Your Umbrella Insurance Policy Does Not Say What You Think It Says

An insurance policy is a contract. Insureds must read and understand their own insurance policy.

umbrella insurance policy

Umbrella coverage is never what you think it is

Right? Except no one reads an insurance policy. I’m not just talking about Joe Six-Pack here.  I’m talking about you, my dear reader: You, me, all of us. Why? Because our busy and lazy lives don’t afford us the time to do it. “Just give me the nutshell” is the mantra even insurance lawyers have in their personal lives.

In Maryland, GEICO and State Farm, in particular, seem to write a lot of umbrella policies.  Few of these standard policies have uninsured motorist coverage. But every victim that comes to us believes that they do.

The problem with this is that there are rare instances where reasonable people would expect insurance coverage, but they don’t because they didn’t read their insurance policies. What do we do in these cases when we know that it is reasonable to expect coverage?

Strickley v. State Farm

The Maryland Court of Appeals gave the wrong answer to this question in Stickley v. State Farm last month. The plaintiff was riding as a passenger in a car driven by her husband when her husband negligently drove into an intersection and was struck by another vehicle. The accident killed the plaintiff’s husband and left her with serious injuries. At the time of the accident, the plaintiff and her spouse had a motor vehicle liability insurance policy with State Farm Mutual Automobile Insurance and an umbrella policy with its subsidiary State Farm Fire and Casualty Company.  No, I have no idea why they do it this way.

The umbrella policy contained a household exclusion, which denied payment of damages for bodily injury or personal injury resulting from the negligence of another insured household member. After the accident, the plaintiff filed a claim under both the motor vehicle liability policy and the umbrella policy. State Farm offered the plaintiff the full amount in liability coverage under the former but denied the second claim because of the household exclusion. The plaintiff subsequently filed suit seeking to declare the household exclusion void.

Supporting her claim, the plaintiff cited Maryland Code § 19-504.1 of the Insurance Article.  This statute requires an insurer to offer its insured, under a policy or binder of private passenger motor vehicle liability insurance (“PPMVLI”), the same amount of liability coverage for both claims made by family members and nonfamily members. The plaintiff argued that the umbrella policy was a PPMVLI and because State Farm never offered her and her husband equal coverage for family members, the household exclusion was void. Here, the court addressed two questions: (1) whether an umbrella policy that includes motor vehicle liability insurance constitutes a PPMVLI; and (2) whether the household exclusion violated public policy.

The court first examined the plain language of the phrase “policy or binder of private passenger motor vehicle liability insurance.” The court noted that PPMVLI refers to a particular type of motor vehicle liability insurance, whereas a personal liability umbrella policy covers a variety of losses. Thus, umbrella policies attach to the insured, whereas PPMVLIs attach to the motor vehicle. Also, the court stated that umbrella policies are a supplemental form of insurance distinguishable from primary policies including motor vehicle liability insurance or homeowner’s insurance. Because they are supplemental, umbrella policies only kick in once the primary policy has been exhausted. For example, if an automobile policy had a liability limit of $100,000, the umbrella policy would pick up after that point and cover for an additional amount.

Next, the court looked to the statutory context. Finding that the legislature used the term “motor vehicle liability insurance policy” in § 19-504 to discuss minimum liability coverage, the court determined that umbrella policies, which are supplemental and serve as an excess form of coverage, were by definition not “motor vehicle liability insurance polic[ies].” Also, the legislature included § 19-504.1 within the subtitle “Motor Vehicle Insurance – Primary Coverage,” suggesting an intent to address household exclusions in primary policies. The plaintiff contended that one of the uninsured motorist statutes in §§ 19-509, 510 referring to primary coverage had been interpreted to apply to umbrella policies, thus showing legislative intent to treat umbrella policies the same as motor vehicle liability insurance. However, the court rejected this argument, stating that the statute in question, § 19-509(h)(1), explicitly refers to policies different in kind from primary policies. Also, the plaintiff also argued that where the legislature distinguished umbrella policies from primary motor vehicle policies in the uninsured motorist statute and chose not to do the same in the household exclusion law, the latter must be read to include all motor vehicle policies, including umbrella policies. The court rejected this argument, explaining that a court “may neither add nor delete language so as to reflect an intent not evidenced in the plain and unambiguous language of the statute.” Finally, the court briefly noted that statutory interpretation requires the court to reach a conclusion consistent with common sense. Here, common sense dictated that the umbrella policy differed from PPMVLI. As a result, the court determined that the umbrella policy was not a PPMVLI.

