Exclusions

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What Isn’t Covered

An exclusion is a provision of an insurance policy referring to hazards, perils, circumstances, or property not covered by the policy. Exclusions are usually contained in the coverage form or causes of loss form used to construct the insurance policy.[1]

For example, one common exclusion is a clause that prohibits coverage for an intentional loss. In some states, like California, a statute prohibits insurance of intentional acts (In California, it is Insurance Code § 533). Regardless, insurers will select belts and suspenders by including an exclusion regardless of the existence of the statute. It should be axiomatic that to pay for an intentional loss defeats the purpose of insurance, which is:

[T]he fundamental principle that insurance coverage is intended to indemnify for fortuitous events, not events which the insured anticipates and can avoid. Panorama Vill. Condo. Owners Ass’n. Bd. of Directors v. Allstate Ins. Co., 144 Wash.2d 130, 26 P.3d 910 (Wash. 2001).

To comply with statues like the California statute, insurance policies contain specific exclusions to limit the coverages available to indemnity for fortuitous or accidental losses. However, not all apparently intentional acts are covered by the exclusion.

Insurance policies contain specific exclusions to limit the coverages available to indemnity for fortuitous losses.

Rejecting an argument that there must be a causal connection between the policy exclusion and the cause of the accident to enable the insurer to avoid payment of the loss, the court stated:

The language of the exclusion is clear and unambiguous. There is no ‘in-flight’ coverage if the aircraft does not bear the appropriate certificate. Unambiguous language does not require construction. [Threlkeld v. Ranger Ins. Co., 202 Cal.Rptr. 529, 156 Cal.App.3d 1 (Cal. App. 1984)]

Where an insurer asserts that coverage is precluded by an exclusion, the burden is upon the insurer to establish that the exclusion is applicable. [Caledonia Community Hosp. v. St. Paul Fire & Marine Ins. Co., 307 Minn. 352, 354, 239 N.W.2d 768, 770 (1976); Ministers Life v. St. Paul Fire and Marine Ins. Co., 483 N.W.2d 88 (Minn. App. 1992)

The Mysterious Disappearance Exclusion

The term “mysterious disappearance” first appeared in insurance policies in 1943. Johnson v. General Accident, Fire & Life Assur. Corp., 454 S.W. 2d 837, 838 (Texas California Civil Code. App. 1970). The term has been defined several ways, but all share the sense of an unexplained loss.

It has been held that:

‘mysterious disappearance’ means a disappearance which is ‘unexplainable, unaccountable, or which occurred in an unknown manner.’ Orenstein v. United Services Automobile Association, 32 App. Div. 2d 227, 301 N.Y.S. 2d 208 (1969); Levine v. Accident & Casualty Ins. Co., 203 Misc. 135, 112 N.Y.S. 2d 397 (1952).

In Alabama, after a sail boat disappeared from the seas off Cape Canaveral, Florida, without explanation the court concluded that the mysterious-disappearance exclusion is not ambiguous and the loss of the sail boat was mysterious. Concluding that the policy, when read as a whole, and because there is no genuine issue of material fact concerning the disappearance of the sailboat, the trial court should have entered a summary judgment in St. Paul’s favor. [St. Paul Fire & Marine Ins. Co. v. Britt, 203 So.3d 804 (Ala. 2016)]

In an action to recover damages for conversion, in which the defendants US Art Co., Inc., and U.S. Art International, LTD., commenced an action for a judgment declaring that Certain Underwriters at Lloyd’s, London (“Lloyd’s), had a duty to defend and indemnify them in the main action. The court refused the motion for summary judgment based on a “mysterious disappearance” exclusion. It also sought defense to the action by the owners of the art. The court found:

[U]nderwriters failed to establish as a matter of law that coverage should be barred based on the “mysterious disappearance” exclusion. The explanation for the loss proffered by the US Art employees, if believed by the trier of fact, could reasonably support an inference that the artwork was accidentally thrown away, which would take the loss out of the “mysterious disappearance” exclusion (Citations omitted.)

In the event that it is determined that the “mysterious disappearance” exclusion does not apply; Underwriters will only have the duty to indemnify US Art for its losses. Pursuant to the language of the policy, Underwriters had the option to defend, not the duty to defend, the main action (Citations omitted.)[2]

Although the Underwriters were unable to establish their defense based on the exclusion at summary judgment, they did establish that the policy issued by them did not require a defense but, rather allowed the insurer the option to defend which Lloyd’s properly refused to exercise. Subsribe at https://barryzalma.substack.com/welcome.