Attorneys: Chubb ruling could have ‘dangerous’ implications for brokers, policyholders

Attorneys at Reed Smith LLP say a recent court ruling over the wording of a Chubb Insurance Company policy adds a new level of uncertainty to coverage expectations in a way that could set a “dangerous” precedent if continued.

In the case of ECB USA v. Chubb, the Eleventh Circuit Court of Appeals ruled that coverage was limited based on the language of the policy. This was a ruling in favor of Chubb, which was being sued over failure to cover a corporate policyholder’s liability. However, Hugh Lumpkin, partner, and Garrett Nemeroff, counsel, Insurance Recovery Group at Reed Smith LLP, said this was atypical as most courts tend to place disputes over unclear language at the feet of the insurer that wrote the policy.

The attorneys said the outcome of this ruling could have “terrifying” implications for brokers, who sell policies with the intention of providing certain coverage yet may find that a court interprets that coverage differently.

“This is a particularly dangerous turn to make. It adds an additional layer of uncertainty to the relationship,” Lumpkin said. Reed Smith attorneys suggested insurers be particularly careful with policy wording, and for policyholders to continually review coverage to ensure it aligns with their actual needs.

ECB v. Chubb Insurance

The case in question involved an accounting firm, Constantin, which purchased professional liability insurance from Chubb. The firm then conducted an audit for a food services company, Schratter Foods, in relation to an acquisition with another company, ECB. However, court documents say the audit “went wrong” and ECB sued the accounting firm as a result.

Due to what Nemeroff described as “some very awkward language” in the liability insurance policy, Chubb denied Constantin coverage. It argued that the policy stated it would only cover services performed for financial institutions, and not for food services. The Eleventh Circuit Court of Appeals ultimately agreed with this argument.

The reason this poses a problem, Lumpkin explains, is that it grants a third party, such as a judge, the power to come to a conclusion about coverage that may have “absolutely nothing to do with why the policy was sold in the first place.”

“Most courts would say that an insurance policy should be interpreted as the man or person on the street would interpret it… All of that goes out the window the moment you start doing what this court did, which is apply canons of interpretation, which neither the broker, the insurance company nor the policyholder had in mind, either when writing, selling or buying the insurance policy,” he said.

This disconnect between the “reasonable expectation” of the insurance industry and what might actually be a court’s finding means brokers could potentially be held accountable by policyholders for failing to procure coverage that would cover a claim, even if it’s been years since the policy was first purchased.

“If you’re a broker, you’re placing risk for a policyholder. It’s going to be terrifying to any broker to know that, regardless of what the broker thinks the policy covers, a court can come along later and apply — I hate to say it, but it’s true — obscure canons of interpretation in order to find that a policy doesn’t cover what the broker thought it was covering,” Lumpkin said.

Addressing policy interpretation

Both Nemeroff and Lumpkin said policyholders and brokers should try to ensure they are on the same page about what is covered in the policy. Lumpkin also suggested disputes like ECB v. Chubb arise as a “drafting issue,” and emphasized the need for insurance policy wording to be clear and easily understood in the first place.

“Insurance companies need to start writing insurance policies that can be readily understood by someone other than the proverbial Philadelphia lawyer,” he said. “Insurance companies should be held to their obligation. Write it clearly, plainly and simply.”

From the policyholder’s perspective, Nemeroff added that continually reviewing coverage can help to ensure needs are met, especially at the time of renewal.

“The case really highlights why it’s important to continually review the coverage that you are purchasing as a service provider, to ensure that it aligns with your current business operations,” he said.

“If you are a professional or any other company that’s providing services and has liability insurance, you want to review your existing insurance program to make sure that you don’t have any gaps in coverage and that the evolution of your business doesn’t require some sort of update or enhancement to ensure that you’re properly protected against liability.”

Reed Smith LLP is an international law firm founded in 1877. Its headquarters is in Pittsburgh, PA, and it has over 30 offices around the world.

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