It is a harsh reality that courts will give policyholders every benefit of the doubt in interpreting the terms, conditions and limits of policies of insurance. Insurers must be careful to place their insureds on notice of significant exclusions and limitations through the use of clear, concise and plain language in their policy forms. Even trickier, most states require that insurers timely advise their insureds and claimants if they conclude that the policy does not cover a particular claim or loss.
What obligation does an insurer have if it does not deny coverage outright but seeks to enforce a significant sub-limit of liability? Is the insurer bound by the same rules that control when the insurer seeks to disclaim liability?
Recently, in Santa v. Capitol Specialty Insurance, LTD., et al., plaintiffs filed suit against a Manhattan night club arising out of an alleged assault on plaintiffs. The third party administrator for the primary insurer became aware of the claim after it received the summons and complaint, which contained a specific count based on assault. Nine months later during discovery, the attorneys for the policyholder disclosed, for the first time, that the primary policy was subject to an assault and battery sub-limit of $50,000. The insurance disclosure also identified an excess policy with limits of $4,000,000 but made no reference to the sub-limit contained in the primary policy.
The claimants protested that the primary insurer must provide its full policy limits because it failed to provide timely notice of the assault and battery sub-limit. Further, they argued that the excess insurer must make its full policy limits available because its policy did not contain any explicit exclusion or sub-limit for claims based on assault and battery.
Of significance, the court held that the primary insurer was not subject to the normal rules requiring timely notice of disclaimer because it was not disclaiming or otherwise denying coverage. Rather, it was providing “the full measure of coverage available for the incident,” just with a reduced sub-limit of liability.
On the other hand, the excess insurer did not fare as well. The court cited a number of problems with the excess insurer’s stance including its failure to exclude or specifically minimize its limits of liability for claims based on assault and battery. Further, the court was troubled by the excess insurer’s failure to put the claimant on notice of the sublimit when the insurance disclosure was furnished to the claimant’s attorney during discovery.
The lesson of Santa is clear: while Santa may overlook minor errors in conduct and still arrive bearing gifts, insurers can expect no such generosity from the courts. Be clear, accurate and specific in the language contained in your policies and the disclosures made to your insureds and claimants.
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