New Jersey Court Prevents an Upside Down View of an Exclusion

A lawsuit recently decided by a New Jersey appeals court illustrates a concept of insurance that sometimes people fail to grasp at first look. It involves a kind of exclusion that appears in most professional liability policies – the one that deals with intentional, dishonest, criminal and/or fraudulent conduct. Such exclusions often contain language to the effect that a defense will be provided until or unless there is an admission of misconduct by the insured or until there is a court or arbitration decision against the insured. Without stopping to consider how all of the policy’s terms fit together, some people assume that provision extends defense coverage for claims involving fraud or dishonesty until there is an admission or adjudication. That is not at all the case.

In the New Jersey case, a physician was the target of an administrative complaint brought by the New Jersey Board of Medical Examiners. The complaint alleged she had engaged in various types of below-standard medical conduct and had engaged in a course of excessive, false and deceptive billing. The complaint sought to revoke her license to practice medicine, to impose financial penalties, to recover costs of the investigation and to force her to disgorge money acquired from the alleged practices.

Two insurance companies filed suit against the doctor and her medical practice. AIG and Allstate had insured, under auto policies, individuals who had sought treatment from the doctor. Allstate alleged that the doctor’s bills issued regarding its insureds were filed by her with the knowledge that the bills contained false or misleading information, that the doctor kept inadequate records and, among other things, that she improperly performed diagnostic testing and misrepresented the results. Allstate did not allege that the patients suffered any injury as a result of the doctor’s treatment. Allstate sought recovery of money it had paid for treatment of its insureds, along with treble damages and recovery of investigative costs and expenses. AIG made similar claims.

The doctor tendered the suits to her professional liability insurer, Princeton Insurance Company (PIC). PIC disclaimed, and the doctor sued PIC alleging breach of contract and bad faith and seeking a declaration that a defense was owed by her professional liability insurer for the two suits and board proceeding.

PIC’s policy covered “claims” seeking “damages” for “injury.” “Damages” was defined as money for which the insured was liable due to “injury.” “Injury” was defined as “sickness, disease, or death.”

Neither the medical board nor the insurers were alleging the doctor had injured her patients, and they were not seeking recovery of money for injury to her patients.

But here is where some people get confused when they aren’t looking at the meaning of the entire insurance policy, or perhaps this is where some lawyers try to create confusion. The doctor and her lawyers argued that coverage was found by way of language in an exclusion. The exclusion, as quoted by the court, said:

“This insurance does not apply to ‘claim(s)’ [for]: (a) criminal, fraudulent, or intentional acts arising out of any willful, wanton, intentional, dishonest, fraudulent, criminal, illegal, or malicious act or omission or any violation of a law, statute, or ordinance regulation. However, the company will defend an ‘insured’… in a civil action until it is determined through the appropriate legal process that an ‘insured’… has committed such act or violation…”

The doctor and her lawyers said this language created coverage and that she was entitled to a defense paid by the insurer until it is determined that she committed the acts described.

The problem with that logic is, of course, that this is an exclusion. It describes things that are not covered. In doing so, it may create exceptions to things that are being excluded. But that is far different from saying those things are covered. Coverage derives from the insuring agreement. It is there that the scope of coverage is defined. Because there was no claim for damages arising from sickness, disease or death, there was no coverage and therefore no need to proceed to the exclusions to assess their impact. Exclusions remove from coverage things that might otherwise have fallen within the scope of the insuring agreement, but they do not themselves create coverage.

As the New Jersey appeals court said, “No other interpretation is reasonably possible.”