INSURANCE COVERAGE

LITIGATION
Little Rock
April 6
Crown Plaza Little Rock
201 S. Shackleford, Little Rock AR 72211
 INSURANCE COVERAGE
LITIGATION
• COMMON KINDS OF INSURANCE
COVERAGE DISPUTES
• J. G. “Gerry” Schulze
• Baker & Schulze
• gerrysch@gmail.com
• 501 537-1000
• 501 537-1016
 COMMON KINDS OF DISPUTES
• Basic Principles Underlying All Insurance
Coverage Disputes
• Insurance is a contract
• Insurance is a contract of adhesion
• This just means take it or leave it.
• Insurance is heavily regulated by the state
• 23-65-101. Unauthorized insurance transactions
prohibited.
 Basic Principles
• Read the statute and read the policy
• The statute controls
• If a statute requires a policy to contain a provision,
the policy is deemed to contain the provision.
• Whether it’s there or not.
• Public policy may control—but not often.
• If the law is silent on the matter, the contract
controls.
 Hiram Tweedle Hypothetical

Okay, this isn’t even close. I

tried to do a cartoon, but it
didn’t work.
 Hiram Tweedle Hypothetical
• What kind of insurance might be involved
here?
• Workers’ compensation
• This seems pretty elementary
• Liability against Bananaberry
• Homeowner’s?
• Commercial General Liability?
• Directors’ and Officers’ Liability?
 Possible exclusions
• Homeowner’s
• Business pursuits
• He’s throwing business documents out the window
• Criminal Act?
 Exclusions
• 2. Exclusions
• This insurance does not apply to:
•
• c. Dishonest, malicious, fraudulent, criminal or
intentional acts, errors or omissions. However, this
exclusion does not apply to you if such acts, errors
or omissions were committed by your “employee”
(other than a partner, director, executive officer, or
stockholder) without your direction or knowledge.
 Exclusions
• Paragraph B. EXCLUSIONS is amended by
the addition of the following:
• This additional insurance does not apply to
the cost of defending:
• 1. Any dishonest, fraudulent, intentional, or
criminal act or omission committed by you or at
your direction;
 Ordinary Sense
• First, a policy is interpreted in its ordinary and
popular sense.
• The context is not forgotten. When words
have a special meaning in the context of
insurance, that special meaning will not be
ignored.
• Example: “loss”
 Elements of Insurance
• Risk Distribution
• Among a substantial number of members
• Through an insurer engaged primarily in the
business of insurance
 Risk Distribution
• Risk: According to Black’s
• The chance of injury, damage, or loss
• The chance or degree of probability of loss to
the subject matter of an insurance policy
• The amount that an insurer stands to lose
• A person or thing that an insurer considers a
hazard
• The type of loss covered by a policy
 Who will suffer the risk?
• Without insurance, the unlucky person who
suffers the misfortune
• A person who intentionally or negligently
proximately causes the misfortune to occur to
others
• Under certain statutory schemes, the party the
legislature decides should bear the loss
(Workers’ Compensation, e.g)
 What risk can be transferred?
• Obviously, the actual misfortune cannot be
transferred. If someone runs over me in the
parking lot and breaks my leg, I can’t transfer
the broken leg to him
• Economic loss, and economic compensation
for other losses is all we can transfer.
 Insurance transfers risk
• Insurer work on the basis of statistics
• Actuaries calculate the risk of certain
eventualities over the population of the
insured
• Insurers fix premium rates to cover losses,
administrative costs, and other costs
• Bonuses for insurance executives, for example
 Rate Filing
• Insurers file
with the
Arkansas
Insurance
Commission
 Factors in calculating risk
• To figure out a premium the actuary has to
consider
• What is the risk to be covered?
• How frequently will the risk occur?
• How much will it cost to cover the risk?
• What will it cost to administer the program?
 The Insurer
• Primarily in the business of insurance
• Compare warranties on merchandise
• An insurer is in the business of insuring against
risk of loss
• A manufacturer can guarantee that its widgets will
work. There is always a risk that the widgets
won’t work. If that risk occurs, the insurer will
replace the widgets. But the manufacturer isn’t
really an insurer
 Underwriters
• Underwriting in this context is just the act of
assuming a risk by insuring it
• The insurer assumes liability to pay the
proceeds on loss
• Historically, there were mutual assessment
associations. Sometimes it was hard to collect
when members were assessed. That’s where
the underwriter came in.
 Underwriting
• Lloyd’s Coffee House in
London, 1600’s, shippers
would pass around a slip of
paper with relevant facts.
Interested person would write
on the slip the amount of
insurance, the rate, and his
initials. Hence: Underwriting.
 Types of Insurance
• In theory just about anything legal could be
insured
