Will Insurance Coverage Become Illusory?

By Michael W. Tootooian

There is a joke about insurance that has an element of truth to it. The joke goes –“You buy insurance for peace of mind - if you want coverage that will cost more.” There is also a legal saying that “bad facts make bad law.” The cases discussed in this article arguably have elements of these two aphorisms.

Recently the Third District in Allstate Insurance Company v Greer, (Ill. App. 12/30/2009) affirmed the trial court’s entry of summary judgment in favor of the insurer denying coverage based on an exclusion in the homeowner’s policy. In the underlying litigation, the homeowners were sued for the death of a minor as the result of being supplied alcoholic beverages by homeowners’ adult son. The basis for Allstate’s denial of coverage was the homeowner policy’s exclusion for bodily injury or property damages resulting from a criminal act or omission, regardless of whether the insured was charged with, or convicted of, a crime.¹

The reviewing court noted that allegations in the underlying complaint stating that the homeowner supplied alcoholic beverages to the decedent-minor, which caused him to become intoxicated and impaired, resulting in a fatal automobile accident, described criminal conduct. (235 ILCS 5/6-16). The underlying lawsuit alleged a cause of action under the Drug or Alcohol Impaired Minor Responsibility Act (740 ILCS 58/1 et seq.) which requires a criminal act. ² (See Liquor Control Act of 1934 (235 ILCS 5/6-16(a-1)(b) and (c)). The plain language of the homeowner’s policy excluded coverage for criminal acts whether or not the insured is actually charged with, or convicted of a crime.

The decedent-minor’s parents argued that summary judgment in favor of the insurer was improper as there was no evidence that the homeowner’s son intended to harm the decedent- minor and that the policy exclusion only applied where such an intent was shown. Otherwise, they argued the exclusion might also apply in the case of a simple traffic violation, or when a traffic violation causes the death of another. They argued that Allstate’s policy exclusion did not apply absent intentional conduct that the homeowner’s adult son intended to injure the decedent-minor when he provided alcohol to the decedent-minor, relying on the case of Lincoln Logan Mutual Insurance Co. v Fornshell, 309 Ill. App.3d 479, 483, 722 N.E.2d 239 (4^th District, 1999). The court distinguished that case by finding that the exclusion in Lincoln Logan dealt with the interpretation of an intentional-act exclusion – not a criminal-act exclusion present in the case before it which barred coverage irrespective of its intentional-act exclusion. Greer at pg. 5.

The decedent-minor’s parents argued that it would be contrary to the public policy of the State when the General Assembly enacted the Drug or Alcohol Impaired Minor Responsibility Act (740 ILCS 58/1 et seq.) to allow such an exclusion. The reviewing court found no language in this act prohibiting such exclusions and cited legislative history in which the bill’s sponsor commented on insurance companies wanting time to “redo their policies” to “make sure that the homeowner’s policy does not cover this Act.” (See 93 Ill. Gen. Assem., Senate Proceedings, May 22, 2003, at 26.)

With the respect the public policy argument, the Greer court also relied on Bohner v Ace American Insurance Co., 359 Ill.App.3d 621, 834 N.E.2d 635 (2^nd District, 2005) which held that a policy exclusion for damages arising out of criminal or illegal acts was valid and enforceable and not against public policy. Since the underlying complaint filed by the decedent’s parents alleged that the homeowners and their son engaged in conduct excluded from coverage, the exclusion was valid and enforceable.

The reviewing court’s reasoning and holding in Greer could have broad ramifications. It passed favorably on the exclusionary language for criminal acts or omissions regardless of whether the insured was charged with, or convicted of, a crime. The decedent’s parents argument that such an exclusion could also apply to a simple traffic violation was not addressed except in a cursory manner by the reviewing court’s reference to Bohner v Ace American Insurance Co., 359 Ill. App.3d 621 (2^nd District, 2005). Furthermore, the reviewing court found that intent was not necessary to support the insurer’s position of non-coverage, since a criminal-act, not an intentional-act exclusion applied. As such, intent was not required. Thus any criminal act irrespective of intent would void coverage under Allstate’s homeowner’s policy.

