The Takeaways:
- Small difference in case circumstances and insurance documents sometimes can make or break the entire case in insurance claim.
- In a case involving homeowner insurance policy in Massachusetts, the lower court initially ruled in favor of the insurer, quoting the policy clause that excludes any abuse and molestation. The state Supreme Court later reversed the ruling, claiming that the abuse and molestation clause only applies when there is an imbalance of power between parties involved.
- In a case involving business interruption insurance in Louisiana, the state’s Supreme Court overruled an Appeals court decision on Covid-19 related business interruption insurance coverage, with the majority opinion insists on the requirement of direct physical loss and damage to trigger the coverage.
- The lesson here is to read the insurance policies very carefully to detect — and then to close —any legal loopholes in the contract as early as possible. We can expect AI GPT model to help us both draft better contracts and explain them for people without legal training at all.
It is no secret that insurance business has a close tie with the legal business as oftentimes we must settle insurance claims through court. What is less well known is that sometimes a little teeny tiny difference in the case scenario or documents can make or break the case.
Once in awhile you hear stories involving insurance companies and insurance contracts (i.e., policies) that open your eyes on how seemingly trivial difference can make a big legal and coverage difference.
This report by Insurance Journal on March 17 told us an interesting story involving homeowners policy: “Leonard Miville, a 61-year old man, who was visiting his girlfriend, was seriously injured by a 30-year old man, William Brengle, who was living next door with his parents. Brengle initiated an unprovoked attack on Miville, punching him in the head and repeatedly kicking him after he had fallen. Miville sued the Brengles.”
Initially a lower court granted a judgment in favor of the insurer, which in this case is the Dorchester Mutual Insurance Co. The lower court essentially says the insurer should not cover the attack because the homeowner policy contains a specific “abuse and molestation” clause to make any case involving abuse and molestation excluded from coverage.
“The Dorchester policy contained multiple exclusions from personal liability coverage, including the abuse and molestation exclusion, which excluded coverage for ‘bodily injury . . . arising out of sexual molestation, corporal punishment or physical or mental abuse,’” the report tells us.
The Massachusetts Supreme Judicial Court has now ruled otherwise, saying that the “act of physical abuse is not excluded by an abuse and molestation exclusion in a homeowners insurance policy unless the act involves ‘an imbalance or misuse of power in addition to being physically harmful.’”
In everyday language: Although the homeowner policy says abuse and molestation are excluded from insurance coverage, meaning insurer won’t pay for the injuries and damage caused by abuse and molestation, the high court disagrees. Instead, it believes that the attack by Brengle to Miville should not be excluded because the only time the abuse and molestation clause can apply is when there is an imbalance or misuse of power.
The way I look at it, the abuse and molestation clause seems to be designed for scenarios like when an underaged girl was abused and molested by her next door neighbor adult — or any adult she met online from a remote place — as that clearly involves imbalance and misuse of power of one party over another. Between a 61-year-old and a 30-year-old adults however, the imbalance of power is not obvious in the eyes of the high court, so should not be excluded. “The court found the age difference between the attacker and victim unavailing.”
Insurer of course sees the case differently. They argue that the age difference between Miville and Brengle demonstrated a physical power imbalance between the two. Additionally, the insurer argued that the incident was both violent and unprovoked, and thus Brengle’s disposition to inflict pain and suffering could be inferred from his conduct.
Interestingly, instead of inferring from the attacking incidence or circumstance, the high court chooses to infer from the insurance policy — a legally binding contract — in which “(i)mmediately preceding the term ‘physical abuse’ in the abuse and molestation exclusion are the terms ‘sexual molestation’ and ‘corporal punishment.’ Both ‘sexual molestation’ and ‘corporal punishment’ generally involve an imbalance or exploitation of power between the perpetrator and the victim, the court noted.”
In other words, although “physical abuse” in the contract does not have an explicit definition that demands power imbalance between the parties, the court tracks its chain of thoughts down to the neighboring terms to figure out what the contract intended to say.
“’Words are, at least in part, defined by the company they keep,’ the court commented.”
Another place the high court uses to help clarify the original policy ambiguity is to go back to the history of the abuse and molestation exclusion. The exclusion started in the early 1980s, when there was a surge of sexual abuse claims arose against clergy members within the Roman Catholic Church.
It said its interpretation of physical abuse requiring a power element is supported by the context in which the exclusion originated. In the early 1980s, A majority of states, including Massachusetts, determined that sexual abuse claims brought against an accused abuser were not covered by the terms of an accused’s liability policy that excluded coverage for expected or intended bodily injury. It was against this backdrop that insurance companies began including abuse and molestation exclusions in their policies.
