The personal auto policy has an exclusion precluding liability coverage for any insured who intentionally causes bodily injury or property damage. The Supreme Court of Utah has decided to limit the scope of that exclusion. The case is Speros v. Fricke, 98 P.3d 28 (Utah 2004).

In this case, Hiatt was a passenger in a car owned and driven by Fricke. On the way home from a nightclub, the two got into an argument and Hiatt suddenly grabbed the steering wheel. This caused the Fricke car to veer into oncoming traffic and crash into a car driven by Speros, who was injured and had his auto damaged. Speros was compensated by his insurer, West American Insurance Company, which then sought subrogation from Fricke's insurer, Nationwide. Nationwide believed that Fricke was not negligent and that its policy with Fricke did not extend coverage to Hiatt, so it refused West American's demand. A lawsuit followed.

Nationwide defended itself and Fricke but chose not to defend Hiatt because it had no duty to defend him. West American obtained a default judgment against Hiatt and sought payment from Nationwide. The trial court sided with Nationwide and the dispute ended up in the state's highest court. The Supreme Court said it had to decide if Hiatt was an insured under Fricke's policy and if so, if the intentional act exclusion applied.

Nationwide claimed that Hiatt was not an insured under Fricke's auto policy because he was not a permissive user. The court noted that the policy said that any person who is legally responsible for the use of the named insured's auto and uses it with permission is an insured. The court said that Hiatt was using the car with permission in that he had accepted Fricke's offer for a ride, and was thus using the car with permission in the sense that he was invited to sit in the passenger seat. The court held that this interpretation was dictated by statutory language and supported by practical considerations of efficiency and predictability in resolving insurance claims.

The controlling statutory language did not limit permissive users to those who drive or operate a vehicle. The state legislature simply mandated coverage for permissive “users” and that can be seen as including those who are riding in the vehicle as passengers. The court noted that other state courts have decided that one who grabs the steering wheel disqualifies himself as a permissive user (for example, Illinois, Kansas, Louisiana, Pennsylvania, and Washington), but none of those decisions relied on statutory language as it was written in Utah. Utah allowed permissive users to be insureds and since Hiatt was using the car as a passenger with permission from Fricke, he was an insured under the Nationwide auto policy.

Nationwide in the alternative claimed that, even if Hiatt was an insured, he had no coverage due to the intentional acts exclusion. The policy did not cover property damage or bodily injury caused intentionally by or at the direction of an insured. Nationwide contended that Hiatt's actions in grabbing the steering wheel were intended to cause injury or damage and so, his actions were not covered. In answer to this, the Supreme Court pointed out that the state legislature had enacted a comprehensive statutory scheme mandating minimum liability coverage for motor vehicles. That statute recognized no distinction between liability arising out of negligent acts and liability arising out of intentional acts; it simply requires coverage for all liabilities imposed by law. Therefore, the intentional acts of Hiatt required liability coverage. This reasoning was supported, said the court, by other decisions from around the country from state courts in Hawaii, Massachusetts, North Carolina, South Carolina, Delaware, Georgia, West Virginia, Louisiana, New Hampshire, Virginia, and South Dakota.

This coverage for Hiatt's actions was not absolute, however. The intentional acts exclusion was unenforceable against accident victims only up to the minimum liability limits prescribed by state law. At the time of this accident, Utah required a minimum coverage of $25,000 for liability for bodily injury to or death of any one person arising out of the use of a motor vehicle, and $15,000 for liability for property damage in any one accident. The amounts claimed by West American fell within the statutory minimum limits and so, the intentional acts exclusion did not apply to allow Nationwide to refuse payment. West American was entitled to be reimbursed for its payments to Speros.

Household Exclusion and the Umbrella Policy

The question has been asked in New Mexico whether household exclusions in liability policies are void as against public policy. The Supreme Court in the state has answered the question in Government Employees Insurance Company v. Welch, 90 P.3d 471 (N.M. 2004).

Welch was driving in Santa Fe and got involved in an accident. His wife was seriously injured. The Welch couple has an umbrella policy with a limit of $1,000,000 and a household exclusion that stated that the policy did not cover damages resulting from injury to any insured (which included the named insured and spouse if a resident of the named insured's household). GEICO filed a declaratory judgment action, arguing that the wife's claim against the husband is excluded by this household exclusion.

