A federal judge in the District Court of Connecticut issued a decision that should serve as a warning to insurers that policy provisions may be rendered useless if the terms are ambiguous by a “reasonable layperson.”

In Thompson v. National Union Fire Insurance Co. of Pittsburgh, PA., plaintiffs sought insurance coverage from National Union for the $13.5 million judgment awarded against National Union’s insured.  The underlying action involved an explosion at a natural gas power plant in 2010.

National Union disclaimed coverage based upon an endorsement that provided, “[t]his insurance does not apply to…any liability arising out of any project insured under a ‘wrap-up’ or similar rating plan,” arguing that the consolidated insurance program that the project was insured under was plainly the type of “wrap-up” program the endorsement specifically excluded from coverage.  The Court disagreed, holding that “[i]f defendant wanted to exclude coverage for any project that “involves” a wrap-up of is in any way affiliated with a consolidated insurance program, it should have explicitly included such limitations and defined the term “wrap-up.”  The Court found that while “insurance experts and attorneys” could familiarly discuss the meaning of ‘wrap-up’ or ‘rating plan’, the fact that a “reasonable layperson” would not understand the terms or their coverage implications was fatal, and meant that the ambiguity had to be resolved in favor of the insured and against the insurer.

This decision is a reminder that additional definitions, explanations and precision, particularly with respect to exclusions and endorsements, will benefit the insurers and the insureds, and may provide clarity as to questions of coverage.

Thanks to Vivian Turetsky for her contribution to this post.