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Hello and Bonjour from the Green Mountain State.
Our courts are rather insistent that the plain, ordinary language of an insurance policy is the alpha and the omega of insurance contract construction (of course, if disputed policy terms are ambiguous, they will be construed in favor of coverage). There is an old joke about Vermont that encapsulates Vermont’s preference for plain talk; a preference that runs through many of our coverage decisions (well, as many decisions as a small, rural state with no intermediate appellate court can issue):
A lost flatlander drives up to a farmhouse where an old Vermonter is sitting on the porch. He leans out his window and says, “Hey buddy, does this road go to Montpelier?
Vermonter: Nope. Stays right here.
Flatlander: No, I mean can I take this road to Montpelier?
Vermonter: Don’t think you can get it in your car.
Flatlander: Well then, if I drive down this road will I get to Montpelier?
Vermonter: Don’t know how good a driver you are.
Flatlander: You don’t know much do you?
Vermonter: I know I ain’t lost.
Under Vermont law, insurance policies are contracts, and therefore, rules of contract construction apply. Such as:
1. The construction of policy language is a question of law, not fact. Chamberlain v. Metro. Prop. & Cas. Ins. Co., 171 Vt. 513, 514, 756 A.2d 1246, 1248 (2000) (mem.); Fireman’s Fund Ins. Co. v. CNA Ins. Co., 2004 VT 93, ¶ 8, 177 Vt. 215, 220, 862 A.2d 251, 256, 2004 VT 93, ¶ 9.
2. Policies are interpreted according to their terms and the intent of the parties is determined by the express policy language. Town of Troy v. American Fidelity Co., 120 Vt. 410, 417, 143 A.2d 469, 474 (1958); Sanders v. St. Paul Mercury Ins. Co., 148 Vt. 496, 500, 536 A.2d 914, 916 (1987).
3. Ambiguous terms are construed against the drafter (the insurer) and in favor of coverage, because the insurer is in the best position to avoid, or correct, ambiguous terms. Town of Troy v. American Fidelity Co., 120 Vt. 410, 418, 143 A.2d 469, 474 (1958).
4. And, our courts “review the language of an insurance contract from the perspective of what a reasonably prudent person applying for insurance would have understood it to mean.” Towns v. Vt. Mut. Ins. Co., 169 Vt. 545, 546, 726 A.2d 65, 67 (1999) (mem.); Co-operative Ins. Companies v. Woodward, 2012 VT 22, ¶ 9, 191 Vt. 348, 352–53, 45 A.3d 89, 93 (2012).
Our courts generously construe an insurer’s duty to defend. Although we haven’t adopted the Texas nomenclature, the “eight corners rule” is the accepted methodology: “Generally, the insurer’s duty to defend is determined by comparing the allegations in the complaint of the underlying suit to the terms of coverage in the policy.” City of Burlington v. Nat’l Union Fire Ins. Co., 163 Vt. 124, 127, 655 A.2d 719, 721 (1994).
Our courts look only to the allegations of the complaint; not the legal theories, when deciding an insurer’s duty to defend. A plaintiff may not, therefore, plead the facts of an intentional tort, but state a claim for negligence, in order to invoke coverage. Coop. Fire Ins. Ass’n of Vermont v. Bizon, 166 Vt. 326, 335, 693 A.2d 722, 728 (1997).
If the complaint presents claims that are “potentially” covered by the policy, the insurer must defend. Garneau v. Curtis & Bedell, Inc., 158 Vt. 363, 366, 610 A.2d 132, 134 (1992). However, although the duty to defend is much broader than the duty to indemnify (State v. Glens Falls Ins. Co., 132 Vt. 97, 99, 315 A.2d 257, 258 (1974)), if there is no possibility that the insurer must indemnify, it has no duty to defend. Garneau v. Curtis & Bedell, Inc., 158 Vt. At 366, 610 A.2d at 134.
