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Vol. 10 - Issue 4

June 17, 2021


Policy’s Drafting Error Leads To Unintended Coverage


As discussed above, insurers sometimes lose cases because they don’t have the facts needed to support a coverage defense.  Other times they have the facts, but the court determines that the policy language does not mean what the insurer says it does. 

In First Mercury Ins. Co. v. Triple Location, LLC, discussed above, the insurer lost because its policy contained an internal inconsistency.  Coverage specifically provided for “personal and advertising” injury was removed by an exclusion. The court’s conclusion: based on these “dueling provisions, the endorsement creates an ambiguity about the scope of coverage that, at least for purposes of the duty to defend, must be resolved in [the insurer’s] favor.”
In Verto Medical Solutions v. Allied World Specialty Insurance Co., No. 19-3511 (8th Cir. May 11, 2021), the insurer came out on the losing side on account of an error in its policy drafting.

At issue was coverage, under a D&O policy, for an asset purchase agreement that went south and gave rise to various claims for which coverage was sought.  The facts of the deal, and what went wrong, are not important for purposes of discussion here.

What is relevant is that the policy contained a “contractual liability” exclusion [exclusion D.], which the insurer maintained precluded coverage.  The court called this “original D.”  But the policy also contained endorsement 11, which “delet[ed] Exclusion D. in its entirety and replac[ed] it with” a new contractual-liability exclusion, also labeled “D.”  The court called this “new D.” 

So far there is nothing unusual here.  The policy itself started out with a contractual liability exclusion (labeled exclusion D.) and then replaced it with a different contractual liability exclusion – also called exclusion D.  In fact, it would have been a bad idea to have called new exclusion D anything other than “exclusion D.”  

But here’s were the train went off the tracks.  Enter endorsement 13, which provided: “Exclusions A., B., C. and D. . . . are deleted in their entirety and replaced” with a list of three new exclusions labeled “A,” “B,” and “C.”  None of these exclusions directly addressed contractual liability.

So now, what to make of Exclusion D?  That was the issue before the court.  The appeals court, reversing the trial court, saw the situation as ambiguous and found for the insured.

The insurer’s position was that exclusion D., in endorsement 11, excluded coverage.  Presumably its position was that exclusion 13, since it didn’t mention replacing exclusion D., had no impact on exclusion D. as set out in endorsement 11.
The court saw it differently: “If the insurance policy seems unclear, it is. Endorsement 13 injected ‘uncertainty’ by deleting Exclusion D, but then failing to specify which one: original D, new D, or both. . . . We cannot rule out the possibility, in other words, that the endorsements deleted and replaced original D and new D, leaving the policy without a contractual-liability exclusion.”

Having found ambiguity, you know how this now turned out.  On remand, the insurer was free to assert the applicability of other exclusions, just not D.

The moral of the story, for policy drafting, is clear.


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