In Canal Ins. Co. v. Sherman, Civil Action No. 05-263, 2006 WL 1184209 (E.D. Pa. May 5, 2006), the court ruled that employee and workers compensation exclusions did not apply under an auto liability policy.

 

Albert Taylor, an employee of Sherman Trucking, was killed on the job when his truck struck a disabled tractor trailer parked on the shoulder of a highway. His wife filed a wrongful death suit against Sherman .

 

Sherman was covered by an auto liability policy issued by Canal Insurance Company. Canal sought declaratory judgment that the wrongful death suit was not covered by its policy.

 

Canal argued that the underlying suit was not covered for three reasons: (1) the employee exclusion barred coverage; (2) the workers compensation exclusion barred coverage; and (3) the MCS-90 endorsement did not apply.

 

Sherman and Taylor countered that the doctrine of reasonable expectations applied and that the exclusions did not.

 

The court boiled down the arguments into three issues: “(1) what duties impress upon an insurer before the insurer may rely on an exclusion to limit the scope or extent of coverage; (2) what is the applicability of the doctrine of reasonable expectations to exclusions from coverage; and (3) when does the duty to defend attach.”

 

The court explained that if the duty to make exclusions conspicuous and the duty to explain are not met, the exclusion cannot be applied. While the court found that the exclusions were conspicuously displayed, it also found that Canal did not show any evidence that Sherman understood the exclusions. Thus, the court found the exclusions were not applicable.

 

Because Taylor and Sherman were entitled to summary judgment due to Canal's inability to satisfy the duty to explain the exclusions, the court did not determine if the doctrine of reasonable expectations applied.

 

Sherman also argued that Canal owed a duty to defend because at least some of the underlying claims would invoke coverage. Canal said that the employee exclusion relieved it from the duty to defend. The court ruled that, since the exclusion was not applicable due to Canal's failure to satisfy the duty to explain, Canal owed Sherman a defense.