Separated and Non-Resident Spouse Found Entitled to SUM Coverage as "Insured"

SUM – "INSURED" – RESIDENCY REQUIREMENT
Matter of Preferred Mut. Ins. Co. v. Bath
(Sup. Ct., Ulster Co., decided 6/2/2009)

What happens when one policy form defines an "insured" one way and another policy endorsement defines it in another way?

Victoria Bath separated from her husband and moved out of the marital residence in early May 2008.  Less than one month later, on June 1, 2008, she was injured when the driver of the car in which she was riding lost control and the vehicle flipped over. The driver was later charged with driving while intoxicated.  His auto insurer settled with Bath for the $25,000 liability limit of his policy, and Bath then sought SUM coverage from Preferred Mutual under a personal auto policy that had been issued to her husband in his name alone.  Preferred Mutual denied SUM coverage on the basis that Bath's physical separation from her husband in early May 2008 ended her status as an "insured" under the terms of the SUM endorsement of the policy.  Bath demanded arbitration and Preferred Mutual commenced this special proceeding for a stay.

The main personal auto policy form (probably a PP 00 01 form) defined "you" and "your" as follows:

A.  Throughout this policy, "you" and "your" refer to:

1. The "named insured" shown in the Declarations; and

2. The spouse if a resident of the same household. 

 If the spouse ceases to be a resident of the same household during the policy period or prior to the inception of this policy, the spouse will be considered "you" and "your" under this policy but only until the earlier of:

1. The end of 90 days following the spouse's change of residency[.]

The prescribed SUM endorsement, however, defined an "insured" as:

I.  Definitions. For purposes of this SUM endorsement, the following terms have the following meanings:

(a) Insured. The unqualified term "insured" means:

(1) You, as the named insured and, while residents of the same household, your spouse and the relatives of either you or your spouse[.]

Preferred Mutual argued that the SUM endorsement's more narrow, regulatorily prescribed definition of "insured" controlled and that, since Bath had moved out of the marital residence a few weeks before the accident, she did not qualify as an "insured" for SUM coverage purposes.

Ulster County Supreme Court Justice Henry Zwack disagreed, finding this to be "a classic 'ambiguity' in its purest etymological sense: it leads the reader in two directions at the same time."  In ruling in favor of coverage and dismissing the petition, Justice Zwack held:

Both parties to this litigation agree that the dilemma must be resolved. They disagree, not only on the ultimate resolution, but on its method. Petitioner urges that the standard to be applied is one of plain meaning and "impartial interpretation" (Reply Affirmation at para 22), since the SUM language is mandated by statute (see Walton v Lumberman's Mut. Cas. Co., 88 NY2d 211, 214 [1996]). Respondent, on the other hand, insists that the general rule construing inconsistencies in insurance policy language against the drafter should be applied (see Wagman v American Fidelity & Cas. Co., 304 NY 490 [1952]). 

The prescribed language of the SUM endorsement, when read alone, is clear and unambiguous. What removes its clarity and creates the ambiguity is petitioner's facially contradictory definition, ostensibly applicable "throughout th[e] policy." The mandatory SUM language existed first; petitioner wrote its policy and incorporated the pre-existing SUM language. Accordingly, if the unambiguous SUM language loses its clarity because petitioner chose to draft language of its own that contradicts the definitions of the SUM endorsement, the Wagman standard should apply, as it is petitioner and not the Insurance Department that created the ambiguity.

The balance of the analysis is simple. Petitioner's policy provides coverage to respondent under one definition of its terms, then excludes her from coverage under another definition. Resolution of the inconsistency against the drafter of the inconsistent language results in coverage for respondent. 

The appropriateness of this result can be cross-checked by the application of the familiar canon of construction which holds that the specific shall take precedence over the general (Cf. Delaware & Hudson Ry. Co. v McDonald, 126 AD2d 29, 32 [3d Dept 1987]). Petitioner's expansive definition of "you" provides a specific formula for the determination of the termination of coverage for a non-resident spouse at the end of ninety (90) days. The general language of the SUM endorsement merely states that a spouse will be covered "while [a] resident[] of the same household," yet is silent as to whether coverage terminates at the moment when a spouse decides to leave the household, after the spouse has established a different residence, or after the spouse has removed all possessions from the former household. The specific language of the main policy provides clear guidance and fixes a definite terminus for coverage; the general SUM endorsement language does not. Coupled with the unequivocal statement that the specific definition will apply "throughout this policy," there can be little doubt that respondent falls within the definition of covered individuals.

Petitioner contends that the clear statement that the policy's definition would apply "throughout" is countered by the statement that appears immediately before the SUM endorsement: "THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY." This statement is so general as to be meaningless. It cannot be reasonably interpreted as superseding the definition that was said, by petitioner, to apply "throughout the policy." 

To say that the SUM endorsement "changes" the policy is at best surplusage and at worst misleading. If the SUM endorsement did not "change" the policy there would be no point in its inclusion. If the policy already provided exactly the same SUM coverage as the endorsement describes, reiterating the terms of that coverage in an endorsement that did not "change" the policy would be pointless. Therefore, to state expressly that the endorsement "changes the policy" means nothing. If, on the other hand, the true purpose of the statement is to provide petitioner with the ability to claim that its own choice of apparently clear wording that its definitions would apply "throughout this policy" was in fact really intended to mean "only until we choose to use a different definition," it is an intent that cannot be effectuated at respondent's expense. As noted supra, ambiguous language in a contract of insurance is to be construed against the insurer. If petitioner's language was chosen to mean one thing while appearing to mean another, it cannot be enforced.

You can't blame Preferred Mutual for attempting to apply the plain and unambiguous words of the SUM endorsement's "insured" definition.  The potential flaw in Justice Zwack's interpretation of the seemingly inconsistent definitions is his overlooking of the modifying prepositional and adjectival phrase "as the named insured", following the "you" in the SUM endorsement's definition.  The court's decision completely ignores that phrase, rendering it meaningless in comparative construction with the main policy form's definition of "you".  If Justice Zwack had focused on this language and actually applied the "specific over the general" canon of contract construction he cites, he would have found the more specific definition of "insured" in the regulatorily prescribed SUM endorsement to control, leaving Bath uncovered for SUM.  The decision does not indicate whether counsel for Preferred Mutual made this particular argument.

Earlier this month I perfected an appeal in a first-party property coverage case to the Fourth Department in which my core argument pivots on the "specific over general" canon of insurance policy interpretation.  In Rocon Mfg. v Ferraro (199 AD2d 999, 1000 [4th Dept 1993]), the Fourth Department stated that “where ‘there [is] an inconsistency between a specific provision and a general provision of a contract * * * the specific provision controls[.]’"  I'll let you know how that appeal turns out, if Ray Zuppa doesn't beat me to the punch.  No widows or "potential" widows in that case.  Just rich country club members and some wet sand.