Thompson v. National Union Fire Insurance Company, 249 F. Supp. 3d 606 (D. Conn. 2017)

O-CIP! Is It A Wrap For The Wrap-Up Exclusion? (Underwriters Take Note)
Coverage Opinions
December 13, 2017

Insurers that rely on exclusions in their policies, to eliminate coverage for their insureds’ projects that are covered under wrap-up policies, have much to take away from the Connecticut District Court’s decision in Thompson v. National Union Fire Insurance Company (applying Georgia law). The court held that a wrap-up exclusion, contained in a commercial umbrella policy, was ambiguous, and, hence, did not apply to a $13.5 million exposure. The case is brief. But when it comes to judicial opinions – size does not matter.

While Thompson is a federal district court decision, and claims involving the possible applicability of a wrap-up exclusion do not arise every day, I selected the case for inclusion here for two reasons. First, the decision – the only one I know of like it -- is an invitation for policyholders, in every case involving a wrap-up exclusion, to attempt to argue that the exclusion is ambiguous. Second, any insurers that rely on wrap-up exclusions, to eliminate coverage under their “practice policies,” need to take a hard look at such exclusions and decide whether to make any changes, to avoid potentially paying $13.5 million for a claim that was clearly not intended to be covered.

Thompson involves coverage for a contractor, Bluewater Energy Systems, that was sued following a power plant explosion. Individuals and estates that were harmed by the blast obtained a judgment for $13.5 million and brought an action against Bluewater’s umbrella insurer.

The insurer maintained that no coverage was owed on account of the policy’s “wrap-up” exclusion, which provided: “This insurance does not apply to . . . any liability arising out of any project insured under a wrap-up or similar rating plan.”

The insurer’s position was that no coverage was owed because the power plant project was insured under a contractor controlled insurance program, which the insurer contended is a type of “wrap-up” program.

The plaintiffs -- those affected by the explosion -- argued what you would expect: there are lots of reasonable interpretations of the wrap-up exclusion, and, because it was drafted by the insurer, the operative language must be read strictly against the insurer and in favor of providing coverage. The court agreed that the wrap-up exclusion was ambiguous.

A couple of the plaintiffs’ arguments, that led to this finding of ambiguity, are specific to the case. Those certainly offer lessons. But one of the plaintiffs’ arguments was very general. And that one should cause insurers, that rely on wrap-up exclusions, to sit up and take notice.

As for the issues specific to the case, the plaintiffs argued that the project had only a partial contractor controlled insurance program and it did not provide coverage to all of the project’s participants and did not provide property damage or “builders risk” coverage. “If defendant wanted to exclude coverage for any project that ‘involves’ a wrap-up or is ‘in any way’ affiliated with a consolidated insurance program, it should have explicitly included such limitations and defined the term ‘wrap-up.’” Second, because the contractor controlled insurance program at issue has been exhausted, no coverage remains. Hence, the plaintiffs’ remaining claims are not “insured under” the program.

But the court’s reason for finding the wrap-up exclusion ambiguous, that should cause insurers the most concern, is this: “Plaintiffs contend that defendant has failed to show that ‘wrap-up’ has one peculiar meaning and cannot legitimately argue that ‘wrap-up’ has one, unambiguous meaning when its own policies and witnesses define the term in a number of distinct ways.”

It’s one thing not to define a term in a policy. Not every term in any insurance policy can be defined (despite what some policyholders and courts sometimes say). But if in fact an insurer’s own policies and witnesses define a term in a number of distinct ways, the court’ job -- especially when it’s reading a policy strictly against the insurer -- is being made easy.

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