All liability policies have exclusions to eliminate risks that the underwriters choose not to underwrite. These exclusions are typically unique to the particular policy and vary depending on the type of coverage that is being underwritten.
As to each exclusion, there is a substantive difference, i.e., the conduct for injury that is to be excluded. However, in addition to the substantive differences, there are also differences dealing with the breadth, i.e., to whom the exclusions apply. In many instances, the breadth of the exclusions is overlooked by both insureds and insurers. However, one cannot obtain a proper understanding of the coverage being provided, particularly with respect to the exclusion, until there is an understanding of the breadth of the exclusion.
The discussion herein will not address the substantive differences since they are too many to be counted. Rather, we will focus on the breadth and how these differences are to be interpreted. The principles discussed will apply to all exclusions, regardless of the substantive differences and will give the reader a better understanding of what was intended by the underwriter and how they will be interpreted by the courts.
Generally, the exclusions in the most liability policy may be broken down into three categories. The first category is those exclusions which speak in terms of "you." The second category of those exclusions which speak in terms of "any insured." The third and final category is those exclusions that speak in terms of "the insured" or "that insured."
The first group of exclusions use the term "you." An example in the personal auto policy is the following exclusion:
We do not provide Liability Coverage for the ownership, maintenance or use of: …
2. Any vehicle, other than "your covered auto," which is:
a. owned by you; or
b. furnished for your regular use.
"You" or "your" is defined by the policy to mean the named insured shown in the declarations. Under the personal auto policy, this exclusion would be limited to the named insured. If there was an omnibus insured involved, under the terms of the exclusion, there would be no application.
Many courts have recognized this distinction. In Buettner v. State Farm Mut. Auto. Ins. Co., 210 S.W.3d 363 (Mo. App. 2006), the court of appeals was faced with this distinction when addressing the underinsured motorists (UIM) portion of a personal auto policy. The policy provided that:
THERE IS NO COVERAGE UNDER W FOR BODILY INJURY TO AN INSURED:
WHILE OCCUPYING A MOTOR VEHICLE OWNED OR LEASED BY YOU, YOUR SPOUSE, OR ANY RELATIVE IF IT IS NOT INSURED FOR THIS COVERAGE UNDER THIS POLICY[.]
"Insured" as defined in this section includes Michele Buettner. "You" or "Your" is defined in the policy as "the named insured or named insureds shown on the declarations page."
On August 19, 2001, Michele Buettner was injured in a motor vehicle accident caused by the negligence of Michelle Pedrotti. At the time of the accident, Michele Buettner was a passenger in a 1990 Chevrolet S-10 truck owned by the Buettners. As a result of the injuries she suffered, Michele Buettner incurred medical expenses in the amount of $160,000, and her lost earnings totaled $40,000. Her total damages exceeded $500,000.
Pedrotti's insurance company paid the Buettners $100,000, as the limit of Pedrotti's automobile liability insurance policy. State Farm consented to the payment.
At the time of the accident, the Buettners had three automobile insurance policies with State Farm. The Buettners paid separate premiums for each policy and separate amounts for underinsured and uninsured motorist coverage for each policy.
Accordingly, the Buettners demanded payment from State Farm of the limits for UIM coverage under all three policies. State Farm paid $50,000 to the Buettners under Policy Number 324344–025–25 (listing the Buettners' 1990 Chevy S-10 as the insured vehicle; hereinafter referred to as "Policy A"). After State Farm refused to pay UIM benefits under the Buettners' other two automobile policies (hereinafter referred to as "Policy B," listing the Buettners' 1984 Lincoln Town Car, and "Policy C," listing their 1984 Toyota half-ton pickup), the Buettners filed this action, seeking $100,000 as the combined limits of the underinsured motorist coverage of those policies, damages for loss of consortium and vexatious refusal to pay, and punitive damages.
State Farm argued that since the S-10 was not scheduled under the other two policies, there was no coverage. The trial court and court of appeals agreed holding:
We conclude the State Farm no coverage clauses in policies B and C prohibit those policies from covering bodily injury suffered while occupying the S-10, because the S-10 is not listed on the declaration page of policies B or C.
Since the vehicle was owned by "you" as defined in the policy and was not scheduled, there was no coverage.
