The former director of the Big I’s Virtual University thoughts on why clarity is paramount in an insurance policy
An insured operates a food trailer that has been insured with the same carrier for over 5 years. The mounted generator that powers the trailer equipment was stolen along with the cage around it. The cage was welded and bolted to the trailer chassis and the generator was also attached inside the cage but not quite as substantially. The carrier has initially denied the claim due to a lack of permanent attachment of the generator but the agent has submitted additional photos and is seeking a coverage opinion from an independent source.
The adjuster has initially hung his hat on some photos and the following defined term in the auto policy:
“Permanently attached equipment” or “PAE” means equipment and devices that are permanently installed or attached to your insured auto. Permanently attached equipment also includes:
- accessories designed to work as part of the equipment or devices;
- load securing equipment and devices; and
- custom paint or decals.
The first question, of course, is what is meant by “permanently”? A word or term used in a policy is not necessarily unambiguous simply because it’s defined in the insurance contract. One reason is that a defined term often includes language that is itself possibly ambiguous, as could be the case here. In addition, courts generally do not look favorably on defined terms that are “circular” in nature. In my book, “When Words Collide: Resolving Insurance Coverage and Claim Disputes,” I discuss this issue in pp. 212-213:
A particularly self-defeating breed of definitions is one that is circular, i.e. definitions that reference themselves. For example, most ISO liability policies define “bodily injury” as follows:
“Bodily injury” means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.
Bodily injury means bodily injury? Not according to the Louisiana Supreme Court in Hebert v. Webre, 982 So.2d 770, 777 (La. 2008). ISO homeowners programs largely exclude “motor vehicle liability,” a defined term that comes about as close to being circular as is possible based on how it used to exclude coverage for most motor vehicles.
A related concept is a definition that uses an undefined term that, when researched, is determined to mean the definition. Confused? Policies that use the term “sudden and accidental” often don’t define it, but one policy defined “sudden and accidental” to mean abrupt. But what does “abrupt” mean? According to one dictionary, “abrupt” means “sudden and accidental.” It’s difficult for a dog chasing its own tail to achieve resolution in that pursuit. The same is true with circular definitions and courts are not impressed by them.
Courts don’t like circular definitions and this one is doubly circular in that “permanently” “attached” means something that is “permanently” installed or permanently “attached.”
So, aside from the permanency revealed by additional photos, the fact that the definition “permanently attached equipment” is likely “circular” could reinforce the subjectivity of what constitutes “permanence” and make this limitation unenforceable.
In addition, one might consider the generator an accessory necessary to power the cooking equipment. If so, the “accessories” provision, as described in the definition, arguably has no permanency requirement of its own.
Clearly the generator is a functional, required part of the operating equipment of the trailer, photo evidence indicates that it and the cage assembly are permanently attached, the definition is likely ambiguous so that it’s limiting nature is unenforceable against the insured, and if the generator is considered an accessory, there might be no permanency required even if the definition was unambiguous.
The good news? After the agent passed along several opinions from coverage experts that the claim appeared to be covered, the insurer, to its credit, backed off its initial denial and paid the claim the next day.
The moral of the story? As discussed in my book, the best way to resolve claim disputes is to avoid them. One way to do that is by carefully drafting the language in the insurance contract to avoid things like circular definitions.
More about Bill Wilson…
William C. Wilson, Jr., CPCU, ARM, AIM, AAM is the founder of InsuranceCommentary.com. He retired from the Independent Insurance Agents & Brokers of America in December 2016 where he served as Assoc. VP of Education and Research and was the founder and director of the Big “I” Virtual University for over 17 years.
He is the former Director of Education & Technical Affairs for the Insurers of Tennessee and, prior to that time, he was employed by Insurance Services Office, Inc. He is a graduate of the Illinois Institute of Technology with a B.S. degree in Fire Protection & Safety Engineering.
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