In the “Cheese Shop” sketch from the old Monty Python comedy series, John Cleese plays a customer trying to buy some cheese from “Ye National Cheese Emporium, purveyor of fine cheese to the gentry (and the poverty-stricken too)”. The cheese shop proprietor, played by Michael Palin, seems to have no cheese in stock, not even common varieties like cheddar. Cleese keeps trying, by asking for different and increasingly obscure types of cheese, but Palin only offers weak excuses like “Ohh! The cat’s eaten it.” Cleese remarks that it doesn’t seem to be much of a cheese shop, but Palin insists it’s the best around, due to its “cleanliness.” And Cleese replies: “Well, it’s certainly uncontaminated by cheese…” (You can find the full sketch on YouTube.)
The policyholder in the recent case of Crum & Forster v. DVO found itself in a similar situation, and must’ve felt like it had bought an insurance policy uncontaminated by coverage.
DVO designs and builds equipment called “anaerobic digesters,” that create electricity from cow manure. (No, I’m not making this up.) A company called WTE sued DVO, contending that an anaerobic digester sold by DVO failed to work properly, resulting in damages of over $2 million.
DVO quite naturally submitted the claim to its E&O carrier, Crum & Forster. But C&F said “not our problem,” relying on an exclusion in the policy for breaches of contract. DVO responded that C&F’s position improperly rendered the policy worthless, because any errors and omissions claim could arguably involve a breach of contract. But the trial court held that, although coverage for professional malpractice would effectively fall within the breach of contract exclusion as to claims alleged by a client or customer, third parties could still bring tort claims against DVO that would not fall within the exclusion. So, according to the trial court, the policy had some value, and it would not be correct to say that the policyholder paid premiums for nothing. Of course, claims by undefined “third parties” are not the main reason why companies buy errors and omissions insurance. They’re primarily worried about claims by clients or customers.
This is why appeals courts exist. Federal courts are often no friend to policyholders, but even the Seventh Circuit recognized that C&F’s position meant that policyholders were paying for mostly worthless “protection” from errors & omissions claims. The Court wrote: “[T]he focus…is not on the hypothetical third-party actions, but on the reasonable expectation of coverage of the insured in securing the policy. There is, after all, no reason to believe that DVO in purchasing Errors and Omissions coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties.”
In short, C&F’s position rendered the coverage “illusory,” meaning that the exclusions to the policy would completely eviscerate the coverage. The appeals court sent the case back to the trial court, with instructions to reform the policy to reflect DVO’s reasonable expectations.
A couple of observations about this. First, it is very difficult to convince a court, let alone a federal court, that an insurance policy contains “illusory” coverage. Courts will usually strain to find some type of claim that would be covered under the policy, which is what the trial court unsuccessfully tried to do here. But the “illusory coverage” argument is worth making if the carrier takes a position that makes the policy essentially worthless with respect to the types of claims that it’s really supposed to cover. Second, insurance policies are generally sold to people who aren’t insurance coverage lawyers or judges, and who do not have the time or experience to pull policies apart word by word and address arcane loopholes created by insurance companies.
In this regard, the late Justice Pashman of the New Jersey Supreme Court once wrote in a brilliant dissenting opinion:
“[General liability] insurance…is not issued to lawyers….As such, our central inquiry must be whether this policy is ambiguous insofar as the average [policyholder] is concerned — not, as the majority emphasizes, whether a jurist who had scrutinized the contract would experience any doubts as to the policy’s ambit… Moreover, the insurer could easily have avoided this ambiguity by utilizing ‘more precise language [which]…would have put the matter beyond reasonable question.’”
That’s the truth. And you can read the full decision in Crum & Forster v. DVO by clicking here.