Friday, July 5, 2013

U.S. District Court interprets arbitration clause, family member exclusion

A 13 year old died while on a fishing boat owned by his grandparents.  Shortly after the accident the grandparents filed a statement of loss with their yacht insurer, Northern Assurance. 

Northern denied the claim on the basis of an exclusion "for any liability between or among 'family members.'"  The policy defined family members as "persons  related by blood, marriage or adoption (including a ward or foster child)." 

Almost three years after the child's death, his father, who  was the previous husband of the insureds' daughter and executor of the child's estate, filed a wrongful death suit against the insureds.  The insurer filed a complaint for declaratory judgment seeking a declaration that the family member exclusion excluded coverage.

The policy contained an arbitration clause which (supposedly) required the insureds to make a demand for arbitration over "whether the claim is payable or about the amount due under the policy" within one year of the loss or damage.

My first reaction when I read the arbitration clause was:  What????  Without going into the ethics of arbitration clauses in insurance contracts, the tort statute of limitations is three years.  Often insureds will not even be aware that the insurer will dispute coverage until after suit is filed and a claim for coverage subsequently made.  If suit is filed more than a year after accident, the insureds would lose the right to dispute the insurer's coverage position.  Here, although the insureds knew shortly after the accident that the insurer intended to deny coverage, no suit was filed against them until almost three years after the loss.  It would make no sense for them to seek arbitration over policy interpretation when no suit has been filed against them. 

You would typically see such an arbitration clause with respect to first party-claims, such as if the insured's boat was damaged.  They would presumably know immediately of the loss and would be in a position to make a claim.

Indeed, there is indication in the decision that the clause applies only to first party claims.  The decision quotes the arbitration clause as "[I]f [Mr. and Mrs. Wells make a claim under this policy, and [Northern Assurance] disagree[s] about whether the claim is payable or about the amount due to [Mr. and Mrs. Wells] under the policy, the disagreement must be resolved by binding arbitration."

Unless the policy is a rare indemnity policy (in which the insurer reimburses the insureds after they have paid a loss out of pocket), in a third party claim no amount will ever be due to the insureds.  The amount due is to the claimant, in this case the grandson's estate. 

The fact that the insurer filed the declaratory judgment action indicates that it believed the arbitration provision applied only to first party claims.  Otherwise, it would have simply informed the insureds that they had waived their right to dispute its denial of coverage, and forced them to file suit if they wanted to pursue the issue.  Or they would have at least made the waiver argument in their declaratory judgment complaint. 

In Northern Assurance Co. of Am. v. Wells, 2013 WL 2250985 (D. Mass.), the insureds moved to dismiss the insurer's declaratory judgment action, arguing that the insurer was required to bring the coverage issue to arbitration.

The court held that the insureds waived their right to arbitration by failing to file a demand for arbitration within one year.  

The court then turned to the family member exclusion.  The question before it was which individual's family member status is relevant in a wrongful death case, that of the decedent or the estate's representative.  If it is the decedent's status that matters, then the family member exclusion would exclude coverage because the decedent was the grandson of the insureds.  If it is the estate's representative, then the exclusion would not apply because the representative was the insureds' former son-in-law and therefore not within the definition of the exclusion.

The court held that it is the decedent's status that matters for purpose's of the exclusion, not the estate's representative.  While I agree with the court as a matter of common sense, the definition of family member for the exclusion is sorely lacking in specificity.   Pretty much all of us are related by blood or marriage if you go back far enough.  What if the child killed had been a grand-nephew?  A second cousin?  How far does it go? 

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