Using the reviewing court’s reasoning in Greer, it could be argued that any type of act that could categorized as a crime – even a misdemeanor, voids coverage and more importantly that such an act voids coverage whether or not you are even charged or convicted of the crime.³ This interpretation could apply in any automobile policy with similar language as most automobile accident cases typically result in a ticket being given to one or more of the vehicles involved. Such an exclusion from coverage in an automobile policy, based on the reasoning of this case, could result in a denial of coverage causing the insured to be faced with bankruptcy and those injured by the insured with little or no chance of recovery. It would also result in ancillary proceedings such as breach of contract and declaratory judgment actions over the disputed exclusionary terms of the policy. Such a broad application of exclusionary provisions was discussed in the two cases cited by the reviewing court in Greer - Lincoln Logan Mutual Insurance Co. v Fornshell, 309 Ill. App.3d 479, 722 N.E.2d 239 (4^th District, 1999) and Bohner v Ace American Insurance Co., 359 Ill. App.3d 621, 834 N.E.2d 635 (2^nd District, 2005).

The Greer court referenced Bohner in addressing the public policy argument advanced by the decedent’s parents, finding that a policy exclusion arising out of criminal or illegal acts did not violate public policy. In Bohner, the plaintiff was involved in a one-car accident while driving under the influence of alcohol. The plaintiff’s insurer refused to cover the loss of the plaintiff’s vehicle due to an exclusion in the policy for criminal or illegal acts. The plaintiff was charged with driving under the influence of alcohol and subsequently pled guilty to the DUI charge. The trial court found coverage and entered summary judgment in favor of the insured. The appellate court reversed finding no coverage and entered summary judgment in favor of the insurer.

The appellate court in Bohner reasoned that driving under the influence is a criminal act in the State of Illinois and at minimum is a Class A misdemeanor. The insured in Bohner, like the decedent’s parents in Greer, cited the Lincoln Logan case for the proposition that the exclusion at issue contravenes public policy. The facts in Lincoln Logan involved the insured stabbing and killing a bar room patron. The insured was later convicted of first degree murder. The homeowner’s insurers defended the insured under a reservation of rights alleging no coverage for the insured’s intentional acts of stabbing and killing a bar room patron. The insurers (Lincoln Logan Mutual Insurance and Grinnell Mutual Reinsurance) brought an action for declaratory judgment arguing that they were not obligated to defend or indemnify the insured. The trial court found in favor of the insurance companies and the appellate court affirmed.

While affirming the trial court decision of no coverage, the appellate court in Lincoln Logan noted that the intentional act exclusion was problematic in that it could render the insurance policy illusory if it excluded coverage for negligent and innocent acts. The reviewing court reasoned that in order to avoid that possibility, the exclusion should not be read in isolation but with reference to the facts of the case at hand and not interpreted unreasonably to render an absurd result. (But one might ask isn’t the absurd result due to the absurd language in the policy that would bar negligent and innocent acts?) With that reasoning, the reviewing court concluded that the parties did not intend to insure for an intentional act of murder. While finding the policy’s exclusionary language to be ambiguous, the reviewing court instead of striking it or finding it void, choose to not interpret it as written but rather in relation to the facts of the case at hand to craft a more reasonable interpretation and application.

There are troubling aspects to the court’s reasoning in Lincoln Logan. Should the court be drafting policy exclusions contrary to the language of the policy to avoid an unsavory result? Isn’t it the insurer’s responsibility to draft exclusionary provisions that avoid ambiguous interpretations and avoid such drafting by the court? Shouldn’t any exclusionary provision, because it excludes coverage, be drafted with even more care? It is black letter law that as the drafter of the policy, any ambiguity in the policy is to construed strictly against the insurer and liberally in favor of the insured. Shouldn’t the court either interpret the clause as written or void it if it provides illusory coverage? Instead the reviewing court relied on the distasteful facts of the case to deny coverage to the insured for the murder of another - an example of “bad facts making bad law.”

