When a Court Reads and Understands a Policy Justice is Done

Almost no one  reads an insurance policy. Regardless, the words of the policy still control any question about coverage for a claim if they are clear and unambiguous.

Insureds are never happy when a claim is denied even if the decision to refuse defense and indemnity are clear, unambiguous and obvious. They sue and try to convince a court that the coverage should apply to the insured seeking coverage, usually by claiming the reasonable expectations doctrine applies since they can easily testify that they reasonably expected to have the coverage they needed. However, if a court allowed an insured to override the plain language of a policy limitation anytime he or she was dissatisfied with the limitation by simply invoking the reasonable expectations doctrine, the language of insurance policies would cease to have meaning and, as a consequence, insurers would be unable to project risk.

In Frederick Mutual Insurance Co. v. Donald Hall, Individually And Trading As Hallstone, Inc.; Maria A. Hall,Individually And Trading As Hallstone, Inc.; Hallstone, Inc.; R. Lee Hulko; Bradley B. Fair, No. 17-3477, United States Court Of Appeals For The Third Circuit (November 8, 2018) Plaintiff-Appellant Frederick Mutual Insurance Company (“Frederick”) appealed the adverse decision of a trial court in a declaratory judgment action in which it sought to have the District Court declare that it did not have the duty to defend and indemnify Hailstone, Inc. (“Hailstone”) under an insurance policy that Frederick issued to Hailstone in a state court action against Hailstone.

FACTUAL BACKGROUND

Donald and Marie Hall formed Hailstone to provide stone masonry work for residential premises. On the advice of a builder, Donald Hall (“Hall”), a principal in Hailstone, approached the Fraser Insurance Agency (“Fraser”) to obtain an insurance policy to provide in Hall’s words “maximum,” “soup to nuts” coverage for Hailstone. Fraser obtained a liability policy from Frederick for Hailstone. Hall and Frederick did not have direct contact and Hall never asked for or received a copy of the policy Frederick issued.

Beginning in or around March 2006, R. Lee Hulko and Bradley B. Fair (“the Customers”) contracted with Hailstone to provide custom stone masonry work for their home. The project was a substantial undertaking as it took several years to complete and the Customers paid nearly $300,000 for the project. The Customers discovered that some of the stone masonry work that Hailstone had undertaken had been damaged and required substantial repairs ultimately costing $352,294. The Customers attributed the damage to what they regarded was Hailstone’s substandard and defective work and consequently they filed a state court action in Pennsylvania against Hailstone alleging breach of warranty, negligence, and related statutory claims.

While defending Hailstone in the state court action, Frederick filed this declaratory judgment action in the District Court, seeking a determination that it did not have a duty under its policy to defend and indemnify Hailstone for its defective workmanship. At the  bench trial the Court found that the insurance policy unambiguously excluded faulty workmanship coverage.

Regardless the Court also found that Hall believed the policy provided coverage ‘”if something was done inadvertently’, or if his business did something and someone made a claim against his business that he might be liable for,” Frederick Mut. Ins. Co. v. Hall, No. 15-3354, 2017 WL 4883157, at *2 (E.D. Pa. Oct. 30, 2017). The Court’s ultimate finding was that Hailstone had a reasonable expectation of workmanship coverage, and, accordingly, it entered judgment for Hailstone.

DISCUSSION

In reaching its decision, the District Court found that the insurance policy unambiguously excluded coverage for the faulty workmanship claims the Customers made in the underlying state court action, a conclusion with which the Third Circuit concurred.

It is well-settled that when policy language is unambiguous, a court must give effect to that language. It is also well-settled that the focus of any inquiry regarding issues of coverage under an insurance policy is the reasonable expectations of the insured. An insured, however, may not complain that its reasonable expectations have been frustrated when the applicable policy limitations are clear and unambiguous.

Having found the policy unambiguous, the Third Circuit concluded that the trial Court should have entered judgment for Frederick instead of applying the reasonable expectations doctrine.

Hall, however, did not apply for the specific type of insurance coverage he now claims that he expected. Rather, he asked in general terms for “soup to nuts” coverage. Although the request was broad it was not specific. Thus, Frederick could regard Hall’s application for insurance as seeking a general liability insurance policy.

However, a general liability policy does not provide a guarantee of the policyholder’s workmanship. A businessman purchases a liability insurance policy to transfer the risk and cost of unexpected and unintended happenings (occurrences) to his insurance company. The insurer only agrees to assume that risk for a calculated premium. The insurer does not, however, provide a guarantee of the businessman’s workmanship or his products for that premium. Typically, the insurer protects itself against such claims by excluding coverage for property in the care, custody or control of the insured or property as to which the insured for any purpose is exercising control. There is usually some form of insurance available to cover injury to or destruction of the excluded property at a higher premium which is commensurate with the risk.

At no point did Hallstone specify that it desired the more costly workmanship insurance. An insured’s failure to request or bargain for a particular coverage precludes a court from finding that the insured expected such coverage, whether or not the insured received a copy of the policy.

Pennsylvania case law makes clear that the District Court’s application of the reasonable expectations doctrine was flawed. Only objectively reasonable expectations are protected. Hall’s claim that he expected Hallstone’s “maximum,” “soup to nuts” liability policy to include workmanship coverage is no more reasonable than if a purchaser of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for “soup to nuts” coverage. It is simply not the kind of coverage insurance agents and insurance companies expect to provide unless the insured explicitly requests such coverage.

The Third Circuit refused to allow an insured to override the plain language of a policy limitation just because he or she was dissatisfied with the limitation by invoking the reasonable expectations doctrine. The language of insurance policies would cease to have meaning.

The Third Circuit refused, therefore, to set such a deleterious sequence of events into motion. Accordingly, it reversed the District Court’s judgment and remanded the matter to that Court to enter judgment for Frederick.

ZALMA OPINION

In essence, the Third Circuit found that the hindsight expectations of the insured, Hallstone, which only arose after it was sued, were not reasonable in light of the clear and unambiguous language of the policy. Insurers are entitled to rely on the clear and unambiguous language of the policy agreed to by the insured before a loss. A court, in a declaratory judgment action is charged with interpreting the policy not rewriting it to meet what the insured learned it needed only after it was sued.

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