Next, the court turned to the second question, whether the exclusion in the umbrella policy violated public policy. This is the court’s chance to do the right thing, right?

The court started by stating that parties are usually free to contract as they wish unless a contractual provision violates public policy, in which case that provision becomes invalid. Here, the public policy regarding household exclusions required the insurer to offer the same amount of insured liability coverage for both family members and nonfamily members in a PPMVLI. As a result, it would violate public policy to enforce a household exclusion provision if the insurer did not make that offer. However, the court stated that the legislature did not intend to eliminate household exclusions in insurance disputes exceeding minimum coverage, but wanted to offer the insured an opportunity to purchase liability limits for family members.

Ultimately, the court left the issue up to the legislature, stating that it “will not invade the province of the General Assembly . . . no matter how just or fair we may think such a new law or public policy would be.” They invade the province of the Maryland legislature, but they pick and choose their spots and decided not to here.

I wrote Irwin Weiss, a real good plaintiff’s lawyer (and sometimes defense counsel) in Baltimore County whose opinion I seek frequently on both legal and tactical issues. He gave me another path the court could have gone down. This is from his email:

This is from Liberty Mutual v. Ben Lewis Plumbing, 121 Md. App 467, 473 (1998):

In Twelve Knotts, supra, this Court quoted from Shepard v. Keystone Insurance Company, 743 F.Supp. 429, 432 (D.Md.1990), to the effect that:

It is the obligation of the insured to read and understand the terms of his insurance policy, unless the policy is so constructed that a reasonable man would not attempt to read it … If the terms of the policy are inconsistent with his desires, he is required to notify the insurer of the inconsistency and of his refusal to accept the condition.

The Twelve Knotts Court then pointed out that, though there were no Maryland cases requiring the result that the District Court had reached, nonetheless, it appeared to be the general rule:
[W]hen the insured accepts a policy, he accepts all of its stipulations, provided they are legal and not contrary to public policy. Where changes from the application appear in the delivered contract, under a more stringent doctrine, the insured has a duty to examine it promptly and notify the company immediately of his refusal to accept it. If such policy is accepted or is retained an unreasonable length of time, the insured is presumed to have ratified any changes therein and to have agreed to all of its terms.” Twelve Knotts, 87 Md.App. at 104, 589 A.2d 105 (quoting l2, J. Appleman, Insurance Law and Practice, § 7155).

The court thinks this is a terrible result. Why not jump on this precedent and the wisdom behind it and say no reasonable person would attempt to read the policy?

The full opinion can be found here.

Bailer v. Erie Insurance Exchange

In Bailer v. Erie, a 1997 Maryland Court of Appeals case, the court looked at another umbrella insurance policy that provided coverage against false arrest, wrongful detention or imprisonment, malicious prosecution, wrongful entry or eviction, invasion of privacy and so forth.  I think it is worth talking about in this context to understand the limits of Maryland law in permitting unreasonable interpretations of umbrella policies.

This case involved an au pair who sued her host family because the creepy father was secretly videotaping her taking a shower.  Erie denied the claim although it is sure sounds like an invasion of privacy, right?  Erie said the policy did not cover personal injury or property damaged “expected or intended by anyone we protect.”

We can all agree that setting up the camera and filming the au pair taking a shower is an intentional act.  The policy excluded intentional acts. Still, the Maryland high court found that the exclusion conflicted with the grant of insurance for “personal injury,” which included coverage for “invasion of privacy” claims.  The court reasoned that under Erie’s interpretation, the exclusion would completely annihilate the coverage afforded under the policy.

So, ultimately, the court found it would be reprehensible not to provide insurance coverage for this reprehensible conduct.  Ironic?  Yes.  But the ruling makes sense. The insurance company should not be able to give the insured coverage with one hand and take away the coverage with the other.

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