Down To Cases

The district court had held that the insured's extra expense loss was not covered under Section 10(h)(2) because the electric substation, though physically damaged by the earthquake, was not the insured's supplier for purposes of Section 10(h)(2). The court also said the resulting power outages did not cause direct physical loss or damage to the Taiwanese factories that were the insured's suppliers.

In its appeal, the insured argued that the Taiwanese electric substation was a supplier within the meaning of Section 10(h)(2). It also argued that the Taiwanese factories suffered "direct physical loss" when the power outages rendered them unable to perform their "intended
function" of manufacturing products for the insured.

The insured relied on several cases to make its argument. In one cited case, a number of farmers supplied a product (grain) that a dealer then resold to the insured. The court in that case held that the policy covered business interruption losses to the insured caused by property damage to the farmers because the policy did not limit BI coverage to suppliers in direct contractual privity with the insured. The appeals court rejected this argument, however. It said that although the electric substation supplied power to the Taiwanese factories, it did not supply a product or service ultimately used by the insured.

The insured also contended the loss should be covered by a section of its policy providing coverage for BI losses arising from power outages at "described premises," although it conceded such premises did not include the insured's suppliers. But the court rejected this argument too.
"We may not assume that this limitation (to power outages at 'described premises') was inadvertent," the court said. "It is one thing to insure all risk of power outage losses at known, identified (insured) facilities caused by covered damage to off-premises power suppliers. Extending that coverage to (the insured's) losses resulting from power outages at unknown third party supplier premises, which may be located all over the world, insures a different and presumably more substantial risk." The lower court's decision was affirmed.

Pentair Inc. vs. American Guarantee and Liability Insurance Co., 400 F.3d 613 (8th Cir. 03/11/2005).

HO endorsement covering child care except as a business ruled unambiguous

In 1999, a 14-month-old child quit breathing while being cared for by the insured in his home. The child's parents filed a personal injury lawsuit against the insured. After the child died, the lawsuit was amended to assert a claim for wrongful death.

The insured's homeowners carrier initially provided a defense under a reservation of rights. The carrier later filed a declaratory action against the insured and the plaintiffs, however, seeking a judgment that it had no obligation to respond to the lawsuit because its policy excluded coverage for bodily injury arising out of, or in connection with, a home day-care business.

Specifically, the policy's liability section excluded coverage for bodily injury "arising out of or in connection with a 'business' engaged in by an 'insured.'" The policy also contained a standard form home day-care endorsement. It stated that if an insured regularly provides home day-care services to a person or persons other than insureds and receives monetary or other compensation for such services, that enterprise is a business. Mutual exchange of home day-care services, however, was not considered compensation. Nor was the rendering of home day-care services by an insured to a relative of an insured considered a business. At its end, the endorsement contained the following sentence: "This endorsement does not constitute a reduction of coverage."

The insured and the parent plaintiffs argued that the home-day care endorsement was ambiguous because it eliminated coverage for bodily injury that otherwise would be covered–in direct conflict with its assertion that "this endorsement does not constitute a reduction of coverage." They further argued that the carrier conceded that the policy's business exclusion was inapplicable.

The carrier filed a motion for summary judgment, arguing that the policy clearly and unambiguously excluded coverage for the claim. It also argued that the home day-care endorsement did not reduce coverage, but rather clarified that certain home day-care services are included in the policy's definition of a business. In addition, the carrier argued it did not concede that the business exclusion of the policy was inapplicable.

A trial court granted the insured and parent plaintiffs a partial summary judgment, ruling that the home day-care endorsement was ambiguous and could not be relied upon to deny coverage. Subsequently, the court also determined that the carrier could not rely on the business exclusion because it had conceded that it did not apply. Accordingly, the trial court denied the carrier's motion for summary judgment and entered summary final judgment in the insured's and the parents' favor.

