During the insurance placement process, important policy terms and conditions are often the subject of negotiation. If things go as intended, the policy that is later issued accurately reflects the outcome of the negotiations. A frequently recurring question is what to do if it is later contended that the policy as issued does not accurately reflect what was negotiated.
These issues were involved in a recent insurance coverage dispute in California between a law firm and its professional liability insurer. When the law firm had renewed its insurance, it had increased the limits of liability available under its professional liability insurance policy from $2 million to $4 million. In arguing that only $2 million of coverage was applicable to a subsequent claim, the insurer sought to rely on a manuscript policy endorsement the insurer argued set policy inception as the past acts date for the $2 million excess of $2 million of limits. In a May 11, 2017 order (here) holding that the full $4 million limit of liability was available for the underlying claim, Central District of California Judge Josephine Staton, called the endorsement on which the insurer sought to rely “indecipherable,” adding that the insurer “must accept the consequences of its slapdash drafting.”
During the 2010 renewal of its professional liability insurance policy, the law firm Brown & Streza sought to increase the policy’s limits of liability from $2 million to $4 million. During the renewal process, communications took place between the insurer and the law firm’s insurance broker that the past acts date for the $2 million excess of $2 million increased limits would be at the date of inception of the renewal policy. (The first $2 million of coverage provided full past acts coverage.)
During the policy period of the renewal policy, the law firm received a demand letter from a former client. The law firm submitted the demand letter to its insurer as a claim. The insurer’s initial coverage letter stated that the full $4 million limits of liability were applicable to the claim. A subsequent letter from a different claims adjuster said that in fact only the primary $2 million was applicable to the claim.
The law firm filed an action against the insurer seeking a judicial declaration that the full $4 million was applicable. The insurer settled the underlying claim and filed a counterclaim against the law firm seeking a judicial declaration that only $2 million was available for the claim. The law firm filed a motion for summary judgment.
The declarations page of the policy specifies that the law firm has $4 million in coverage “for all claims made or deemed made during the Policy Period” and the Retroactive Date listed in Item 6 is “Full Prior Acts.” Endorsement #1 to the Policy states:
In consideration of the premium charged, it is hereby understood and agreed that with respect to the $2,000,000 excess of $2,000,000 of the Limit of Liability stated in the Declarations, the Insurer shall not be liable to make any payments in connection with any Claim made against the Insured prior to the below Retroactive date listed in Item 6 of the Declarations page:
Prior Acts Exclusion: May 03, 2011
The May 11, 2017 Order
In a May 11, 2017 order, Judge Staton granted the law firm’s motion for summary judgment, saying with reference to Endorsement #1, on which the insurer sought to rely in trying to argue that only $2 million of insurance applied to the underlying claim, that the Endorsement that the insurer had drafted is “perplexing,” “unintelligible,” and “indecipherable” and that the insurer “must accept the consequences of its slapdash drafting under California insurance law.”
In noting numerous ambiguities in the way the Endorsement is worded, Stanton observed that nowhere does Endorsement #1 restrict coverage for the insured’s “acts or omissions” that occurred prior to the policy period; rather, she noted that though Endorsement #1 purportedly altered the policy, it “seems merely to reiterate a basic attribute of a claims-made policy.” And, “most puzzling,” the endorsement cross-references Item #6 of the policy declarations, which says that the policy provides “Full Prior Acts” coverage.
In opposing summary judgment, the insurer sought to rely on communications between the insurer and the law firm’s broker during the renewal process to try to argue that the conversations should be imputed to the law firm for purposes of interpreting the policy and determining its intent. Judge Staton said that the insurer provided no legal authority that “imputed [to a policyholder] statements made by an insurer to a subagent to construe an unintelligible policy provision that was drafted by the insurer in its favor.” In addition, the communications between the insurer and the agent are not probative of the law firm’s reasonable understanding of a provision that the time of the communications had not yet been written.
Finally, Judge Staton added that whether or not the pre-renewal communications between the insurer and the broker can be imputed to the law firm is immaterial, because the exclusion in the endorsement did not satisfy the requirement under California insurance law that exclusions must be “conspicuous, plain, and clear.” She said that in interpreting the endorsement, “the Court can conceive of at least two interpretations that are much more plausible” than the one the insurer offered: either the provision is “hopelessly indecipherable”; or it “appears to reaffirm that the entire four million dollars of coverage provides standard claims-made coverage” – which is of course “essentially the exact opposite” of the insurer’s proffered construction.
This was always going to be a tough case for the insurer to win here. Simply put, the endorsement doesn’t say what the insurer tried to argue that it says. The endorsement doesn’t say that the increased limit does not apply to acts or omissions that took place before the policy period. As Judge Staton herself noted, the endorsement does not refer to acts or omissions that took place before the policy period, it refers to Claims made against the Insured before the policy period. Moreover, as Judge Staton also noted, the endorsement cross-references Item 6, which explicitly refers to “Full Prior Acts.” The insurer drafted the endorsement, so its complaints that the endorsement doesn’t say what had been agreed upon or what was intended ring hollow.
Just the same, there is something about this dispute that makes me uncomfortable. In reading Judge Staton’s account of the pre-renewal communications between the insurer and the law firm’s broker, using terminology that is very familiar to me from my involvement in many similar exchanges, it seems clear that as far as the participants in the process were concerned, the past acts date for the $2 million increased limit would be at the inception date of the renewal policy. Indeed, again referring to my own experience, it would be pretty standard for increased limits to be subject to a past date as of the policy inception. I guess what makes me uneasy is the feeling that it seems clear what was intended, even if that is not what the policy says.
The upshot is that because of the sloppy draftsmanship of the manuscript endorsement, the insurer was unable to assert and rely on a policy coverage restriction that it thought had been agreed upon but that in fact was not memorialized in the actual policy language. In the end, the scope of insurance coverage and the terms and conditions on which the coverage is available must be measured from the written document. Between the policyholder and the insurer, it seems right that the insurer should be the one to have to “accept the consequences” of “slapdash” drafting.
If nothing else, this case is an important cautionary tale for anyone at an insurance company responsible for drafting policy language, particularly in the form of manuscript endorsements. I know from experience, particularly when in a hurry, that sometimes the mind will play tricks and will substitute words and meanings that are not in fact there on the printed page. I suspect something like that happened here – the endorsement draftsman and the others that reviewed the endorsement knew what the endorsement was intended to do, and somehow they failed to see that the endorsement didn’t actually say what was intended. In our industry, the words on the page are so important. This case is a reminder to all of us to slow down and read the words that are actually there on the page.