The So-Easy-To-Avoid Self-Inflicted Policy Drafting Error
 
It can be hard enough to draft insurance policies that keep policyholders from trying to find more than one reasonable meaning for a term, i.e., establish coverage by ambiguity.  But with the language contained in an automobile policy before the North Dakota Supreme Court, in Nodak Insurance Company v. Farm Family Casualty Ins. Co., the insurer never had a chance.  The court called the term at issue “inherently vague.”  And that was being kind to the insurer, compared to how another court saw it.    

As someone who drafts a lot of policy language for insurers, I like cases that provide guidance on how to do it right.  And with Nodak coming from a state high court, and offering an overarching, general lesson for policy drafters, i.e., not being limited to a specific provision – not to mention the lesson being hard to miss – I picked the decision for the annual coverage best-of.

The take-away from Nodak Insurance Company v. Farm Family Casualty Ins. Co.: if a policyholder’s goal is to try to find more than one reasonable meaning for a term, stay away from using adjectives when drafting policy language. 

Putting aside all of the details, at issue was whether a Farm Family automobile policy had been cancelled prior to an accident.

Farm Family issued an automobile policy to the Hamiltons, residents of Vermont, for the period from October 19, 2018 to April 19, 2019.  The policy covered a pick-up truck.  The liability limits were $250,000 per person and $500,000 aggregate.  The Hamilton’s son was involved in a serious accident on April 6, 2019.

The Hamiltons moved to Montana and purchased an automobile policy from Mountain West Farm Bureau Mutual for the period from December 2, 2018 to June 2, 2019.  The policy covered the same pick-up truck.  The liability limits were $100,000 per person and $300,000 aggregate.

So far, as you can see, the accident took place during both policy periods.  However, here’s the rub.  Farm Family argued that its policy terminated on December 2, 2018, the day that the Mountain West Farm Bureau policy went into effect.  Farm Family’s argument was based on the following provision in its policy:

10. CANCELLATION OR NONRENEWAL OF THIS POLICY

If other insurance is obtained by you on your insured car, similar insurance afforded under this policy for that car will cease on the effective date of the other insurance.

If different requirements for cancellation and nonrenewal or termination of policies are applicable because of the laws of your state, we will comply with those requirements. (bold added).

As Farm Family saw it, this policy language was clear and unambiguous.  Its policy “ceased” on December 2, 2018 because, on that date, its insureds obtained a “similar” policy of insurance through Mountain West.  Thus, Farm Family’s policy was not in effect at the time of the accident.  Farm Family claimed that the “termination by substitution” or “cancellation by substitution” doctrine is “well-grounded in insurance law and dispositive.”

The principal issue before the court was whether the Mountain West policy was “similar insurance” as the Farm Bureau policy.

The North Dakota Supreme Court concluded that it was not.  As the court saw it, while the policies may have been similar in “type,” as they were both automobile liability policies, they were not similar “in type and in amount.”  The Farm Family policy’s liability limits were $250,000 per person and $500,000 aggregate.  The Mountain West policy’s liability limits were $100,000 per person and $300,000 aggregate.
 
The court had little trouble finding many cases nationally where policies differing in amount of coverage were not considered “similar insurance” for purposes of an automatic termination clause.

The court explained its decision:

“Under the undisputed facts of this case, this Court concludes, as a matter of law, the Farm Family policy and the Mountain West policy do not provide ‘similar insurance,’ i.e., insurance that is ‘strictly comparable’ or ‘alike in substance or essentials.’  An essential part of automobile liability insurance is the amount of coverage. A policy providing bodily injury liability coverage limits of $250,000 per person and $500,000 per accident and a policy providing bodily injury liability coverage limits of $100,000 per person and $300,000 per accident are not strictly comparable or substantively alike. We do not need to and do not decide today how much difference there must be in liability coverage for two policies to constitute similar insurance. We also do not need to and do not decide today how other differing aspects of insurance policies, such as deductibles and premiums, impact the consideration of whether two policies are similar.”

Indeed, even the dissent in Farm Family described “similar” as an “inherently vague term.”  

And that was kind.  In reaching its decision, the Farm Family court cited to Motors Ins. Corp. v. Bodie, a 1991 California federal court decision that said this about the word “similar” in this situation – “It is difficult to imagine being called upon to interpret a more imprecise term.  This inherent vagueness fully justifies the conclusion that the term ‘similar’ is ambiguous.”

The lesson here for policy drafters – for this scenario and, more importantly, all others – could not be clearer.