The reviewing court in Bohner, like the reviewing court in Greer, found that Lincoln Logan did not support the insured’s belief that the exclusion is contrary to public policy. The court also interpreted the exclusion with reference to the facts of the case at hand to avoid such a finding, implying that the facts of the claim, not the policy language, are controlling. The Bohner court found that without such context, a literal interpretation of the exclusion would effectively deny coverage for acts as minimal as infractions of the statutory rules of the road. Such a literal interpretation would be absurd. Speeding, running a stop sign and other similar infractions are not considered criminal offenses. They are considered quasi-criminal petty offenses (625 ILCS 5/11-202), while driving under the influence is a criminal offense. Bohner, 834 N.E. 2d at 640. Nevertheless, are these not intentional or illegal acts that would be excluded from the policies at issue in Greer and Bohner? What about tickets issued for talking on your mobile phone or texting while driving?

The dissent in Bohner argued that the exclusion in question was against public policy because it would exclude coverage for quasi-criminal petty offenses such as speeding or running a stop sign. The dissent found the insurance coverage to be illusory and that the majority ignored the well-settled principle that insurance provisions that exclude coverage are to be construed liberally in favor of the insured and most strongly against the insurer. The exclusion language at issue states there is no coverage, “Arising directly or indirectly out of any dishonest, fraudulent, criminal or illegal act committed by you or your agents.” Conceding that the insured’s actions amounted to a “crime,” the dissent noted that provisions that deny coverage for intentional acts are interpreted as such where the insured (1) intended to act and (2) specifically intended to harm a third party citing Lincoln Logan. It would be contrary to the parties’ intention to interpret such a provision to deny coverage for negligent or innocent acts because the clause would then contradict and swallow the entire personal liability policy. Bohner, 834 N.E.2d at 641.

The dissent in Bohner further noted that the illegal act committed by the plaintiff required no mens rea – intent is not element of the DUI charge that was brought against the plaintiff, which is a strict liability offense. “Illegal acts” as the term is used in the exclusion would apply to other traffic violations such as speeding and improper lane usage which also do not have a mens rea element. These acts are also “illegal” within the meaning of the exclusion provision. Bohner, 834 N.E.2d at 642.

The dissent also pointed out that the majority’s attempt to draw a distinction between the DUI offense which has no mens rea element and is not covered and other offenses, such as speeding and running a stop sign which also have no mens rea element but are covered, is a distinction without a difference relative to insurance law. Because the insurer did not allege or prove that the plaintiff’s act of driving into the tree was intentional (mens rea) and was intended to harm persons or property, the exclusion should not apply. The plaintiff’s act of driving into a tree and damaging his vehicle was neither more nor less unintentional than any minor traffic offense, petty offense, and negligent tort that the majority sought fit to exclude under the exclusion provision. If all unintentional, negligent acts, as defined by the exclusion provision, are excluded from coverage as illegal, then the exclusion subsumes the entire purpose of the policy, despite the majority’s improper attempt to limit the extent of the exclusion to unintentional acts. Instead the majority held that the intent of the parties was that DUI would be the sole unintentional act excluded from coverage. The majority’s particular interpretation of “illegal” has no support in the text of the policy which the majority redrafted due to its understandable distaste for the plaintiff’s conduct. The dissent found the exclusion provision ambiguous and that it should only be interpreted to exclude intentional acts, which require a mens rea and an intention to harm a third party. The majority ignored black letter law that ambiguous policy terms are construed against the insurer and most favorably to the insured. Instead the majority erroneously differentiates between unintentional illegal acts for reasons immaterial to insurance law. Bohner, 835 N.E.2d at 643.

The key case cited by the parties seeking coverage in Greer and Bohner was Lincoln Logan Mutual Insurance Co. v Fornshell, 309 Ill. App.3d 479, 483, 722 N.E.2d 239 (4^th District, 1999). The decedent’s parents in Lincoln Logan sought coverage from the insured arguing that the insured’s coverage was illusory since the exclusionary language would avoid coverage for essentially any voluntary act that results in harm – that not only intended torts and crimes would be excluded but so would traditional negligence claims. The exclusionary language in question read: “We do not cover bodily injury or property damage arising out of any act intended by an insured person whether or not the bodily injury of property damage was intended . . . .” As such, they argued, this policy language should be found to be void and unenforceable.