• In practice most insurance actually written
can be categorized as:
• Life Insurance
• Fire and Casualty Insurance
• Marine and Inland Marine Insurance
 Life Insurance
• Pay on death—easy enough
• Who is involved:
• Insurer
• “Owner” of the policy—who can change
beneficiary
• “Owner” often is, but is not always the subject of
the policy, the cestui que vie
• “Beneficiary” Who is paid in the event of loss
 Fire and Casualty
• Fire
• Pretty simple concept
• Except that by now this
insurance also can cover
other losses such as
weather (lightning, water,
etc). There is also
earthquake, riot, etc.
insurance available.
 Casualty
• Liability
• Theft/burglary
• Accident
• Health
• Property damage
• Workers Compensation
• Fidelity and surety bonds
• Car insurance
• Boat / airplane insurance
Marine Insurance
• “Perils of the sea”
• Fairly comprehensive, covering all losses
except those excluded.
• Similar, Inland Marine Insurance, covers gaps
between seas and docks.
 Yacht Insurance Policy
• PERILS
• Upon the Hull, Spars, Sails, Tackle, Apparel, Machinery, Boats, and other
Furniture of and in the Yacht hereby insured.
• Touching the adventures and perils which we, the Assurers, are contented
to bear, and do take upon us, they are of the
• seas, men-of-war, fire, enemies, pirates, rovers, assailing thieves,
jettisons, letters of mart and countermart, reprisals,
• takings at sea, arrests, restraints and detainments of all kings, princes and
people, of what nation, condition or quality
• soever, barratry of the Master and Mariners, and of all other like perils,
losses and misfortunes, that have or shall
• come to the hurt, detriment or damage of said Yacht or any part thereof.
 Floater policies
• All risk insurance on personal property not
situated at a fixed location. Another kind of
inland marine insurance.
 No fault Compensation
• Workers’ Compensation
• Automobile No Fault
 Policy language: Liability Insurance
• The company will pay on behalf of the
insured all sums which the insured shall
become legally obligated to pay as damages
because of ... the property damage to which
this insurance applies, caused by an
occurrence.
 Occurrence
• An accident, including continuous repeated
exposure to conditions, which results in
bodily injury or property damage, neither
expected nor intended from the standpoint of
insured.
 Language of Insurance Policies
• Legal Language is a dialect of English
• Special meaning of words--jargon
• Special constructions
• Subjunctive more common
• Struggle for more precision in language
• Use of “magic words”
 Plain Language
• The standardized insurance policies are
somewhat “plainer” than the old ones were
• They are still necessarily confusing, because
their topics are confusing
• Pay careful attention to the definitions.
• Vizzini: HE DIDN'T FALL?
INCONCEIVABLE. 
Inigo Montoya: You keep using that word. I do
not think it means what you think it means. 
 Ambiguity
• If there is an ambiguity, the contract is
construed in the light most favorable to the
insured.
• In most cases, this is the application of the
contra proferentem rule.
• The fact is that the language of most insurance
policies is drafted not only before the insured is
identified, but sometimes before even the insurer
is identified.
 Ambiguity
• The rule that a policy is construed in the light
most favorable to the insured doesn’t apply
unless there is an ambiguity in the first place
• An ambiguity occurs when the language is
capable of more than one meaning when read
in context.
• A contract must be interpreted to give effect to all
its provisions
 What is “ambiguity”
• Ambiguity
• Lack of precision and clarity.
• When a reasonable person can understand your
writing in more than one way.
 Ambiguous words
• Example: biweekly.
• Main Entry: 1bi·weekly    Pronunciation Guide
Pronunciation: ( )b +
Function: adjective
Etymology: 1bi- + weekly
1 : occurring or appearing every two weeks : having a 2-
week interval between recurrences : FORTNIGHTLY
 -- now usually used with this meaning in respect to
publication dates; compareSEMIWEEKLY
2 : occurring or appearing twice a week : 
SEMIWEEKLY -- used especially of transportation
schedules 
• "biweekly." Webster's Third New International
Dictionary, Unabridged. Merriam-Webster, 2002.
http://unabridged.merriam-webster.com (3 Mar. 2010).
 Ambiguous punctuation
• It’s easier if we step away from insurance for a
moment.
• The witness identified defendant Jones, the butler,
defendant Smith, the cook, and defendant Brown, the
gardener.
How many people
did the witness
identify?
 You can fix that, of course.
• Example of the use of semicolon to distinguish
separate elements
• Correct:
• The witness identified defendant Jones, the butler;
defendant Smith, the cook; and defendant Brown, the
gardener.
• Incorrect:
• The witness identified defendant Jones, the butler,
defendant Smith, the cook, and defendant Brown, the
gardener.
 NOUN PLAGUE