The carrier appealed, arguing that the trial court erred in (1) finding that the home day-care endorsement was ambiguous and unenforceable, (2) refusing to apply the business exclusion, and (3) finding that the carrier conceded the business exclusion did not apply.

The higher court agreed that the carrier had not conceded that the business exclusion was inapplicable, at least in conjunction with the home day-care endorsement. The court said the carrier had consistently argued that coverage is excluded because its insured was engaging in a home day-care business.

The appeals court also held that the home day-care endorsement was not ambiguous and that coverage was excluded as a matter of law under the policy's business exclusion, as modified by the home day care endorsement. The trial court had found the home day care endorsement ambiguous because of its statement that it "does not constitute a reduction of coverage." But when the statement was considered in conjunction with the entire language of the endorsement, the appeals court held, there was no genuine ambiguity.

Did the insured have a business? The appeals court held that he did. It was undisputed that the insured provided daily care to the deceased child from approximately 8 a.m. until 5 p.m. Monday through Friday, starting in late 1998 and continuing until Aug. 19, 1999, in exchange for $50 per week. It was also undisputed that the child was neither an insured nor a relative of any insured. The activity alleged as the basis for the wrongful death claim was the negligent supervision of the child in the course of her daily care in August 1999. These undisputed facts, the appeals court said, fit squarely within the policy's business exclusion, as modified by the home day-care endorsement. The trial court's decision was reversed.

First Protective Insurance Co. v. Featherston 4/20/05 2005.FL.000 1484 (www.versuslaw.com).

Law in force when policy was sold determined excess insurer's obligations

In this Ohio case, an employee who was a passenger in a vehicle owned by his employer was injured in an automobile accident in January 2001. At the time of his accident, he was acting within the scope of his employment.

The employer self-insured losses up to $250,000 and had an excess insurance policy to provide further protection. The employee and his wife sought benefits under the policy. They asked a court for a declaratory judgment that the employee was an insured under the employer's excess policy, and that the policy provided un- derinsured motorist coverage.

The carrier moved for summary judgment, arguing among other things that an excess insurance policy is not an automobile liability or motor vehicle liability policy under Ohio law. Therefore, the carrier said, it did not need to offer underinsured motorist coverage. The carrier said its policy complied with an Ohio statute governing underinsured motorist coverage, and that the plaintiffs were not entitled to coverage until after they proved their damages exceeded the employer's self-insurance limits.

The trial court rejected the insurer's request for summary judgment and found first-dollar underinsured motorist coverage for the employee under the employer's excess policy. The carrier appealed.

In its ruling, the trial court had applied a statute, R.C. 3937.18, pertaining to auto insurance requirements. In doing so, however, it had refused to distinguish between an excess and an umbrella liability policy. This was an error, the carrier said, arising from the fact that the trial court applied the wrong version of the statute in question. In the applicable version, the insurer said, the legislature specifically exempted excess insurance policies from the law's mandates.

In response, the plaintiffs cited many Ohio Supreme Court cases that refused to recognize a distinction between excess and umbrella policies for the purposes of R.C. 3937.18.

The appeals court considered which version of the statute was applicable at the time of the accident. The statute originally did not define what constituted an "automobile liability or motor vehicle liability policy of insurance." A definition was included in an amendment to the law that took effect in September 1997. In part, it defined an "automobile liability or motor vehicle liability policy of insurance" as any insurance policy that serves as proof of financial responsibility or as any "umbrella liability policy of insurance."

A later amendment, which took effect in November 1999, changed the definition to include: "Any umbrella liability policy of insurance written as excess over one or more policies." The trial court had used this definition in reaching its decision.

The appeals court, however, citing previous rulings of the state supreme court, held that the statutory law in effect at the time an insured and insurer enter a contract for automobile liability or motor vehicle liability insurance controls the rights and duties of the contracting parties in regard to underinsured motorist claims.

