After this article appeared in the April, 2013 issue ofClaims, I received an email from a public adjuster whoasked the following question:

“Hi Tom. I read your article about Cuban cigars inClaims Magazine today. I'm curious why you state that 'theinsured would need to possess indisputable documentation'. Thepolicy covers all the insured's personal property. I think theburden of proving that any property is excludedrests with the carrier. Can you provide the policy language thatsupports your position?”

Although my article focused on valuation, this gentlemen'squestion focused on policy language and coverage. Despite thefact that I didn't initially address the existence ornon-existence of coverage, I thought it would be interesting toexplore this reader's question in more depth publicly.

As surprising as it may be, there are many policies that do notcontain specific exclusionary language regarding illegal items. Iwould agree with this reader that without exclusionary language, anillegal item would be technically “covered” under many policies.However, I am of the opinion that being in possession of an illicititem and not having a legitimate marketplace in which to sell suchan item, the value/payment would be $0.

See related article: Top10 Art Crimes

Appraised values should always take into account onlylegitimate market sales and can never consider illegitimate blackmarket activities.

So I responded to this public adjuster that while I agreed thatmany policies do not contain specific exclusionary languageregarding illegal items, the inability to legally possess or sellpost-embargo Cuban cigars should result in zerovalue/payment. The adjuster then responded as follows:

“Ok. I think the insurance company would have the burden ofproving the cigars were post embargo.” (Illegal)

When a law places restrictions on either the possession, or saleof, an item, the law squarely places the burden of proof on theowner to be able to prove his items are legal or risks having themconfiscated without compensation.

The Burden of Proof

If a claim is made for an item subject to a law restricting itspossession or sale, then I strongly disagree with the reader'sassertion that the burden of proof rests with the carrier to provethe illicit nature of the item. I absolutely believe the burden ofproof rests with the insured.

Furthermore, the policyholder has a contractual obligationto fully disclose the details surrounding the objects he isclaiming. Any misrepresentation hiding the illicit nature oromitting known facts regarding the legality of a restricted objectwould be a material misrepresentation.

An example we can all relate to would be controlled prescriptiondrugs. A policyholder who was prescribed a controlled narcotic by alicensed physician for medical reasons (and legally purchased hisprescribed narcotic medication from a licensed pharmacy), can makea claim for the drug if damaged from a covered peril. The valuewould be the cost of replacement in the legitimate marketplace, ata licensed pharmacy, not the street price being charged by a cornerdrug dealer.

A policyholder without a prescription who purchased controlleddrugs illegally in some back alley could also make claim for whatthey paid their drug dealer. Yet without indisputable documentationthat they purchased and possessed the drug legally, the carrier has every right to place zero value on the itemresulting in zero payment for these illegal items.

Does the policy you work with exclude illicit items? What do youthink? We want to hear from you.

Tom Kirkpatrick is a consulting founder at Enservio, a provider of software andservices for P&C carriers to price policies correctly andsettle contents claims with more accuracy. He may be reached at[email protected].