So what is an insurer to do when coverage is questionable? Send out a unilateral reservation of rights? No! In Vermont, “[a] unilateral reservation of rights . . . is ineffective.” Am. Fid. Co. v. Kerr, 138 Vt. 359, 363, 416 A.2d 163, 165 (1980). Simply deny coverage? Well, that is allowed, but care must be taken: “[The insurer] may refuse to pay and say nothing as to the basis of his refusal. In that case, all defenses to an action on the policy are available to him. He may refuse to pay on a particular ground reserving the right to defend on other grounds, with the same result. But, when he deliberately puts his refusal to pay on a specified ground, and says no more, he should not be allowed to ‘mend his hold’ by asserting other defenses after the insured has taken him at his word and is attempting to enforce his liability. Cummings v. Connecticut Gen. Life ins. Co., 102 Vt. 351 (1930); see also, Hamlin v. Mut. Life Ins. Co., 145 Vt. 264, 268–69, 487 A.2d 159, 162 (1984).
By far, the most common practice, and the practice endorsed by our courts, is to enter into a bilateral reservation of rights agreement with the insured, reserving coverage defenses, while agreeing to defend. Beatty v. Employers’ Liab. Assur. Corp., 106 Vt. 25, 168 A. 919, 923 (1933); Jefferson Ins. Co. v. Travelers Ins. Co., 159 Vt. 46, 50-51, 614 A.2d 385, 388 (1992).
What kinds of claims are not covered? That depends on the policy language. Vermont has no blanket public policy against insurance for intentional and criminal acts, except when the policy language shows that the parties did not contemplate such coverage. Co-operative Ins. Companies v. Woodward, 2012 VT 22, n. 1, 191 Vt. 348, 353, 45 A.3d 89, 93 (2012). Vermont also does not bar, on public policy grounds, coverage for punitive damages. To the contrary, we have a statute requiring liability insurers to “pay and satisfy any judgment that may be recovered against the insured upon any claim covered by this policy to the extent and within the limits of liability assumed thereby” (8 V. S. A. § 4203(1). The Vermont Supreme Court has “[found] in this statute a legislative declaration of a public policy favoring complete coverage.” State v. Glens Falls Ins. Co., 137 Vt. 313, 320, 404 A.2d 101, 105 (1979). And, our high court has avoided the opportunity to rule on whether public policy prohibits coverage for sexual exploitation of children, although it noted that if a policy were to do so, the insurer would be “subsidiz[ing] defendant’s sexual misconduct and force [the insurer’s] other policy holders to bear the expense of any passed-along costs.” TBH by & through Howard v. Meyer, 168 Vt. 149, 154, 716 A.2d 31, 35 (1998).
Efforts to avoid policy provisions that bar coverage for intentional acts, criminal acts, sexual abuse, and the like have largely failed. Often, these efforts manifest when the victim of an intentional tort sues the family member of the perpetrator for negligence, both of whom are insured under a homeowners’ policy. Typically, our courts find that the plain language of policy terms, such as “occurrence,” “bodily injury,” “personal injury” and exclusions, bar such coverage. Co-operative Ins. Companies v. Woodward, 2012 VT 22, 191 Vt. 348, 353, 45 A.3d 89, 93 (2012). And, when an insured denies an intent to harm, our courts may find such intent under the “inferred intent rule,” which allows a court to infer intent from the nature and character of the act (such as sexual abuse) and to establish conclusively the existence of intent to harm as a matter of law. Nationwide Mut. Fire Ins. Co. v. Lajoie, 163 Vt. 619, 620, 661 A.2d 85, 86 (1995); Massachusetts Mut. Life Ins. Co. v. Ouellette, 159 Vt. 187, 192, 617 A.2d 132, 135 (1992); TBH by & through Howard v. Meyer, 168 Vt. 149, 153, 716 A.2d 31, 34 (1998). But there is an exception to this rule for minors: the “trier of fact should examine the facts and circumstances of the case before it, including the circumstances . . . surrounding the sexual conduct, as well as the minor’s age, ability, intelligence, and experience . . . to determine whether the minor alleged perpetrator expected or intended his or her actions to result in harm to the victim.” N. Sec. Ins. Co. v. Perron, 172 Vt. 204, 218, 777 A.2d 151, 161 (2001) (internal citation and quotations omitted).