As noted above, the underlying facts in Lincoln Logan involved the fatal stabbing of the parents’ son by the insured which involved a claim of self-defense by the insured that was rejected by the criminal and civil courts in three separate proceedings. The reviewing court in Lincoln Logan agreed that the above exclusionary language was ambiguous and if read and applied literally would exclude negligent and innocent acts. The exclusionary clause would “exclude intentional acts ‘whether or not the bodily injury or property was intended.’” The exclusion, as written, would apply where the injury or damage is intended and where the injury or damage is not intended. While the Lincoln Logan court had no problem with applying the exclusion in the first situation, it did have a problem with applying the exclusion in the second situation. The Lincoln Logan court, like the reviewing court in Bohner, ignored the ambiguous wording of the exclusionary clause which contained broad exclusionary language. Instead it found that the exclusion for intentional acts applied only when the insured (1) intended to act and (2) specifically intended to harm a third party. Both the act and the harm had to be intended. Lincoln Logan at 772 N.E.2d at 243.

Instead of voiding the clause in question, the reviewing court in Lincoln Logan found that it should be interpreted reasonably. The exclusion from coverage provision should not be read in isolation but must be read with reference to the facts of the case at hand. In the three legal proceedings arising from this stabbing (criminal, wrongful death and declaratory judgment) the insured’s claim of self-defense was rejected and the trial judge in the declaratory judgment action found that the insured intended to inflict bodily harm upon the decedent without legal justification. Insurance for first degree murder was not intended by the parties. Lincoln Logan at 772 N.E.2d at 243. Another example of “bad facts making bad law.”

CONCLUSION

By not voiding the exclusionary clauses in question, insureds may face denials of coverage for quasi-criminal, petty offenses such as speeding, disobeying a stop sign or red light, talking on a mobile phone or texting while driving. They will be forced to litigate coverage in ancillary proceedings to get a definitive ruling that such exclusionary clauses are void and do not apply. Insurance companies will be encouraged to push the limits of their exclusionary provisions until they are found to be void. To date the courts have refused to find such exclusionary language void and instead have chosen a case by case approach which will only increase litigation. Insurance companies will continue to test the limits of their “intentional act”, “illegal act”, “criminal act”, and “whether or not charged or convicted” exclusions. The reviewing courts in the above cases chose to rely on the facts of the claim instead of the meaning of the words in the policy’s exclusionary provisions. Such an approach will only invite insurance companies to deny coverage and foster ancillary litigation to determine coverage until definitive rulings are made finding such exclusionary language void. Some insureds will not even pursue such ancillary litigation if the liability exposure is small and/or the chances of prevailing in an ancillary proceeding such as a breach of contract/declaratory judgment action are cost prohibitive without the likelihood of the insured recovering its attorney fees/costs in pursuing such ancillary proceedings under §155 of the Illinois Insurance Code (215 ILCS 5/155) which is far from a sure thing.

¹Allstate represented to the court that the homeowner’s son had been found guilty of a misdemeanor for willfully supplying alcohol to a minor which apparently was not alleged in the underlying complaint.

² The two statutory acts have different age requirements that trigger liable conduct. The Drug or Alcohol Impaired Minor Responsibility Act triggers liability for those at least 18 years of age for supplying alcohol to those under 18 years of age (740 ILCS 58/5(a)), while the Liquor Control Act of 1934, attaches liability for serving alcohol to those under the age of 21 (235 ILCS 5/6-16(c)(2)).

³ One could argue that a broader reading of exclusion regardless of whether the insured was charged and/or convicted is dicta since the court noted in its opinion that the homeowner’s son was found guilty of a misdemeanor for supplying alcohol to a minor and as such any discussion of an exclusion applying beyond that would be dicta. However, the reviewing court did not appear to rely on the conviction, but rather the fact that the acts alleged constituted a criminal act and it did not matter to the reviewing court whether or not the criminal act resulted in a charge or conviction in order to uphold the exclusionary provision.