out that the (d) exception to the exclusion did not grant coverage because it applied to nonowned trailers only.

However, that was immaterial to the claim because the vehicle exclusion was never triggered in the first place. Note that the exclusion only applies to vehicles that:

(1) Are licensed for use on public roads; or (2) Are operated principally away from the described premises.

The trailers in question were not licensed for road use, nor were they operated at all on or away from the described premises. Therefore, the exclusion was not triggered and, as a result, exception (d) was immaterial. That sends us back to the primary insuring agreement in the policy for business personal property.

The vehicles are simply the insured’s stock in trade or raw material in their assembly process. If you look at the insuring agreement for Your Business Personal Property in the CP 00 10, you’ll find that it includes “stock,” which is defined in the form as:

“Stock” means merchandise held in storage or for sale, raw materials and in-process or finished goods, including supplies used in their packing or shipping.

In almost every claim, there is a learning opportunity. In the present case, in addition to the premise that exceptions to policy provisions don’t matter unless the provision itself applies, another learning point is something I harp on repeatedly: Insurance is NOT a commodity.

For example, consider the following two definitions, the first from ISO’s CGL policy and the second from a non-ISO CGL policy [emphasis added]:

“Coverage territory” means…All other parts of the world if the injury or damage arises out of…Goods or services made OR sold by you in the territory described in a. above;

“Coverage territory” means…All other parts of the world if the injury or damage arises out of…Goods or services made AND sold by you in the territory described in a. above;

Note that there is a difference of only one word between these definitions, but that one word makes a huge difference in coverage.

Words matter.