Just lately I used to be studying an article from the College of Pennsylvania Legislation Overview entitled, “The Illusory Protection Doctrine: A Essential Overview.” Based on the article, the Illusory Protection Doctrine “is a doctrine of insurance coverage contract enforceability, versus interpretation, that serves to guard policyholders from procedurally unconscionable exclusions that nearly utterly wipe out the protection purportedly accessible beneath their insurance policies.”
In different phrases, if a industrial strains insured is bought a coverage that doesn’t cowl a enterprise exercise that resulted in a declare, the protection beneath the coverage is likely to be thought-about illusory, relying on the scope and diploma of the exclusion. If the exclusion is broad and deep, a courtroom may discover the insurance coverage contract to be unenforceable.
I first spoke about this in seminars I did within the ’90s and wrote about it in my e book, “When Phrases Collide: Resolving Insurance coverage Protection and Claims Disputes.” The issue is, many courts have discovered that protection is just not illusory if there’s any protection in any respect for which a premium was paid.
In my e book, I give a private instance of when my residence was hit by a twister in 2013. Along with about $40,000 in injury to property, we misplaced 19 bushes that needed to be lower down and faraway from the premises. These had been largely 40- to 80-foot cedar bushes in varied states of harm. We acquired not less than 4 quotes from tree service corporations vying for the job. After all, I requested for documentation of insurance coverage protection.
One of many corporations had solely been in enterprise for a number of months. I’m positive getting protection was tough for them, as attested by the truth that the proprietor proudly offered me with a portfolio of insurance coverage paperwork that included a certificates of insurance coverage, a CGL coverage declarations web page, and diverse coverage varieties.
The CGL coverage was the 2004 ISO version and hooked up to it had been 42 endorsements, a lot of them exclusionary in nature. One particularly excluded “ongoing operations” and “your work,” the latter time period successfully which means accomplished operations. In different phrases, this enterprise proprietor, tasked with bringing down very giant bushes, some instantly adjoining to a neighbor’s residence, basically had what was referred to within the previous days as an OL&T coverage — Homeowners, Landlords and Tenants. That’s, his coverage coated him on his premises however not on a job web site.
Was his CGL protection illusory given the character of his enterprise? I might argue that it completely was. Nonetheless, many courts would opine in any other case. The regulation assessment article above cited an Indiana Supreme Court docket determination that reiterated a longtime rule that “Protection beneath an insurance coverage coverage is just not illusory except the coverage wouldn’t pay advantages beneath any fairly anticipated set of circumstances.”
As acknowledged earlier, many courts have discovered that protection is just not illusory if there’s any protection in any respect for which a premium was paid. Translated, because of this, in case your insurance coverage premium deal was too good to be true, there’s doubtless little protection to be discovered. Within the case of this tree service firm, I suspected as a lot after I noticed on the declarations web page that the CGL protection was priced at $707, a ridiculously low premium for such a hazardous enterprise.
Clearly, the rationale the premium was so low was that it was basically a premises-only coverage. Subsequently, the premium being commensurate with a premises publicity, the protection may not be thought-about illusory. You get what you pay for. Once more, guessing that this new tree service enterprise had a really tough time procuring protection, you’d assume that the proprietor would query what he was shopping for at such a reduced value after doubtless being turned down by different insurers or supplied protection at an outrageous value.
The issue is, most customers and small enterprise homeowners don’t perceive this. In any case, particularly from the standpoint of residence and auto insurance coverage, business advertising and marketing is dominated by price-focused promoting. The implication is that insurance coverage, by and enormous, is a commodity differentiated solely by value. A householders coverage is a householders coverage. An auto coverage is an auto coverage. A CGL coverage is a CGL coverage. The regulation assessment article addresses this by invoking the “cheap expectations” doctrine, one thing I additionally tackle in my e book.
I’m positive there are enterprise homeowners who could be suspicious of the extent of protection, but when it helps them get work, ignorance is bliss. Sadly, that doesn’t defend the general public who could possibly be harmed by somebody who’s successfully uninsured. The regulation assessment article addresses this by questioning whether or not protection needs to be granted as a matter of public coverage, one other idea I discover in my e book.
So, can a coverage present illusory protection? Legally, it most likely can as some courts have discovered, however realistically, making a case for illusory protection might be very tough. However that’s not the purpose.
March is acknowledged as “Ethics Consciousness Month” within the insurance coverage and threat administration business. From that perspective, let’s overlook concerning the legality of an insurance coverage coverage just like the CGL bundle mentioned on this article. Is it moral to promote such a coverage, KNOWING how restricted the protection is relative to enterprise operations?
I don’t consider it’s. It’d presumably violate fraud or unfair commerce practices legal guidelines, however even that’s debatable given how most state legal guidelines are written.
Is it an moral observe? I don’t consider it’s and I stated that to the tree service enterprise proprietor, defined his protection deficiencies, and gave him my enterprise card if he wished to current it to his insurance coverage representatives. I by no means heard any extra about this, so my guess is that the enterprise proprietor pretended our dialog by no means occurred. Now we have sufficient folks within the business who unknowingly promote poor protection — we don’t want folks knowingly doing that.
What do you assume? Is knowingly promoting an insurance coverage bundle that’s grossly poor in offering protection for a enterprise’s common and customary operations unethical? Be at liberty to reply within the Feedback part of this text, if studying on-line, or ship me an e mail.