• The National Highway Traffic Safety

Administration’s automobile seat belt “interlock”
rule.
• Garner, Dictionary of Modern Legal Usage, s.v. “Noun
Plague.”
• baseball game ticket price increase proposal
• Raymond P. Ward, For the Defense,
Dec. 2005, at 74 (DRI 2005). 
 Some contracts can be interpreted by
a jury
• Where interpretation of a contract depends on
other evidence, such as parol evidence, a jury
may be able to interpret a contract
• That is unlikely to happen with insurance.
 Insurance Policies are Interpreted by
the Court
• An insurance policy is to be interpreted by the
court as a matter of law. Smith v. Prudential
Prop. & Cas. Ins. Co., 340 Ark. 335, 10
S.W.3d 846(2000) overruling Farm Bureau
Mut. Ins. Co. v. Whitten, 51 Ark. App. 124,
126-27, 911 S.W.2d 270, 271 (1995).
• Whitten created some confusion because it
suggested that sometimes the interpretation of an
insurance contract could be left up to a jury
 Distinguish ERISA
• Employee benefit plans governed by the
Employee Retirement Income Security Act of
1974 are not governed by insurance law, but
by ERISA. All these rules of construction go
out the window.
 Parties to an Insurance Policy
• Insurance Company
• Insured
 Others involved
• Claimant/Plaintiff (Third Party)
• Insurance Agent or Broker
• Lawyers
 Structure of an Insurance Policy
• DECLARATIONS PAGE
• Usually stapled to the front
• Blanks filled in for
• Name of insured
• Policy number
• Limits of coverage
• Policy period
• Lists of which documents constitute the policy
• Coverage provided
• Name of agent
• Logo and catchy slogan
 Structure of an Insurance Policy
• Contract (Usually Preprinted)
• Insuring Agreement
• Definitions
• Grant of Coverage
• Exclusions
• Conditions
• Conditions precedent
• Conditions Subsequent
• Covenants
• Endorsements
 Structure of an Insurance Policy
• Standardized Forms
• The insuring agreements are almost always
standardized forms.
• The Insurance Services Office writes a lot of
them, but there are other trade associations as well
• Mutual Insurance Rating Bureau
• Insurance Rating Bureau
• National Bureau of Casualty Underwriters
• Confederated Gobbledygook and Boilerplate
Conglomerate
 Significance
• The Insured has the burden of proof on coverage
• The Insurer has the burden of proof on exclusions
• With a condition precedent, the insurer need not
prove prejudice. All the insurer must show is that
the condition precedent was not met. Fireman's
Fund Ins. Co. v. Care Mgmt., 2010 Ark. 110.
• Decided after the written materials were written. March
4, 2010. See the footnote on p. 17. I guessed wrong. The
Eighth Circuit guessed right. All I guessed wrong on was
the insurers’ strategy, though.
 Typical exclusions
• Intentional Act
• Exclusions There are certain instances which we do not
intend to cover for liability. Under this policy, liability to
others and medical expenses do not apply to personal
injury or property damage:
• 1. Which is expected or intended by an insured.
• CNA Ins. Co. v. McGinnis, 10 Ark. App. 234, 663 S.W.2d 182
(1994) rev'd CNA Ins. Co. v. McGinnis, 282 Ark. 90, 666 S.W.2d
689 (1984).
• The test is whether a plain ordinary person would expect
and intend damage to result from the actions involved.
 Typical Conditions
• Notice
• Inventory
• Cooperation
 Typical Endorsements
• Additional coverage
• Commercial policy, computer equipment, etc.
 Significance
• I don’t think the Arkansas Courts have given
extraordinary weight to the simple location in
a policy of a particular provision.
• Courts in other states have rejected the idea
that you can assign burdens of proof
“reflexively” just based on where in a policy a
particular provision is found.
• Appleman 3.07-[1].
 Lines of Insurance
• Homeowner’s
• Casualty/Indemnity
• Automobile
• Commercial
• Life
• Disability
 FIRST PARTY COVERAGE
• Identifying the insured
• Declarations page
• Definitions page
• Insuring agreement

