It is no secret that insurance policies are famous for containing convoluted language. The average insured likely has no clue what is and is not covered. Little solace can be found in referring to the conspicuous “Definitions” section; ultimately no more than a trap to trick unsuspecting policyholders into believing that any ambiguities that arise will be easily rectified. Insurance is big business and carriers don’t want to have to pay claims. At the end of the day, coverage is all about semantics and carriers use the complicated wording of their policies to create plausible ways to deny claims otherwise assumed to be covered. Carriers bank on the fact that many insureds either don’t know the law (and will simply accept the carrier’s interpretations) or can’t afford to fight the carrier in court. Carriers save significant dollars each year because some insureds don’t pursue questionable coverage denials. Radical change is not likely on the horizon. Some good news, however, is that there is a body of policyholder-friendly case laws in New Jersey on the issue of ambiguity.
A recent unpublished decision out of the U.S. District Court for the District of New Jersey reaffirmed the long-standing principal that ambiguities in insurance policies must be construed in favor of the insured. In Gregory Packaging, Inc., v. Travelers Prop. Cas. Co. of Am., the Court found that a shutdown of the insured’s factory caused by the discharge of an unsafe amount of ammonia constituted a “direct physical loss or damage” to the property; a condition precedent to coverage. The carrier argued that a physical change of, or alteration to, the property, is necessary to trigger coverage. The Court disagreed and found that an accident that renders a building unfit for occupancy, and in need of remediation, amounts to a direct physical loss. Here, the release of ammonia physically transformed the air, rendering the facility dangerous. Accordingly, the Court determined that coverage cannot be denied on the basis that there was not a “direct physical loss.”
The policy at issue in the Gregory Packaging case was a Property policy, and the holding is clearly policyholder-friendly in that it provides for an expansive definition of the phrase “direct physical loss or damage” in the Property policy context. However, the concept reinforced by the Court with respect to ambiguity, while not novel, can be applied to insurance cases beyond “Property” policy losses. Insurance policies are contracts of adhesion. Although the plain meaning of the terms of an insurance policy will usually govern, if there is more than one reasonable interpretation, the interpretation favoring the innocent insured will prevail.
In the context of commercial general liability (CGL) policies, carriers have increased incentive to deny claims given that the potential payouts are large—often in the millions. These policies are often intentionally very hard to interpret. It is not uncommon for the basic policy provisions to be subject to exclusions. There can also be exceptions to those exclusions and there may be policy endorsements that override everything. It can be a very difficult maze to navigate. Simple acceptance of the carrier’s denial, especially under a CGL policy, could prove very costly.