The Acts or Decisions Exclusion That Tried To Swallow the Policy
December 2006
Most property insurance policies provide "all-risk"
coverage requiring insurer to indemnify the insured for any loss unless specifically
excluded. Among the exclusions in standard property policies is the so-called
acts or decisions exclusion.
by Jay M.
Levin and R. Clayton Alspach
Reed Smith
This exclusion is generally worded something along the lines of the following:
"This insurance does not apply to:
- … acts or decisions, including the failure to act or decide, of any
person, group, organization or governmental body. However, this exclusion
does not apply to any ensuing loss as a result of loss otherwise covered.
Taken literally, this exclusion could swallow the entire coverage provided
by a property insurance policy because, in almost every instance imaginable,
there is some act or decision, or failure to act, in the chain of causation
of every loss. For example, in a fire loss caused by faulty wiring, negligence
by the contractor who installed the wiring would result from an act or failure
to act, leading to the fire. Consequently, the exclusion could be read to apply,
precluding coverage for the loss. Likewise, a windstorm loss could be traced
back to the roofer's decision to use a certain method of fastening, as opposed
to a stronger method of fastening, or the township's decision not to enact and
enforce a higher level of building code.
Fortunately, most courts have recognized the inordinate breadth of the acts
or decisions exclusion if applied literally and have refused to accept such
an invitation from insurers. In one of the leading cases construing this exclusion,
the court looked to the efficient proximate cause of loss, as opposed to an
act or a decision that fell somewhere within the chain of causation.
Jussim v. Massachusetts Bay Insurance Co.
In Jussim v. Massachusetts Bay Insurance Co.,
597 N.E. 2d 1379 (Mass. App. Ct. 1992), the insureds sought a declaratory judgment
that they were entitled to coverage under an insurance policy. The loss resulted
from the movement of home heating oil onto the plaintiffs' property as the result
of a negligent spill on a neighbor's property. The insurance policy at issue
was an "all-risk" policy, but excluded "'loss . . . caused by … release, discharge
or dispersal of contaminants or pollutants….'" Id. at 1380 (quoting the insurance policy).
While the insurance company claimed the plaintiffs' loss was excluded under
this exclusion, the insureds argued that their loss was caused by the negligence
of others and, therefore, the loss was covered (the parties stipulated that
the spill resulted from negligence). The court concluded that the loss was covered,
holding that, "where the excluded event is not the cause of the loss, but rather
the result of a covered risk, the insured may recover." Id. at 1381. It quoted a previous decision
of the court where it relied on "'the well-established principle that recovery
on an insurance policy is allowed where the insured risk itself set into operation
a chain of causation in which the last step may have been an excepted risk….'" Id. at 1381 (quoting Standard Elec. Supply So. v. Norfolk & Dedham Mutual
Fire Ins. Co., 307 N.E. 2d 11, 13 (Mass. App. Ct. 1974).
The insurer also argued that an acts or decisions exclusion barred recovery.
While the insurer conceded that the policy covered negligent acts that caused
covered losses, it argued that the acts or decisions exclusion barred coverage
where negligence caused an excluded loss. The court rejected that argument,
holding that the acts or decisions exclusion could not be taken literally because
if it were, "it would exclude coverage for all acts and decisions of any character
of all persons, groups or entities." Id. at 1382. According to the court, this interpretation would have made the policy
worthless. The court went on to affirm the trial court's grant of summary judgment
against the insurer.
The Massachusetts Supreme Court affirmed the decision of the appellate court
in Jussim v. Massachusetts Bay Insurance Co.,
610 N.E. 2d 954, 957 (Mass. 1993). Commenting on the appellate court's decision,
the Massachusetts Supreme Court explained that the purpose of the chain of causation
test employed by the appellate court was to determine the efficient proximate
cause of the loss. The Massachusetts Supreme Court held that, if the efficient
proximate cause of the loss was an insured risk, "there will be coverage even
though the final form of the property damage, produced by a series of related
events, appears to take the loss outside of the terms of the policy." Id. at 955-56. The Massachusetts Supreme
Court specifically agreed with the appellate court's conclusion regarding the
acts or decisions exclusion. Id. at 957.
St. Paul Fire & Machine Co. v. General Injectables
& Vaccines, Inc.
A similar causation analysis was used by the federal court in St. Paul Fire & Machine Co. v. General Injectables
& Vaccines, Inc., No. 98-0737, 2000 U.S. Dist. LEXIS 2597 (W.D. Va. March
3, 2000). The court there addressed the insurer's request for a declaratory
judgment that an all risks insurance policy it issued did not provide coverage
for damaged vaccines. The insured stored its vaccines at freezing temperatures
in several refrigeration units; a power interruption caused one of these refrigeration
units to shut down after a sensor module tripped. Protec, the company hired
by the insured to monitor the units, failed to reach anyone at the insured's
place of business, only an off-duty employee at his home.
