Boatowner liability insurance
Malecki, Donald S
Exclusions may affect whether boat owners who are injured by negligent operators have coverage
For a long time, personal auto policies, both standard and independently filed ones, have contained certain exclusions that attempt to preclude coverage when one family member sues another family member in order to receive coverage for injuries sustained in an auto accident.
These exclusions are described using various terms. The exclusion that was part of older policies that preceded the modern-day personal auto policy was, and still is, referred to as the “household exclusion.” However, the more common reference is the “intrafamily exclusion.”
Whatever the name given to this exclusion, its original purpose is to prevent collusion among family members who could profit by being both insureds and claimants under one policy For example, while Tom is driving his dad home from an outing, Tom has an accident in which his dad is injured. His dad files suit against his son, a permissive user, who seeks coverage under the dad’s auto policy.
Without this kind of exclusion, there is nothing to prevent the dad from colluding with his son to inflate the amount of damages sought in a situation where both would benefit as insureds. This is not to say the dad would necessarily do that, but being given the opportunity to have someone else pay for those damages may foster such attempts.
While the earlier household exclusion, as its term connotes, was limited to claims and suits between insureds in the same household, later exclusions became broader in scope. The standard ISO exclusion is an example. (Its title, “liability coverage exclusion,” also is an example of an oxymoron, i.e., contradictory or incongruous words.)
This standard exclusion not only rules out injuries suffered by insureds at the hands of family members, but also injuries suffered by insureds caused by others who are not related to any named insureds. An example is where the auto owner asks a friend to drive the auto owner’s vehicle and an accident occurs injuring the owner. If the owner sues his/her friend, a permissive user, the friend may not be covered by the owner’s personal auto policy.
Although these exclusions have been in use for many years, they are still being tested in the courts with mixed results. In the state of Ohio, where many cases involving auto-related issues result in coverage, the unexpected happened in the case of Shidel, et al. v. Liberty Mutual Insurance Company, 674 NE.2d 1191 (Ohio App. 1995). The court here upheld the liability coverage exclusion in a case where a wife, while driving an auto in which her husband was a passenger at the time of the accident, sought coverage when the estate of her husband filed suit against her.
However, in the case of Farmers Insurance Exchange v. Dotson, 913 P. 2d 27 (Sup. Ct. of Colo. 1996), the exclusion was held to be contrary to public policy and void. This was a case where both the operator and passenger, as named insureds, were killed and suit was brought by a relative.
Use of exclusions not limited to personal auto policies
It is important to understand the rationale for these exclusions, because they are no longer limited to autos. In recent years, these exclusions have been incorporated into boatowners and yacht policies where they could be even broader in scope than what is found in auto policies.
Generally, it is not necessary for producers to point out these exclusions to their policyholders, but there are some jurisdictions where producers have that obligation. Even in the absence of that obligation, some producers gratuitously point out potentially troublesome exclusions. Whatever the case may be, it is important for producers to understand the rationale for these exclusions and to recognize them in the event they are queried about them.
In one case some years ago, a Louisiana court ruled that the liability coverage exclusion in a yacht policy was ambiguous and therefore did not preclude coverage when a yacht sank after striking a bridge. The insurer paid the total loss and then sought subrogation against two guests who were operating the yacht as the time of its collision. The court ruled that the two guests were covered by the yacht owners policy, despite a provision that the insurer argued precluded coverage. The case is Truehart v. U.S.F& G. Insurance Co., 676 FS. 123.
Many of the boatowners forms and yacht policies that incorporate exclusions of the kind discussed here use wording that differs from the standard liability coverage exclusion. In another case involving a watercraft accident in Louisiana, the court ruled that the exclusion did not violate public policy.
The case is Callihan v. Hiatt & State Farm Fire and Casualty Co., 753 So.2d 302 (Ct. App. of Louisiana 1999). After the boat owner was killed in an accident where the craft was being operated by someone else, the family sued the operator who sought coverage under the boatowner’s policy. However, coverage was denied because the policy contained an exclusion reading: “[Watercraft liability] does not apply to … bodily injury to you. …”
The reason for the question concerning public policy was that Louisiana courts have refused to apply the same exclusion in auto policies since the advent of compulsory liability insurance whose purpose is to protect the owner or operator of an auto against liability and to provide compensation to those who are injured. The problem is that there is no compulsory liability insurance requirement for watercraft, unlike autos, in this state.
Another more recent case that involved similar circumstances is Zacarias v. Allstate Insurance Company, et al., 749 A.2d 394 (Sup.Ct. NJ. 2000). A wife sued her husband for injuries she allegedly sustained because of his negligent operation of the boat.
The boat policy contained an exclusion that read: “We do not cover bodily injury to an insured person or property damage to property owned by an insured person.” The insurer denied coverage but did agree to provide defense.
The husband countered with the argument that the preclusion of his spouse from coverage was against public policy, among other reasons.
This kind of an exclusion in an auto policy was held to be against public policy in New Jersey, because its compulsory auto law mandated that claims brought by members of the named insured’s household may not be excluded from coverage. But the court in this case stated that “other insurance policies `unencumbered’ by statutory requirements were governed by the plain language of the policy.”
In the absence of a legislative mandate requiring liability insurance coverage for boat owners, the court said, it may not establish a corresponding public policy in this case. The court therefore ruled that because the wife was an insured, her claim was not covered.
It is interesting to note that in the dissenting opinion of one justice, a passing comment was made that one of the reasons the plaintiff was unaware of the exclusion was that he was not advised of it by his insurance agent who sold him the policy. Unless the agent serves as a consultant for clients, the agent should not have the obligation to inform clients what the policy covers and does not cover. Many courts appear to rule that way, but there are exceptions.
For those enterprising producers who have newsletters or other sources of communication with their clients and want to advise about boatowner liability insurance problems, the subject of this article is ideal. What must be kept in mind by boat owners is that they may not have coverage under their policies when they are injured by negligent operators, whether or not the
operators are family members even though coverage may apply in similar circumstances involving the use of autos.
These exclusions, furthermore, are not necessarily found in the exclusions sections of policies. In some cases, these exclusions are couched within the Who Is An Insured provision of policies.
Finally, while a growing number of boatowners policies include these exclusions, some still do not. But based on underwriting discretion, an exclusion may find its way onto the policy by way of an endorsement.
Donald S. Malecki, CPCU, is chairman and CEO of Donald S. Malecki & Associates, Inc. He is a committee member of the International Insurance Section of the Society of CPCU, on the Examination Committee of the American Institute for CPCU, and an active member of the Society of Risk Management Consultants.
Copyright Rough Notes Co., Inc. Aug 2000
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