• IV. DEFINITION OF INSURED

• The unqualified word "INSURED" includes the named insured

and if the named insured is an individual, his spouse and
dependent children residing in the household and also includes: *
***
 Insured
• . . . "insured" means a person or organization
described under "Persons Insured"; . . .

• Persons Insured: The following are insureds under

Part 1: * * * (2) any other person using such
automobile with the permission of the named
insured, provided his actual operation or (if he is not
operating) his other actual use thereof is within the
scope of such permission, and . . . .
 Insured
• In business policies, an insured may be
defined as including, "your employees, other
than your executive directors, but only for
acts within the course and scope of their
employment by you.“
• Tri-State Ins. Co. v. Sing, 41 Ark. App. 142, 850
S.W.2d 6 (1993).
 Acts of “an insured”
• An insurance policy which contains an
exclusion for acts of "an insured" can refuse
to pay an innocent insured if the acts of a
guilty "insured" void the policy.
• Noland v. Farmers Insurance Company, 319 Ark.
449, 892 S.W.2d 271 (1995).
 Separation of Insureds provision
• Except with respect to the limits of insurance,
and any rights or duties specifically assigned
in this coverage part to the first Named
Insured, this insurance applies:
• (a) As if each named Insured were the only named
Insured: and
• (b) Separately to each Insured against whom
claim is made or suit is brought.
• Silverball Amusement, Inc. v. Utah Home Fire
Insurance Co., 842 F.Supp. 1151 (W.D.Ark. 1994).
 Cause of Loss
• Definition of “occurrence” in policy.
• "an accident, including continuous or repeated
exposure to substantially the same general
and harmful conditions, which results in
bodily injury or property damage neither
expected nor intended from the standpoint of
the insured."
 Definition of Damage
• Property damage in the policy is defined as:
• (1) Physical injury to or destruction of tangible
property which occurs during the policy period,
including the loss of use thereof at any time resulting
therefrom, or
• (2) Loss of use of tangible property which has not
been physically injured or destroyed provided such
loss of use is caused by an occurrence during the
policy period.
 First Party Coverage
• Protects insureds or their heirs from losses
• Health Insurance
• Disability Insurance
 Third Party Coverage
• Liability Coverage
• Automobile
• Workers’ Compensation
• Property Insurance
• Homeowner’s
• Commercial
• Professional Liability
 Policies that provide both
• As a practical matter, in most circumstances,
if an entity needs first party coverage, he, she,
or it needs third party coverage too.
• Many policies have provisions that provide
both First Party and Third Party coverage
 Homeowners Policies
• First Party coverage on dwelling
• Property damage—physical injury to, destruction of,
or loss of use of tangible property.
• Fire, storm, etc.
• Exclusions
• Earth movement
• Collapse
• Mold
• War, nuclear hazard
• Flood
• Business
 Exclusion: Criminal Acts
• We do not cover any bodily injury or property damage intended by, or
which may reasonably be expected to result from the intentional or
criminal acts or omissions of, any insured person. This exclusion applies
even if:
• (a) such insured person lacks the mental capacity to govern his or her
conduct;
• ******
• (c) such bodily injury or property damage is sustained by a different
person than intended or reasonably expected; . . .
• This exclusion applies regardless of whether or not such insured person is
actually charged with, or convicted of, a crime.

