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."
"You" Exclusions
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:
EXCLUSIONS
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:
a. breakdown;
b. repair;
c. servicing;
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.
Conclusion
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.