[lg policy] blog: "Plain Language" Policy Wording Frustrates Coverage Denial

[Harold Schiffman]

"Plain Language" Policy Wording Frustrates Coverage Denial

December 10, 2012
David W.P. Moriarty

Richards Buell Sutton Insurance Law Newsletter

While the modern day movement to “plain language” contracts has been
helpful in levelling the playing field between commercially
sophisticated and unsophisticated parties its usage does allow for
ambiguity.  The effect of plain language ambiguity was recently felt
in the British Columbia Supreme Court case of Royal & Sun Alliance
Insurance Company of Canada v. Araujo 2012 BCSC 1203 where an
insurer’s application to uphold its coverage denial in the context of
a personal lines policy exclusion was dismissed.

The Facts

Fifteen year old Matthew was sleeping on a sofa in his grandparents’
house when the house was fire bombed by third party arsonists. After
suffering serious burns Matthew commenced an action in negligence and
occupiers liability against his grandparents, father and uncle for
failing to keep him safe given another arson incident that occurred
the previous day at the house. At the time of the incident the
defendant relatives lived together in the house while Matthew
primarily resided with his mother at her townhouse. Matthew stayed
with his father at the house two or three nights per month.

The defendants sought coverage under the grandparents’ homeowners
insurance policy. The policy provided Personal Liability Protection
subject to the following exclusion clause:

We do not insure claims made against you arising from...

5.        bodily injury to you or to any person residing in your
household other than a residence employee;

The words “you” and “your” were given the following definition in the policy:

You or Your means the person(s) named as Insured on the Coverage
Summary page and, while living in the same household:

    his or her spouse;
    the relatives of either;
    any person under 21 in their care.

The insured denied the defendants coverage and sought a declaration as
to the propriety of its denial.

The Ruling

The court found there are two parts to the exclusion clause: the
exclusion of claims for bodily injury to “you” and the exclusion of
claims arising from bodily injury to “any person residing in your
household”.

The first issue canvassed in respect of the exclusion clause was
whether Matthew fell within the definition of “you” and “your”. To
avoid an absurdity created by the repetitive use of “you” in the
exclusion clause (ex. a claim against the grandparents for bodily
injury to the grandparents) the insurer argued that “you” in the
exclusion clause must be given different meanings depending on the
context (ex. a claim against the grandparents for bodily injury to
Matthew). The court accepted the need to give context to the
interpretation of the exclusion clause but, while appreciating the
objective of “plain language contracts”, found the very definition of
“you” itself to be inherently ambiguous because it brings in all of
the named and unnamed insureds.  As is usual the ambiguity in the
exclusion clause was resolved in favour of the insured.

Irrespective of how the court interpreted the terms “you” and “your”
the insurer, to fit within both the definition and the second part of
the exclusion, needed to establish that Matthew was “residing” in his
grandparents’ household (all parties agreed the terms “living in the
same household” and “residing in your household” were synonymous) and
that he was part of the “household”. Given the familial relationships
involved the court had no difficulty in concluding that when Matthew
stayed at the house he was part of the “household”.  He was
distinguished from a renter or house-sitter in this regard.
Accordingly, the key question became whether Matthew was “residing” in
the household.

The court accepted it is possible for a person to have more than one
residence for insurance purposes and referenced several cases where
children of separated parents were found to have dual residences. The
court however found that this case was different for two reasons.
Firstly, as this case involved the interpretation of an exclusion
clause, the court needed to narrowly construe the term “residing”.
Secondly, in all the cases where dual residency was found, both
parents had set up their own separate households of which the child
was a part. Here Matthew was found not to be “residing” at the house
primarily because he did not maintain a physical presence in the
house.  He did not have his own exclusive room, he did not have the
subjective intent to reside at the house since he considered his
mother’s townhouse to be his home and his access to the house was
dependent upon those who lived there as he had no key.

The determination that Matthew was not residing or living in the
household, in addition to negating the application of the second part
of the exclusion, lead to the finding that he did not fit within the
definition of “you” irrespective of the inherent ambiguity in the
definition.

Practical Consideration for Insurers

We are again reminded that ambiguity in an insurance policy will work
in favour of insureds.  In this case, the use of pronouns in policy
definitions and language lead to the application of the contra
proferentum doctrine.  Even though the objective of using plain
language is primarily for the benefit insureds courts will resolve any
ambiguity arising from that language in their favour.

Insurers and claims examiners are well advised to note the use of
pronouns in their policies, particularly in the definitions contained
therein, when making coverage determinations.  Such policy terms may
be inherently ambiguous and thus favour coverage.  Consideration may
be had to greater usage of defined terms such as “Named Insured” and
“Unnamed Insured” in policy language.

Additionally, insurers may consider including specific language in
their policies as to what the term “residing” means. While here the
court agreed it was possible that a person could have dual residency
for insurance purposes it would have been helpful had the policy
contained a specific definition as to what that term means.


http://www.rbs.ca/newsroom-publications-Plain-Language-Policy-Coverage-Denial.html

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