Because of the mistakes by Protec and the insured's maintenance staff, the
refrigerator remained off for 2 full days, the vaccines reached a semi-liquefied
state, and the Food and Drug Administration (FDA) refused to authorize the use
of the vaccines because the vaccines had thawed. The court held that the loss
was fortuitous because, although the refrigerator had failed on five prior occasions,
there was uncertainty as to whether the refrigerator would fail again.
The insurer tried to establish that seven different exclusions precluded
coverage, one of them being an acts or decisions exclusion. In its argument
regarding the acts or decisions exclusion, the insurer claimed that the acts
of the maintenance employees, Protec, and the FDA caused the loss of the vaccines.
The court found that the exclusion did not apply because, while the acts cited
by the insurer may have made the losses worse, the acts did not cause the loss.
Therefore, the acts or decisions exclusion did not apply. In a footnote, the
court noted that the acts or decisions exclusion was also "overly broad, ambiguous,
and irreconcilable with other policy provisions and with the very concept of
an all-risk insurance policy." Id. at 17
n.5. Further, the court quoted Jussim and
commented that the acts or decisions exclusion's breadth was untenable. Id.
Duarte & Whiting, Inc. v. Universal Underwriters
Ins. Co.
Even in cases where the acts or decisions exclusion is applied, it is in
a very limited context. Thus, In Duarte & Whiting, Inc.
v. Universal Underwriters Ins. Co., No. 05-1315, 2006 U.S. Dist. LEXIS
52339 (N.D. Cal. July 28, 2006), the district court applied an acts or decisions
exclusion to preclude coverage for a loss. The insurer insured plaintiff's automobile
dealerships. One of the buildings insured under the policy was the Ferry Building.
The insured submitted a claim for cracks in the Ferry Building's walls, which
led to litigation over the cause of the cracking, the magnitude of the cracking
before the inception of the policy, the tenant's contribution to the severity
of the cracks, and the insured's knowledge concerning the cracking of the walls.
After noting that the California Supreme Court followed a manifestation of loss
rule (where liability falls on the insurer on the risk at the time the loss
manifests, which is when appreciable damage occurs and is or should be known
to the insured, such that a reasonable insured would be aware that his notification
duty under the policy has been triggered), the court found that cracking had
occurred before the policy incepted and that plaintiff was aware or should have
been aware of the cracking. Consequently, there was no coverage under the manifestation
rule.
The court went on to analyze whether coverage would have been afforded if
the cracking manifested itself during the policy period and found that, even
if that were the case, there still would be no coverage. Under the single cause
theory presented by the insurer, the court found there would be no coverage
because the cause of the cracking was seismic activity and ground destabilization
due to flooding, two perils specifically excluded under the policy. With respect
to the plaintiff's multi-causation theory, which was that seismic activity and
the tenant's negligence both caused the cracking, the court found this argument
would not prevent summary judgment. Under the efficient proximate cause theory,
both causes were excluded. First, as discussed above, the policy excluded coverage
for seismic activity. Second, concerning the tenant's actions, the court, without
substantial discussion, concluded that losses caused by actions of third parties
were specifically excluded under the policy's acts or decisions exclusion.
Cytopath Biopsy Laboratory, Inc. v. U.S. Fidelity
and Guaranty Co.
In one of the few cases to rely solely on the exclusion, a New York court
held that the sole cause of loss was a decision by governmental authorities. Cytopath Biopsy Laboratory, Inc. v. U.S. Fidelity and
Guaranty Co., 774 N.Y.S.2d 710 (N.Y. App. Div. 2004), involved an appeal
of a grant of summary judgment in favor of the insurer. The insurance company
disclaimed coverage because the insured laboratory failed to establish that
its business interruption losses resulted directly from physical loss to property.
The laboratory was shut down after other tenants in its building became sick
due to a discharge of noxious fumes. While the laboratory claimed that this
release was caused by a broken pipe, the court held that, if the laboratory's
claims were true, the laboratory could have been reopened quickly had the pipe
been repaired.
The court concluded that the losses were caused by the refusal of authorities
to allow the laboratory to resume operations until the laboratory obtained proper
permits and installed a new ventilation system. Because the insurance policy
excluded coverage for losses resulting from acts or decisions of "any person,
group, organization, or governmental body," the court found that the loss was
not covered under the policy, and the appellate court affirmed the grant of
summary judgment in favor of the defendant insurance company. Id. at 711
Conclusion
As these cases show, courts will generally apply exclusions in a common-sense
fashion, refusing to take them literally if it would lead to an absurd result.
Therefore, while an acts or decisions exclusion uses extremely broad language,
to avoid absurd results, courts will enforce it in a limited fashion and only
when no other covered cause of loss is involved.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.