What is one of the hardest things to believe in Insurance?
An insurance company suffering, as an insured, unexpected denial of coverage under an exclusion.
“The insurer issued a pollution liability policy to one of its insureds. The insured was sued by a third party for pollution, and the insurer, in turn, denied coverage. Following the denial, the insured sued the insurer, alleging bad faith. Yet, because the insurer’s own insurance company E&O liability policy contained an “absolute” pollution exclusion, coverage for the bad faith lawsuit against the insurer was denied. This was despite the fact that the insurance company was not the polluter and, ironically, the insurer’s premium volume received for writing pollution liability coverage was used (in part) to calculate its premium when purchasing its E&O policy! Such language—to at least one attorney’s delight—is being upheld by courts with increasing frequency.”
More on the subject of absolute exclusions can be read from an article from International Risk Management Institute(IRMI) here.
Every insurance policy has exclusions. The purpose of an exclusion is to eliminate or restrict coverage. While the ideal thing is to get all exclusions at one place, it does not happen that way. Exclusions are listed in multiple places – general exclusions, specific exclusions, definitions, conditions and also endorsements.
Exclusions can be “Absolute” exclusions and “For” exclusions. Absolute exclusions eliminate coverage completely for claims irrespective of whether they are directly or remotely connected to the primary nature of exclusion.
Absolute exclusions may negate coverage in an unexpected manner. They have always been a matter of concern. But, following the recent upsurge in event triggered claims, whether it is Cyber risks or Covid 19, absolute exclusions are beginning to find place in many policies and it has become necessary to review the policy document with a fine tooth comb to understand the impact of absolute exclusions.
When an exclusion cannot be avoided, insurance buyers should negotiate to reduce the fallout of absolute exclusions by getting the exclusions tied to their ( Insured’s) primary acts. Additionally, carve back of coverage can also be sought – for aspects like defence costs and derivative suits etc. Absolute exclusions deleting coverage for claims “for, based upon, arising from, in consequence of, or related to, directly or indirectly ” should ideally be resisted. Wordings that exclude coverage only “for” the claims, ought to be the preferred option.
It may be noted that in India, any exclusion imposed by insurer has to be in conformity with the “Guidelines on Product Filing Procedures for General Insurance Products” issued by Insurance Regulatory and Development Authority of India (IRDAI). Relevant provisions as mentioned in CHAPTER II GUIDING PRINCIPLES FOR PRODUCT DESIGN AND RATING are as under:
6. Product Development
(g) The design of insurance product should take care of Policyholders’ reasonable expectations. Insurance product design should ensure transparency and clarity in wordings, terms, coverage, exclusions and conditions in order to devise a fair and balanced risk transfer mechanism through insurance.
(l) The terms and conditions of cover shall be fair between the insurer and the insured. The conditions and warranties should be reasonable and capable of compliance and in conformity with various laws, regulations, guidelines and circulars. The exclusions should not limit cover to an extent that the value and intent of insurance is lost.
All exclusions need to be filed with the regulator as a part of the filing procedure.
That said, once the policy terms and conditions are accepted, there is not much one can do in commercial contracts hoping for kind interpretation. While delivering judgment in Bajaj Allianz General Insurance Co Ltd & Another Versus The State of Madhya Pradesh, Hon’ble Supreme Court recently has said:
“— The court must interpret the words in which the contract is expressed
by the parties and not embark upon making a new contract for the parties. A
reasonable construction must therefore be given to each clause in order to give
effect to the plain and obvious intention of the parties as ascertainable from the
whole instrument. The liability of the insurer cannot extend to more than what is
covered by the insurance policy —-“
The judgment can be accessed here.
Insurance is for uncertainties. But, contract predictability needs to be a certainty. While normal hazards of contracting cannot be eliminated completely, being attentive helps to understand the impact of an exclusion and if possible to prevent it from gnawing away coverage which was considered available.
Consultant – Liability Insurance
Disclaimer: The information contained and ideas expressed in this article represent only a general overview of subjects covered. It is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Insurance buyers should consult their insurance and legal advisors regarding specific coverage and/or legal issues.