In the case at hand, the parties entered into the insurance contract on May 1, 1998. Thus, the applicable version of the statute was the one that took effect in September 1997, which defined auto liability or motor vehicle liability insurance in part as a policy that serves as proof of financial responsibility. What was the definition of "proof of financial responsibility?" The answer was provided by another statute, R.C. 4509.01(K):

"'Proof of financial responsibility' means proof of ability to respond in damages for liability, on account of accidents occurring subsequent to the effective date of such proof, arising out of the ownership, maintenance, or use of a motor vehicle."

The appeals court cited another case establishing that if an insurance policy provides coverage only after a specific amount of damages has been paid to the claimant, then it does not assure an "ability to respond in damages for liability" in the event of an accident. (Wright vs. MedAmerica Intern. Ins., Ltd., 2nd Dist. No. 19809, 2003-Ohio-5723.) "These kinds of excess insurance policies do not serve as proof of financial responsibility," the court in Wright had said.

In the case at hand, the appeals court said that the insured's policy was an example of an excess insurance policy, as described in Wright. The policy stated that the carrier "will pay 'ultimate net loss' in excess of the 'self-insured retention' because of 'bodily injury' or 'property damage' to which this insurance applies, caused by an 'accident' and resulting from the ownership, maintenance or use of a covered 'auto.'" The declarations page indicated that the self-insured retention was $250,000 for each accident. "Thus, this policy does not provide proof of ability to respond in damages for liability…and is not proof of financial responsibility," the appeals court said. Therefore, the court said, it was not an "automobile liability or motor vehicle liability policy of insurance" as that term is described in former R.C. 3937.18."

The appeals court also held that the policy was not an umbrella insurance policy, the other part of the definition of auto or motor vehicle liability insurance in the applicable version of the statute. It cited a "thorough explanation of the differences between excess and umbrella insurance policies" by another Ohio appellate court in a previous case:
"Although the terms 'excess insurance' and 'umbrella policy' have been used interchangeably by some courts, they are distinct terms of art within the insurance business. In Richmond, Rights and Responsibilities of Excess Insurers (2000), 78 Denv.U.L.Rev. 29, 29-31, the differences between excess insurance and umbrella coverage were explained: 'An excess policy provides specific coverage above an underlying limit of primary insurance. Excess insurance is priced on the assumption that primary coverage exists; indeed, an excess policy usually requires by its terms that the insured maintain in force scheduled limits of primary insurance….

"A true excess policy does not broaden the underlying coverage. While an excess policy increases the amount of coverage available to compensate for a loss, it does not increase the scope of coverage.

"'An umbrella policy is like an excess policy in that it is written in addition to a primary policy to protect the insured against liability for catastrophic losses that would exceed the limits of affordable primary coverage… An umbrella policy differs from an excess policy in a critical aspect: an umbrella policy typically insures against certain risks that a concurrent primary policy does not cover. An umbrella policy is thus a 'gap filler'; by design, it provides first-dollar liability coverage where a primary policy and an excess policy do not. For example, an umbrella policy may insure against 'personal injury' when a primary policy only insures against 'bodily injury' and 'property damage.' By essentially dropping down to provide primary coverage or by filling a gap in primary coverage, an umbrella policy broadens the insured's primary coverage where an excess policy does not. The terms 'excess policy' and 'umbrella policy' are not synonymous. (Tscherne vs. Nationwide Mut. Ins. Co., 8th Dist. No. 81620, 2003-Ohio-6158, paragraphs 21-24, quoting Richmond, Rights and Responsibilities of Excess Insurers (2000), 78 Denv.U.L.Rev. 29, 29-31.)"

In short, said the appeals court, the insurer's policy was neither an umbrella policy nor an "automobile liability or motor vehicle liability policy of insurance" as that term was described in the version of R.C. 3937.18 prevailing at the time the policy was written. Accordingly, the judgment of the trial court was reversed and judgment was granted to the carrier.

Sean Griewahn, et al, vs. United States Fidelity & Guaranty Co., 2005-Ohio-1660, 2005.OH.0001691 (www.versuslaw.com).