Insurance is all about trust, at least it was before.

Traditionally, trust played a big part in the relationship between a policyholder and their insurance company.  When a claim is being made, the insurance company becomes responsible for maintaining the policyholders trust.  In the days of COVID Business Income claims it seems that maintaining the trust of the policyholder has taken a back seat to rush coverage letters to policyholders.  If an insurance company is looking to maintain credibility, taking the time to issue transparent coverage letters is vital.  A policyholder typically losses any trust they had because of a bad claim experience.  Claims do not have to paid for trust to remain.  Not all claims are covered, but at all times trust can be built. 

How are insurance companies losing the trust of the policyholder? One such example is in issuing reservation of rights (“ROR”) letters that fail to disclose exceptions to exclusions.  A ROR is supposed to disclose specific information about the known facts of the claim, the relevant terms of the insurance policy, and the reasoning that all or part of a claim may not be covered.  In this blog post we will examine an exception to an exclusion that was probably omitted from your ROR.

DISCLAIMER:  This example will feel real, but it is completely hypothetical.  The views and opinions expressed are not universally applicable and are meant for educational purposes only.  I reserve the right to change, modify, or reverse any views or opinions expressed.

When an adjuster fails to disclose all relevant parts of an insurance policy to an insured it’s a good chance they are not in compliance with state laws governing fair claims practices.  It is odd to me, that most adjusters do a good job relaying the facts as they understood them, but then fail to deliver a coverage letter that clearly discloses the complete terms of the relevant sections of the insurance policy.  The most common error is leaving out the exceptions to exclusions.  When an exclusion applies to a claim it typically means that the insuring agreement of the policy was met, but the cause of the loss was not a covered peril, thus excluded.  An insuring agreement is broadly stated and exclusions are meant to be narrowly written and applied.  An exclusion must be clear with precise language.  Chances are pretty good you have received a coverage letter that mentions a pollution exclusion, but the following wording may not be the exact words in your insurance policy.  Let’s look at a hypothetical pollution exclusion closely and see how a failure to disclose exceptions to exclusions can erode a policyholders trust.

Pollution Exclusion:

This Policy does not cover loss or damage caused by, resulting from, contributed to or made worse by actual, alleged or threatened release, discharge, escape or dispersal of “POLLUTANTS” all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this Policy.

When looking at the actual insurance policy the wording will most likely continue. For our purpose let’s say that Virus is in the definition of “POLLUTANTS”.  Additionally, for the sake of this blog post, I am paraphrasing—hopefully you will still trust me.  So let’s get to the part that some insurance companies are leaving out, and that you have probably not seen in the coverage letter sent by your insurance company.    

This exclusion shall not apply when loss or damage is directly caused by fire, lightning, aircraft impact, explosion, riot, civil commotion, smoke, vehicle impact, windstorm, hail, vandalism, malicious mischief.  This exclusion shall also not apply when loss or damage is directly caused by leakage or accidental discharge from automatic fire protective systems.

So, you may recall from the last blog post about the Flesch Reading Ease Test, this is where insurance coverage language gets tricky.  First, note a key word in the exclusion—alleged.  Then, look at the verbs used--release, discharge, escape, and dispersal.  Lastly, look at the last eight words of the exclusion, “by any physical damage insured by this policy.”  This is essentially saying that any physical damage that is alleged to have been contributed to by the release, discharge, escape, or dispersal of COVID is not covered.  But then we get into the exception to this exclusion.  When an exception to an exclusion applies it means coverage is afforded for your claim.  Look at these words in the exception above:

                                “This exclusion shall not apply when loss or damage is directly caused by… civil commotion.” 

What is a civil commotion?  Well, we know it is not a riot because riot appeared in the policy right before civil commotion.  When in doubt about the meaning of a word check the dictionary, just be careful which one you use these days—not all dictionaries are held in the same regard.  For us, Webster’s Third New International Dictionary (Unabridged) provides the following definition of Civil Commotion:

                                Civil: 1a: relating to, growing out of, or involving the relations of citizens one with another. . . .

                                Commotion: 3: mental…uncertainty…

So let’s bring this all together.  Hypothetically speaking, this Policy does not cover loss or damage resulting from the alleged release, discharge, escape or dispersal of COVID, all whether direct or indirect, proximate or remote or in whole or in part caused by, contributed to or aggravated by any physical damage insured by this Policy unless the loss or damage is directly caused by the mental uncertainty growing out of or relating to the relations of citizens one with another.  In other words, it appears at least plausible that if your business suffered loss or damage is directly caused by mental uncertainty involving the relations of citizens, one with another, then coverage applies to that loss or damage.    

Is it possible that physical loss of your business premises occurred because it was deemed, “essentially social” and forced to close?  Is it because your bar or restaurant is where the people come to relate to one another? Is the direct physical loss of your property due to the dangerous condition present by allowing your operations to continue? These are the issues being explored in litigation all across the country.  Until either courts or legislators take up the issue, it appears for the time being, that insurance companies may continue to lose your goodwill when they fail to establish trust in the handling of your claim through the full disclosure of the complete relevant policy terms.  By failing to disclose the exceptions to exclusions, whether relevant in the eyes of the insurer or not, speaks to the trust a policyholder places in the insurance company.  If the insurer does not believe the exception to be relevant they can explain their reasoning, but its complete omission, in my opinion, is misleading to policyholders. 


David R. Princeton - CPCU, AMIM, AIC, CSRP

Principal Consultant

Advocate Claim Service, LLC.

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