Another Court Case Concerning Commercial Insurance
Here is another case in which Louisiana’s Supreme Court overruled an Appeals court decision on Covid-19 related business interruption insurance coverage.
In case you are unfamiliar with it, business interruption insurance is a type of insurance coverage that replaces business income lost in the event of a disaster or covered peril, such as a fire or natural disaster. Typically it is not sold as a separate or standalone policy but is either added to a property/casualty policy or most typically included in a businessowners policy (BOP), which is a bundled policy involving several coverages.
Note business interruption coverage typically requires a direct physical loss or damage to a property caused by a covered peril, such as fire or water damage, in order for the coverage to apply. In other words, there are numerous, even unlimited, ways a business can be disrupted, but only those caused by physical loss or damage will be counted by this coverage.
This requirement has been upheld by courts consistently. Specifically, a slowdown of income will have little chance to be counted toward business interruption by the court.
The upside of this rule is to make cases easier to judge, while the downside is that sometimes it is too narrow. Of course, business owners can always buy additional coverages for losses from flooding, earthquakes, and mudslides.
What make this Louisiana story interesting is that there is a split of opinions in the Louisiana Supreme Court ruling, 5-2. The case itself is rather simple: If an insured bought business interruption insurance before Covid, they would like the insurer to cover their business income losses due to Covid. On the other hand, insurers argue that the Covid does not exactly cause any direct physical damage or losses, so that it should not be covered.
This is not the first time the same case is brought to the attention of the court. In fact there were 10 other similar cases in other states’ supreme courts, all ruled in favor of the insurers. The only exception was in the state of Vermont, where its high court favored policyholders.
Another reason Louisiana differs from other states is that the same case has undergone three turns. The first trial in February 2021, a Louisiana state judge ruled in favor of the insurer, meaning Covid-19 did not qualify for direct and physical loss or damage to property. In June 2022, the first ruling was reversed by the Louisiana appeals court, which held that the restaurant was entitled to business interruption coverage because of ambiguous policy language.
In its ruling, the Louisiana appeals court says, “the phrase ‘direct physical loss of or damage to’ was ambiguous and should thus be construed against the drafter and in favor of coverage.”
This report of BusinessInsurance.com tells more details in the Louisiana Appeal court ruling. The court “said the policy ‘covers the loss of business income due to necessary ‘suspension’ of operations caused by ‘direct physical loss or damage to the property.’” “‘Suspension’ is defined in the policy as the ‘slowdown or cessation of your business activities.’ Therefore, under the terms of the contract, the complete cessation of operations and uninhabitable property are not prerequisites to payment for business losses suffered due to the suspension of operations caused by ‘direct physical loss or damage to the property.’”
I would personally support the above ruling and ask the insurer to take at least partial responsibility of covering the restaurant by a vague terminology in the contract that is open to different interpretations.
From the beginning of the story we already know the final turn of the case from the Louisiana Supreme Court: It reversed the ruling by the Appeals Court. The reasoning of the majority opinion of the high court focused on the requirement of “direct loss or damage” to property, and said, “‘COVID-19 did not cause damage or loss that was physical in nature.’ It ‘never repaired, rebuilt or replaced any property that was allegedly lost or damaged.’”
The dissenting opinion is also interesting. It states that “while the restaurant did not suffer any physical damage, “it did suffer physical loss of its property due to the physical contamination of the property by the COVID virus, a physical thing.”
It even used an analogy of smoke and business interruption. “Like smoke for a fire next door that did no physical damage to other premises, but caused the business to be closed until the odor could be removed and the business cleaned, a physical loss occurred.”
This opinion has been viewed positively by the attorney for policyholders. “If a business has to close because of smoke, even if it did not have the fire, it is ‘absolutely physical damage.’”
The Lessons
All parties, both insured and insurer, should draft and read the insurance contract or policy carefully to detect and then to close any loopholes in the documents. This used to be easier said than done but today the story is different, because we have the AI powered GPT (generative pretrained transformer) to help us. It is safe to expect future insurance contracts to contain fewer legal loopholes than before.
Based on the Massachusetts case involving homeowner liability coverage, legal loopholes can arise not only from particular terms that stand alone by themselves (e.g., the word “suspension” of business due to Covid in Louisiana) but also the contextual circumstances (i.e., the words before and after, like we see in the Massachusetts case on “abuse and molestation” clause).
AI GPT can also help everyone, including people with no legal training at all, understand legal contracts better, by entering documents into a GPT model and then ask for quick explanations in laymen’s terms. With the AI assistance we can expect fewer lawsuits in the future.