When the case got to the state Supreme Court, that court noted that in previous cases, it had concluded that the family exclusion provisions in liability and uninsured motorists coverages implicate a fundamental principle of justice and are contrary to New Mexico public policy. GEICO argued that the precedents were decided in the mandatory liability insurance and uninsured motorists contexts and so, they should not be extended to the optional umbrella liability policy with which this case was concerned. The court disagreed. The court said that once an insurance company offers insurance that is in excess of the limits required by law, whether it is primary vehicle coverage beyond that which is required by statute or umbrella policies that include coverage for motor vehicle accidents, the coverage applies equally to the victims of such accidents whether or not they are family members. Where excess auto coverage is explicitly provided, public policy prohibits exclusion of an arbitrarily designated class of household member victims for no legitimate reason.

GEICO also argued that the exclusion should be upheld because the majority of courts around the country have upheld similar optional umbrella liability policy household exclusions, and because the exclusion represented freedom to contract. The Supreme Court simply rejected both arguments and found that the exclusion violated New Mexico public policy and was unenforceable. The court limited the decision to the circumstances of this particular case, saying that it would not address household exclusions beyond auto liability and uninsured or underinsured coverages contained in umbrella policies.

Anti-Stacking Clauses Ruled Void in South Dakota

A motorcycle passenger brought an action against her auto insurer to recover uninsured motorists (UM) benefits after she recovered UM benefits under the motorcycle owner's policy. This involved stacking and the Supreme Court of South Dakota had to decide if an anti-stacking clause prevented such an action. The case is Phen v. Progressive Northern Insurance Company, 672 N.W.2d 52 (SD 2003).

Phen was seriously injured when the motorcycle she was on was struck by another vehicle (uninsured); her injuries amounted to about $100,000. After recovering $25,000 from the motorcycle owner's policy, Phen made a claim for the $25,000 UM limit under her policy with Progressive. Progressive denied coverage based on an exclusion and on an anti-stacking provision meant to prohibit the insured from collecting under the policy when other UM coverage was available. Phen then brought a lawsuit to determine whether these provisions on her policy violated public policy in South Dakota . The trail court sided with Phen and the insurer appealed. The Supreme Court got the case and affirmed the lower court's decision.

The court began by discussing stacking. It said that stacking of auto policy coverages arises where the same claimant and the same loss are covered under multiple policies, or under multiple coverages contained in a single policy, and the amount available under one policy is inadequate to satisfy the damages alleged or awarded; in other words, insureds or claimants add all available policies together to create a greater pool in order to satisfy their actual loss. Here, Phen's policy had a clause that prohibited stacking, but the court ruled that that clause violated public policy.

The court noted that the state legislature made UM coverage mandatory, and that the legislature had also addressed the issue of stacking over the years, but had not prohibited stacking under circumstances such as in this case. Therefore, the court held that since the legislature clearly enunciated a public policy of requiring insurers to provide UM coverage to every insured in the state, a policy clause that purported to eliminate that coverage violated public policy. This was especially true where, as in this case, the insurance company would completely escape any liability whenever there is any other applicable insurance available, regardless of the amount available or the damages sustained by the insured. Phen was entitled to stack her $25,000 policy limit onto the $25,000 she received from the policy of the motorcycle owner.

What are the States Doing?

The Kansas Department of Insurance now believes that the arbitration/appraisal clause in insurance policies can be put to use only when resolving disputes that have already arisen and when both parties volunteer. This would seem to contradict language in many policies—such as the personal auto policy and the commercial property policy—that allow either the insured or the insurer to demand an appraisal.

Maryland law now requires that insurers offer under a policy (or a binder) of private passenger motor vehicle liability insurance, coverage for claims made by a family member in the same amount as the liability coverage for claims made by a non-family member. This law applies to policies issued on or after January 1, 2005. The household exclusion is now under attack in Maryland .

New Hampshire says that medical payments coverage under the auto policy is not a plan and would not be primary in relation to group health coverages. Insureds can choose and coordinate medical payments coverage and group health coverages for medical expenses.

New Mexico has decided that provisions in a construction contract that would hold an additional insured harmless for liability caused by or resulting from, in whole or in part, the negligence of an additional insured is void and unenforceable.

Speaking of Security

An article by Charles Fleming in the “Money & Investing” section of the Wall Street Journal (December 13, 2004) is “Terrorism Insurance: Many Companies Going Without.” The author notes that figures indicate that only about 45 percent of companies have purchased this coverage on their property policies. As one might expect, the coverage is more prevalent in those parts of the country thought to be more prone to terrorist attacks.

