Clear & Unambiguous Exclusion Must Be Enforced

Exclusion of Injuries To Resident is Effective

Feb 09, 2022

BACKGROUND

In 2016 and 2017, the Insureds owned a home located in Bloomington, Illinois. They insured the property through Farmers with a homeowners policy. The Insureds, unable to sell the house, entered into a two-year lease agreement with Donnelly who rented the insured home as a tenant. On January 25, 2017, Donnelly allegedly sustained physical injuries while in the rented home when a defective staircase collapsed under her.

On January 24, 2019, Donnelly filed her complaint initiating the underlying action by alleging she sustained injuries due to the Insureds negligence. On March 7, 2019, Farmers sent the Insureds a letter disclaiming coverage for Donnelly’s injuries. Citing the resident and business exclusions in the homeowners policy, Farmers found their application excluded coverage because “[a]t the time of her alleged injury, Ms. Donnelly was a tenant in your home.”

Farmers moved to dismiss the Insureds’ claim and the trial court issued a four-paragraph order granting Farmers’ motion for judgment on the pleadings and dismissing the case.

ANALYSIS

Judgment on the pleadings is proper when the pleadings disclose no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

An Insurer’s Duty to Defend its Insured

An insurer has a duty to defend its insured “[i]f the facts alleged in the underlying complaint fall within, or potentially within, the policy’s coverage.” Illinois State Bar Ass’n Mutual Insurance Co., 2018 IL App (4th) 170548, ¶ 35.

If an insurer relies on an exclusionary clause to deny coverage and refuses its duty to defend its insured, as Farmers does here, then it must be clear and free from doubt that the exclusionary clause applies.

Interpreting This Insurance Policy’s Resident Exclusion

When construing the language of an insurance policy, a court’s primary objective is to ascertain and give effect to the intentions of the parties as expressed by the words of the policy. If the policy’s words are clear and unambiguous, they will be given their plain and ordinary meaning, but if the policy terms are reasonably susceptible to more than one meaning, they are ambiguous and will be strictly construed against the drafter. Likewise, courts will not strain to find ambiguity in an insurance policy where none exists.

The Insureds’ homeowners insurance policy included certain liability coverage. The Insureds’ homeowners policy, however, also contained a “Liability Exclusions” to “Any insured or other residents of the residence premises. We do not cover bodily injury or personal injury to: (a) any insured; or (b) any resident of the residence premises, whether resident in the dwelling or a separate structure.”

In her underlying complaint, Donnelly identified herself as a tenant lawfully on the premises. The Court of Appeals, obviously, understood that allegat to mean she dwelt in the home. In fact, neither the Insured nor Donnelly denied she lived in the insured home.

Looking at the policy as a whole and considering the type of policy involved, as the Insureds implored the court to do, the court could not conclude the parties intended for the personal liability coverage in this homeowners’ policy to apply to bodily injuries sustained by a person renting the insured home for two years.

In sum, since “resident(s)” is an undefined, unambiguous policy term, the court of appeal adopted its plain, ordinary meaning. Given that meaning-one who dwells in a place permanently or for a considerable amount of time- the court concluded, based on the allegation in the underlying complaint that Donnelly was a tenant in the Insureds’ home, Donnelly was a resident of the residence premises when she allegedly sustained injuries from a defective stair in the home. Consequently, the court of appeal concluded that it was “clear and free from doubt” that the resident exclusion applied to preclude coverage, Farmers had no duty to defend the Insureds, and the trial court rightly granted Farmers’ motion for judgment on the pleadings.

Estoppel

The Insureds also argued Farmers should be estopped from exercising the right to disclaim coverage because it twice informed the Insureds it would cover the claim and then waited two years to disclaim coverage.

Farmers twice informed the Insureds it was investigating their claim, but Farmers did not promise coverage. Similarly, the agent’s comment that Farmers “will take it from there” did not promise coverage. More importantly, though, the Insureds have not alleged prejudice, let alone present clear, concise, unequivocal evidence of prejudice. Because plaintiffs did not assert how they were prejudiced plaintiffs fail to establish a necessary element of estoppel.

The court affirmed the trial court’s dismissal, agreeing that Farmers did not unreasonably delay, nor did it wrongly deny coverage.

ZALMA OPINION

The Illinois Court of Appeal found, as it was required to do by law and precedent, that an insurance policy is a contract that must be interpreted as a whole. Doing so it found that the clear and unambiguous term “resident” means a person living in the house, as did Donnelly, subject to a written lease. Multiple, creative arguments to find coverage failed. Insurance was not the only remedy available to Ms. Donnelly. She can still proceed against the landlords and collect any judgment she may receive from the landlord’s assets, like the house she rented.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

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