We have long lived in a country where most insurance policies have been comprised of standard forms. Most general liability insurance “products” issued by the same insurer to small businesses throughout the United States have long been uniform within a given industry. For instance, if two similarly situated small businessmen in a given state purchased general liability policies from the same insurer during the same policy period, they could reasonably expect that their policies were comprised of the same standard forms.
Despite the fact that historically, most of the general liability policies sold in the United States were policies comprised of standardized forms, most of our courts have continued to analyze standard CGL policies as individually negotiated, specific business deals reduced to writing. As Jeffrey W. Stempel writes in his recent Tort Trial & Insurance Practice Law Journal article, The Insurance Policy as Thing,
“despite the longstanding realization of the goods-like character of contracts‚ contract construction law has largely failed to make effective use of this observation to improve judicial resolution of disputes over contract meaning. This is especially true, and regrettable, regarding insurance policies, in which standardization is particularly dominant and where the transaction evinces a sale of a certain scope of risk shifting and distribution rather than entry into any particular or ongoing business relationship. Relentlessly, and often simplistically, courts continue to intone that they are merely reading insurance policies as written and contending that even highly problematic language is crystal clear or that difficulty in translating the words of a policy immediately triggers the ambiguity principle requiring resolution of controversies against the insurer.”
Most state courts, remaining indifferent to the “product” nature of these historic CGL policies, continue to treat motions for declaratory judgment regarding standard policy language as cases of first impression. This approach leads to disparate results among the various state courts. Judges make different findings regarding the meaning of standardized language in policies issued to similarly situated insureds across state lines. No greater example of the inequities of this approach exists than the uneven application of the qualified pollution exclusion in long-tail claims cases by courts in neighboring states. This policy exclusion, first approved for use by the Insurance Service Organization (ISO) in the early 1970’s was a standard feature in general liability policies issued to small businesses throughout the United States prior to the advent of the absolute pollution exclusion in 1986.
Some state courts have determined that the qualified pollution exclusion with its exception for “sudden and accidental” occurrences (or those “neither expected nor intended from the standpoint of the insured”) is ambiguous. These courts, following the general rule that ambiguity must be construed against the insurer, allow the ambiguous language to drop out of the contract, leaving the policy without a pollution exclusion at all. Courts that find no ambiguity in this exclusion, often uphold the exclusion, requiring that the polluting event be temporally “abrupt” for there to be any coverage. And of course, there are variations concerning what constitutes “abruptness.”
The crazy quilt pattern of state court declaratory judgments, relating to the qualified pollution exclusion, means that small businesses with operations across state lines continue to find that pollution occurring over time at their operations on one side of the state line may be covered under the policy covering one location, while their operation in the neighboring state is not covered. This despite the fact that both operations were identical and the policies covering each were identical.
This discrepancy is particularly onerous where two businesses belonged to a trade association that purchased group insurance on behalf of its members. These trade associations historically purchased a single master general liability policy and issued certificates to each of their members. Small businesses, belonging to and purchasing insurance through the same trade association, now find that, while they were insured under the very same group policy, the member with a contaminated site on one side of a state line will be awarded coverage under that policy while his counterpart in the neighboring state will not.
The two members of the trade association doing business at opposite sides of the state line, undoubtedly had similar expectations concerning the effectiveness of the insurance “product” they were purchasing through their association in years past. Their expectation was that the CGL would function to cover the risks it was advertised to address. Is it not an absurd result to continue to subject these insurance consumers to the wildly disparate legal interpretations that now control the coverage decisions of insurers regarding these long-tail claims?
As Jeffrey W. Stempel points out in his article, a product liability approach to insurance policy analysis makes more sense. If insurers marketed these policies as products, and policyholders purchased them with the expectations they would perform as advertised, why do state courts not adopt product liability analysis to use in insurance policy interpretation? There is certainly more uniformity among state court decisions regarding the failure of manufactured products to meet standards of performance than there is in insurance law. Is there really that much difference between an insurance policy that fails to perform as the reasonable policyholder might expect and a manufactured product’s failure to perform as impliedly warranted? Are ordinary business risks covered by standardized insurance products that unpredictable that we cannot use the same analysis that we do for a malfunctioning tool or computer?
Manufactured products that fail to perform continue to be analyzed under a different jurisprudence than insurance products do. Perhaps that should no longer be the case. Perhaps it is time to adopt product liability standards in judicial determinations of historic insurance policy language.