As a reminder, as of this writing the Terrorism Risk Insurance Act (TRIA) of 2002 will sunset on December 31, 2005, unless Congress acts to extend it.

Mold, Updated

The 1991 ISO homeowners forms (HO 00 03) have included “mold” among the “wear and tear, rust or other corrosion” group of losses that are not covered. These are the perils that will occur over time; they are not fortuitous and are thus uninsurable. (Of course, if one of these excluded perils results in a covered peril, that resulting peril is covered.) The editors of FC&S Bulletins have always been of the mind that when a covered cause of loss results in mold, that resulting mold cleanup is also covered. For example, a fire occurs; the water used to suppress the fire isn't immediately dried and there is mold growth. A tornado rips off a roof; because restoration companies in the area are stretched beyond capacity, the unfortunate homeowner finds mold growth in the insulation in the wall cavity.

The 2000 ISO homeowners (HO 00 03) specifically states that “We do not insure against loss caused by….mold, fungus, or wet rot. However, we do insure for loss caused by mold…that is hidden within the walls or ceilings or beneath the floors or above the ceilings… if such loss results from…accidental discharge… from within a plumbing… system.”

The AAIS homeowners form 3 states “'We' do not pay for loss if one or more of the following exclusions apply to the loss. However, 'we' do pay for an ensuing loss that is otherwise covered by this policy… c. Wear and Tear – 'We” do not pay for loss which results from wear and tear… corrosion, mold, contamination…”

The language of these forms is important—so important, in fact, that one case construing it is one of Randy J. Maniloff's “2004: The Year's Ten Most Significant Insurance Coverage Decisions,” which appears in the January 4, 2005 issue of “Mealey's Litigation Report: Insurance.” The particular case is Simonetti, et al. v. Selective Insurance Co., et al., 859 A.2d 694 (N.J. Super App. Div. 2004). The homeowners sustained a water loss following a heavy rainstorm, and mold developed. The insurer determined that poor workmanship caused the roof to leak, and denied coverage based on the faulty workmanship and mold exclusions. The policy language appeared to be that of the 1991 ISO form. The trial court agreed, but the New Jersey appeals court held differently. The court said “This distinction between mold damage and loss caused by mold is supported by the very language of Selective's policy: 'we do not insure, however, for loss caused by… mold…” This language does not exclude all mold. Rather, it excludes loss 'caused by' or resulting from mold. The language clearly focuses on 'cause' of the loss, conveying the intention to exclude mold as a cause of loss. But mold which is the loss is not mentioned. If Selective had intended to exclude not only losses caused by mold, but also mold itself, it could have easily expressed that intention.”

In reaching this conclusion, the court looked to the case of Liristis v. American Family Mutual Ins. Co., 61 P.3d 22 (Ariz. App. 2002). Here, mold damage was also found to be both a loss and a cause of loss, and “mold damage caused by a covered event is covered under the American Family policy in this case.” (Note, the exclusion for mold in the American Family policy was prefaced by anti-concurrent causation language.)

Why does Mr. Maniloff view Simonetti as one of the ten most significant? In his words: “If the loss versus cause of loss rationale adopted in Liristis continues to gain acceptance, some insurers may find that their normally reliable and water-tight anti-concurrent causation lead-in clauses are still not enough to relieve them of liability for certain property damage for which coverage was clearly never intended.”

Indeed, this question has just been certified to the Texas Supreme Court:: “Does the ensuing loss provision contained in Section I Exclusions, part 1(f) of the Homeowners Form B (HO-B) insurance policy as prescribed by the Texas Department of Insurance effective July 8, 1992 (revised January 1, 1996), when read in conjunction with the remainder of the policy, provide coverage for mold contamination caused by water damage that is otherwise covered under the policy?” See Fiess v. State Farm Lloyds, 2004 WL 2801796 (C. A. 5. Tex. 2004). Here, though, a covered cause of loss (water leaks from plumbing) resulted in the mold, rather than, as in Simonetti, an excluded cause of loss.

Subscribers will recognize Mr. Maniloff as a regular contributor to FC&S. He is an attorney at White and Williams, LLP, where he concentrates his practice in the representation of insurers in coverage disputes. Known for his humor as well as his clear and insightful writing, Mr. Maniloff begins his introduction to the Simonetti case with ” New Jersey appeals court splits spores…” He can be reached at [email protected], and will send a copy of his article upon request.