When obtaining insurance coverage, businesses must be wary of policy exclusions that are so broad that they defeat the policy’s primary purpose and render coverage illusory. In Travelers Property Casualty Company of America v. H.E. Sutton Forwarding Co., LLC, No. 2:21-CV-719-JES-KCD, 2023 WL 5486746 (M.D. Fla. Aug. 24, 2023), the U.S. District Court for the Middle District of Florida considered this very issue in deciding when a policy exclusion goes too far.
The policyholder, H.E. Sutton Forwarding Co., LLC, D/B/A Tex Sutton Equine Air Transportation (“Tex Sutton”), operates a business entirely based on transporting horses by aircraft. Tex Sutton had charted an aircraft, named “Air Horse One,” that landed at Blue Grass Airport in Lexington, Kentucky. A worker operating a tractor trailer to pick up horses and equipment was injured when he crashed into the wing of Air Horse One. The worker sued Tex Sutton based on a number of claims, including negligence.
Tex Sutton sought coverage from both its primary insurance policy issued by Chubb and its excess policy issued by Travelers. Travelers’ policy, however, contained an aircraft liability exclusion on which it relied to deny coverage. In relevant part, the exclusion barred coverage for damages arising out of the use of any aircraft, including “loading and unloading.” A question one might ask themselves – and an argument that Tex Sutton itself raised – was what purpose or value would the Travelers’ policy have to Tex Sutton if it excluded coverage arising out of the use of an aircraft? After all, this is the entire premise of Tex Sutton’s business. In legal terms, interpreting the exclusion so broadly to bar coverage would arguably render the policy “illusory.”
Travelers moved for summary judgment, arguing that the exclusion applied and did not eliminate coverage for all potential claims under the policy. The court, applying Florida law, examined the circumstances under which a policy exclusion renders coverage illusory. In Florida, this occurs when an exclusion “grants coverage with one hand and then with the other completely takes away the entirety of that same coverage.” In other words, the exclusion “swallow[s] up an insuring provision” or otherwise “eliminates all—or at least virtually all—coverage in a policy.” The bar is high – even if the exclusion has a significant detrimental impact on the potential for coverage, it does not render coverage illusory so long as there are scenarios where coverage could apply.
Applying these principles, the court found different ways that the Travelers’ policy could provide coverage despite the exclusion. For example, the policyholder leased a facility at the Blue Grass Airport where Air Horse One was located. Technically speaking, the policy could cover slip and fall accidents at the property that have nothing to do with an aircraft. Or there could be coverage for property damage due to negligent maintenance of the leased facility. In short, because the court could point to ways for the policy to provide coverage, the aircraft exclusion did not completely contradict or swallow the insuring provisions. Accordingly, the fact that the exclusion may have eliminated coverage for the vast majority of potential claims did not mean coverage was illusory, and Travelers had no duty to defend or indemnify Tex Sutton.
Language in a policy can be dense, full of legalese and unique terminology. But, this case highlights at least two critical considerations that fall to policyholders when purchasing insurance. First, there is the absolute need for a policyholder to read an entire policy to ensure it makes sense for its business. The insured knows its operations better than anyone (including its insurance agent) and accordingly stands in the best position to ensure that coverage is appropriately tailored to the risk. A stock, “over-the-counter” insurance product simply cannot account for all the risks that face every business, and changes are invariably required to meet specific needs. Second, policyholders who take the extra step of purchasing excess insurance – as Tex Sutton did here – must ensure consistency amongst their insurance policies. Here, Travelers’ addition of an aircraft liability exclusion in the excess policy effectively eliminated coverage once the primary policy was exhausted. This defeats the very purpose of having excess insurance, and this inconsistency could have been identified and addressed before an incident occurred.
As the Middle District of Florida’s opinion makes clear, there can be a high bar to overcome to demonstrate that an exclusion makes coverage illusory. The buck stops with consumers to read and understand the language in a policy before agreeing to it, which may require the assistance of experienced coverage counsel to make certain that a policy is actually designed to serve its intended purpose.