"Any Insured" Exclusions
The second group of exclusions to be addressed are those exclusions that apply to "any insured" or use the term "any." In the personal auto policy, the following is an example:
We do not provide Liability Coverage for the ownership, maintenance or use of:
Any vehicle, located inside a facility designed for racing, for the purpose of:
a. Competing in; or
b. practicing or preparing for:
any prearranged or organized racing or speed contest
Under the terms of this exclusion, there is no coverage for any insured if the vehicle is being used for organized racing. If the named insured is engaged in competitive racing, there is no coverage for anyone. If an omnibus insured is engaged in racing, there is no coverage for anyone, including the named insured. The underwriters have made the decision that this is an activity that they do not want to underwrite and will provide no coverage, regardless of who may qualify as an insured.
"The Insured" or "That Insured" Exclusions
The third category of exclusions is those exclusions which use the term "the insured." An example of this type of exclusion in the personal auto policy is found in the following exclusion:
We do not provide Liability Coverage to any "insured":
Using a vehicle without a reasonable belief that that "insured" is entitled to do so.
If an omnibus insured is found to have been using a vehicle without permissive use, under this exclusion, there would be no coverage for the nonpermissive user. However, the named insured may be sued for negligence for not taking greater care to see that the vehicle was not taken by the nonpermissive user. In this case, while the nonpermissive user would have no coverage, there would still be coverage for the named insured since the application of the exclusion is limited to "the insured" or "that insured." In Progressive County Mut. Ins. Co. v. Sink, 107 S.W.3d 547 (Tex. 2003), Joshua McCauley's pickup truck became disabled. He was at that time employed by Alamo Rent-A-Car, and, while on the job, he took one of its rental cars to drive to a location that is not disclosed in the record to get his tools so that he could attempt to repair his truck. It is uncontested that McCauley did not obtain permission from Alamo to use any of its vehicles and did not believe that he had permission to use the car in question. While returning to work in Alamo's car, McCauley was involved in an accident with Paul Sink. The Progressive policy provided:
A. We do not provide Liability Coverage for any person: ....
Using a vehicle without a reasonable belief that that person is entitled to do so. This exclusion (8.) does not apply to you or any family member while using your covered auto.
The policy's definition of "your covered auto" contained, among other things, the reference to a "temporary substitute" vehicle:
G. "Your covered auto" means: ....
Any auto or trailer you do not own while used as a temporary substitute for any other vehicle described in this definition [e.g., a vehicle identified in the policy Declarations or a vehicle acquired by the insured during the policy period] which is out of normal use because of its:
d. loss; or
The court of appeals concluded that a vehicle used by an insured or an insured's family member as a temporary substitute for another vehicle that is "out of normal use" is covered, even if used without the permission of the owner. The court reasoned that paragraph 8 of the exclusions expressly does not apply to "your covered auto," which includes a "temporary substitute vehicle." Accordingly, the court of appeals held that because McCauley "was driving a temporary substitute vehicle because his own vehicle had become disabled," it did not matter that he drove the "substitute vehicle" without permission.
The supreme court disagreed, holding:
Because the term "temporary substitute" is not defined in the policy, we consider the ordinary, everyday meaning of the words used. It is common to rent a car, use a loaner car, or borrow a car from a friend or family member while one's primary vehicle is undergoing service or repair. The generally accepted meaning of "temporary substitute" vehicle does not, however, include taking a vehicle without at least a reasonable belief of entitlement to its use.
This interpretation is not in conflict with paragraph 8 of the exclusions. Indeed, it is in harmony with that exclusion. Paragraph 8 says that a person using a vehicle without a reasonable belief that he or she is entitled to do so is not covered. But this exclusion does not apply to the insured or any family member while using "your covered auto." Thus, under the current TPAP, "your covered auto" includes a vehicle owned by an insured and "used as a temporary substitute" by a teenage member of the insured's family. But the general public understands that if a vehicle driven by a teenager and expressly covered by the policy breaks down, and the teenager steals a neighbor's car, the stolen vehicle would not be regarded as a "temporary substitute" vehicle. Nothing in the use of the term "temporary substitute" vehicle suggests otherwise. The analysis would not change if the teenager "borrowed" the neighbor's car without the neighbor's knowledge or permission. The same can be said of an adult insured who "borrows" his or her employer's car without permission. The ordinary connotation of a "temporary substitute" vehicle is that it is a vehicle used with the owner's permission, or at least a reasonable belief that the owner consented.
In conclusion, when addressing exclusions in liability policies, the substance of the exclusion is always a critical issue. However, one must not overlook the breadth of to whom the exclusion applies. This is critical, and the words used in the exclusions have exact meanings which cannot be overlooked.
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.