What if some claims asserted against an insured are covered and others are not? Well, the insurer must defend. But the insurer must only indemnify for those claims that actually fall within the coverage provisions and are not barred by an exclusion. Cincinnati Specialty Underwriters Ins. Co. v. Energy Wise Homes, Inc., 2015 VT 52, ¶ 33, 199 Vt. 104, 116, 120 A.3d 1160, 1169 (2015). If such a case goes to trial, how can the insurer protect its coverage defenses, while still discharging its duties to its insured? In Vermont, insurers are expected to become directly involved in the case to ensure that the verdict distinguishes between covered and not-covered claims and allocates damages accordingly: “it was incumbent upon [the insurer] to notify the trial court and the parties of the potential apportionment issue and of the need for special interrogatories allocating damages, to seek permission if necessary to attend the charge conference to propose such interrogatories, or even to intervene in the litigation if all else failed.” Pharmacists Mut. Ins. Co. v. Myer, 2010 VT 10, ¶ 15, 187 Vt. 323, 333, 993 A.2d 413, 420 (2010).
But of course, if the trial is going terribly, and one has tried everything else, one may always cause a mistrial by running through the courtroom and screaming, “insurance,” “insurance,” “insurance.” (Don’t actually do this.) Bliss v. Moore, 112 Vt. 185, 188, 22 A.2d 315, 317 (1941); Cone Realty Corp. v. Smith, 137 Vt. 567, 568, 409 A.2d 567, 568 (1979) (injection of fact of insurance into liability trial is grounds for mistrial).
Some other decisions of note:
1. Vermont allows first-party (failure of an insurer to pay a claim filed by its insured) and third-party (handling third-party claims brought against its insured), bad faith claims against insurers. Myers v. Ambassador Ins. Co., 146 Vt. 552, 555, 508 A.2d 689, 690 (1986) (third party bad-faith); Bushey v. Allstate Ins. Co., 164 Vt. 399, 401–02, 670 A.2d 807, 809 (1995) (first-party bad faith).
2. Insurers do not owe their insureds an extra-contractual duty, such as a duty in tort. Murphy v. Patriot Ins. Co., 2014 Vt. 96, ¶16, 197 Vt. 438, 445, 106 A.3d 911, 917 (2014).
3. An injured plaintiff may not sue a defendant’s insurer for bad faith: “the relationship between plaintiffs and [the tortfeasor’s insurer] is by nature adversarial, and we find no obligation imposed on [the insurer] to conform to a particular standard of conduct with respect to plaintiffs.” Larocque v. State Farm Ins. Co., 163 Vt. 617, 618, 660 A.2d 286, 288 (1995).
4. Finally, it is not clear whether insurers may be sued under Vermont’s Consumer Protection Statute (9 V. S. A. § 2451 et seq.), which allows recovery for misleading representations, practices, or omissions. In 1981, our high court held that insurance was not the type of “goods and services” protected under the statute. Wilder v. Aetna Life & Casualty Insurance Co., 140 Vt. 16, 433 A.2d 309 (1981). After the legislature amended the definition of “goods and services” in 1985, many trial courts (but not all) held that insurance is now covered by the statute. Fish v. Allstate Ins. Co., (No. S0056-03 CnCv (Katz, J., June 11, 2003), Bertelson v. Union Mutual Fire Insurance Co., No. 834-04 Cncv (Norton, J., Nov. 22, 2004); Vallee v. Am. Int’l Spec. Lines Ins. Co., 431 F. Supp. 2d 428, 442 (D. Vt. 2006); Christopher Blake v. Progressive Northern Insurance Co., no. 164-9-15 Oecv (Tomasi, J., February 4, 2016); but see, Nautilus Ins. Co. v. Loomis, No., 194-9-10, Oecv (Eaton, J., Feb. 29, 2012) (holding that, in the absence of either a more specific expression of legislative intent, or decision by the Vermont Supreme Court, to abrogate Wilder, that case remains controlling precedent). The Vermont Supreme Court, however, has avoided every opportunity, since 1985, to revisit the Wilder decision.
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