• Allstate Insurance Company v. Burroughs, 914 F. Supp. 308 (W.D. Ark.,

1996)
 Exclusion: Business Pursuits
• Business pursuits
• This exclusion provides that the liability coverage
does not apply "to bodily injury or property
damage arising out of business pursuits except
activities therein which are ordinarily incident to
non-business pursuits." U.S.Fire Insurance Co. v.
Reynolds, 11 Ark. App. 141, 667 S.W.2d 664
(1984).
• As you can see, there is an exclusion, and an
exception to the exclusion.
 Commercial General Policies
• Insured: Business, officers, directors, owners,
• Perils: fire, lightning, explosions, theft, smoke
• Exclusions, riot, volcanoes, collapse, etc.
• Coverage for Bodily Injury claims
• “Personal Injury” Term of art, intangible injuries
including false arrest, false detention, false
imprisonment, etc.
• Advertising injury.
 Exclusion: Automobile
• Typical exclusion
• Automobile:
• This policy does not apply to bodily injury or property
damage arising out of the ownership, maintenance
operation, use, loading or unloading of any motor
vehicle owned or operated by, or rented or loaned to
any insured; but this provision does not apply to bodily
injury or property damage occurring on the resident
premises if the motor vehicle is not subject to motor
vehicle registration because it is used exclusively on
the residence premises or kept in dead storage on the
residence premises.
 Pollution exclusions
• It is agreed that the exclusion relating to the actual, alleged or
threatened discharge, dispersal, release or escape of
pollutants is replaced by the following:
• (1) Bodily injury or property damage arising out of the actual, alleged
or threatened discharge, dispersal, release or escape of pollutants.
• (2) Any loss, cost or expense arising out of any governmental
direction or request that the named insured test for, monitor, clean up,
remove contain, treat, detoxify or neutralize pollutants.
• Subparagraph (1) above does not apply to bodily injury or property
damage caused by heat, smoke or fumes from a hostile fire. As used
in this exclusion, a hostile fire means one which becomes
uncontrollable, or breaks out from where it was intended to be.
• Pollutants means any solid, liquid, gaseous thermal irritant or
contaminant, including smoke, vapor, soot, fumes, acids, alkalis,
chemicals and waste.
• Waste includes materials to be recycled, reconditioned or reclaimed.
 Exclusion: Grooming
This insurance does not apply to “bodily injury”, “property damage”,
“personal injury” or “advertising injury”
• arising out of:
• 1. The rendering of or failure to render any service, treatment, advice or
instruction related to:
• a. Any hair removal by electrolysis or any surgical procedure to remove or
replace hair;
• b. Any application of permanent cosmetic makeup, tattoos or other
implantation of pigments into skin pores;
• c. Any invasive medical or surgical procedure to improve or alter the
appearance of skin, including but not limited to injections, chemical peels,
dermabrasion, laser surgery or cryosurgery;
• d. Body piercing, other than piercing of ears;
• e. Diet or physical fitness; however, this exclusion does not apply to the
use of physical fitness facilities if the user is not under the direct
supervision of a personal trainer;
• f. Chiropody; or
• g. Tanning the skin; or
From my legal malpractice policy. (From a hotel
policy)
 Directors and Officers
• “Side A” coverage covers losses directly
incurred by the directors and officers which
the corporation is not required or allowed to
pay.
• “Side B” reimburses the corporation for
losses incurred by the directors and officers
that the corporation is allowed to pay.
• “Side C” arose when corporations noticed that
there was no coverage for their own out of
pocket losses, which could be substantial.
 Errors and Omissions
• Professional liability insurance for:
• Doctors
• Architects
• Engineers
• Surveyors, accountants, lawyers, agents,
brokers, bankers, and the like
 Occurrence versus Claims Made
• An occurrence policy covers the insured for
any occurrence that happens while the policy
is in force
• A claims made policy covers the insured for
any claim made while the policy is in force.
 Construction Defect
• D. “Construction Defect(s)” means any actual or alleged
defective, faulty, or delayed construction or any other matter
constituting a construction defect under applicable law,
regardless of whether it results from:
• (1)defective or incorrect architectural plans or other designs,
• (2)defective or improper soil testing,
• (3)defective, inadequate or insufficient protection from subsoil or
earth movement or subsidence,
• (4)construction, manufacture or assembly of any tangible
property,
• (5)the failure to provide or pay for any construction-related
goods or services, or
• (6)the supervision or management of any construction-related
activities.
 Back to Bananaberry analysis
• Is there a homeowner’s claim here?
• Is he engaged in business or is he just cleaning
out his house?
• Is there a criminal acts exclusion?
• If neither exclusion is good, why should the
plaintiff bother suing the insurance company?
• Bananaberry’s got money. Let him collect from
his insurer.
• Penalty and attorney’s fees.