Based on a Doubtful “Plausible” Reading of an Insurance Policy, the Seventh Circuit Finds Coverage


    While interpreting a policy governed by Illinois law, the Seventh Circuit found ambiguity based on two “plausible” interpretations and found coverage, a finding based on language that appears to have been construed in isolation and without regard to the purpose or pricing of the policy. That case was National Casualty Co. v. White Mountains Reinsurance Co., no. 11-3158 (7th Cir. Oct. 30, 2013). Having defended the former locally elected Edgar County State’s Attorney against a lawsuit brought against him by men whose convictions were overturned two decades later, National Casualty sought reimbursement from White Mountains Re, claiming that the ex-State’s Attorney was insured under a policy White Mountains Re issued to the County. The Seventh Circuit ruled that “National Casualty ekes out a narrow victory here, in large part due to the Illinois canon of construction that favors the insured in cases of ambiguity.” Stating that “we need not determine which of the readings is correct, as both readings are plausible,” the court construed the language in favor of coverage.

    White Mountains Re’s policy insured any “elected . . . officials . . . or units of [the County], with respect to their responsibilities to law enforcement.” Because a State’s Attorney is a State of Illinois official and not a County official, the Seventh Circuit considered if only the “units” needed to be the County’s or if the “elected officials” did, too. Stating that a policy is ambiguous if its “terms are susceptible to more than one meaning” and deeming both readings “plausible,” the court ordered the insurer to cover the former prosecutor even though he was not an official of the County. This interpretation appears to be in tension with the Illinois law of contract interpretation under which courts are expected to consider “the nature of the risk involved” and “the overall purpose of the contract.” Ill. Ins. Guar. Fund v. Va. Sur. Co., 2012 IL App (1st) 113758. The policy apparently was purchased by the County Sheriff’s Department, which had no evident obligation to indemnify any State official; and according to the briefs submitted to the court, the premium was calculated based on the number of employees in the County’s Sheriff Department, not on the number of other governments’ law enforcement employees. The Seventh Circuit could have well rejected the reading it adopted, recognizing, as it did in another case the day before, that this reading would “expand[] coverage to remote consequences, mak[ing] it very difficult for an insurer to estimate liability and thus fix a premium.” Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Mead Johnson & Co., no. 13-1526 (7th Cir. Oct. 29 2013) (holding that a policy issued to cover product disparagement did not cover allegations of consumer fraud).

    Under the Seventh Circuit’s reading, the policy gave coverage to law enforcement officials other than just those of the County, even though they were not factored into the price of that coverage. As noted in Illinois state court decisions, the “business of insurance is one of insuring against risks in exchange for a premium.” Nichols v. Underwriters at Lloyd’s London, 771 N.E.2d 595 (Ill. App. Ct. 2002). Illinois law acknowledges that “the insurer’s risk corresponds with the insured’s premium.” Ill. Ins. Guar. Fund, supra. Other Seventh Circuit decisions acknowledge that where “a contract is susceptible to one of two constructions, one of which makes it fair, customary, and such as prudent men would naturally execute, while the other makes it inequitable, unusual, or such as reasonable men would not be likely to enter into, the interpretation which makes a rational and probable agreement must be preferred.” Sutter Ins. Co. v. Applied Systems, 393 F.3d 722 (7th Cir. 2004). It seems doubtful that an insurer would intend to provide coverage for state officials not included in the premium charged.

    Further, in quoting the policy language, the court’s decision omitted some telling policy language. The policy defined “insured” to include “the political subdivision in which the Named Insured [the County’s Sheriff Department] is located . . ., and elected or appointed officials or other personnel or units of the political subdivision of which the Named Insured is a unit thereof, with respect to their responsibilities to law enforcement.” The phrase “other personnel” is key, as it ties officials to the County; but the court did not account for that phrase. Thus, it appears that the court found coverage based on a “plausible” interpretation that was the far less reasonable of the two readings in the context of the policy’s purpose, price, and complete terms.

    The Seventh Circuit’s opinion in National Casualty Co. v. White Mountains Reinsurance Co., no. 11-3158 (7th Cir. Oct. 30, 2013) is here, and its opinion in Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Mead Johnson & Co., no. 13-1526 (7th Cir. Oct. 29 2013) is here.

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