INTRODUCTION 1545 I. WHAT THE DOCTRINE IS AND WHY IT EXISTS 1548 A. Enforceability, not Interpretation 1548 B. Procedural Unconscionability, not Public Policy 1552 II. How THE DOCTRINE WORKS 1555 A. Scope in the Trigger Test: How Big Must the Shadow Be? 1555 B. Degree in the Trigger Test: How Dark Must the Shadow Be? 1559 C. Reforming Policies That Have Illusory Coverage 1563 III. How THE DOCTRINE COMPARES TO ITS ALTERNATIVES 1567 A. The ICD and Contra Proferentum 1567 B. The ICD and the Doctrine of Reasonable Expectations 1568 CONCLUSION 1570 INTRODUCTION
How should a court handle a liability insurance policy sold to a tavern that purports to cover general commercial liability, yet contains an exclusion for liability "arising out of or in connection with the manufacturing, selling, distributing, serving or furnishing of any alcoholic beverages"? (1) How about a liability insurance policy sold to DISH Network that contains an exclusion for liability "arising out of the ownership, operation or use of any satellite"? (2) Or how about one that purports to cover a business for its liability arising out of "discrimination," yet contains exclusions for discrimination that either violates a statute, is done knowingly or intentionally, is directed towards prospective, current, or wrongfully terminated employees, or is "committed on the basis of race, creed, color, sex, age or national origin"? (3)
In all three of those cases, the policyholders argued that it would be unfair for the court to enforce the exclusions (4) in their policies as they were written. Those exclusions, the policyholders argued, wiped out so much of the coverage that otherwise would have existed under the policies' insuring clauses (5) that the coverage would be practically worthless. (6) Thus, the courts were asked to analyze those policies under the doctrine known as the Illusory Coverage Doctrine (ICD). The ICD is implicated when an insurance policy is written in such a way that could give the policyholder the "illusion" that the policy covers risks that are not actually covered. The ICD is somewhat obscure, and no precise formulation of the doctrine has yet achieved predominance among American jurisdictions.
This Comment will discuss the status of the ICD in American insurance law, especially liability insurance law, and will also offer my own views as to how the doctrine can be best understood and refined. I will first argue that, while some courts have conceived of the issue of illusory coverage as an interpretive one related to contra proferentum, or as matter of "public policy," the ICD is best understood instead as a doctrine of enforceability whose function is to protect policyholders from procedurally unconscionable insurance policies. (7)
I will then address the questions of what standards are and ought to be used to determine whether an insurance policy "triggers" the ICD. In other words, how can we tell if an insurance policy features illusory coverage? My discussion of this issue will rely on a metaphor of shadows cast by exclusions upon the coverage that would otherwise exist. The shadow metaphor allows us to clearly visualize two distinct factors that could determine whether the ICD is triggered. The first, which I will call "scope," corresponds to the size of the shadow: over how much insurance coverage must the exclusion's shadow extend before the ICD is triggered? The second, which I will call "degree," corresponds to the darkness of the shadow: does the coverage that falls beneath the exclusion's shadow disappear completely, or is there still some possibility that the policyholder will be able to use that coverage?
To clarify, consider a simple hypothetical liability insurance policy sold to the owner of private campgrounds. The policy has two insuring clauses: a Weather Clause granting coverage for weather-related injuries; and a Wildlife Clause granting coverage for wildlife-related injuries. Suppose further that the policy has a Lightning Exclusion removing coverage for injuries caused by lightning. The "scope" of the Lightning Exclusion would extend only to the coverage granted by the Weather Clause, not the Wildlife Clause. The "degree" to which the exclusion would eliminate the Weather Clause's coverage would be rather low, since lightning comprises only a small proportion of weather-related risks. Thus, we should envision the Lightning Exclusion casting a faint shadow upon the coverage granted by the Weather Clause.
Now suppose instead that the policy had a Serious Injury Exclusion, removing coverage for injuries from which the victim does not recover within twenty days. The scope of this exclusion would extend to the coverage granted by the Weather Clause and the Wildlife clause, since victims of both weather- and wildlife-related injuries can take longer than twenty days to recover. The degree to which the exclusion would eliminate coverage would be relatively high, since most injuries that generate lawsuits are too serious to recover from within twenty days. Thus, the Serious Injury Exclusion would cast a dark shadow over the coverage granted by both of the policy's insuring clauses.
With respect to scope, I will conclude that no scope should be construed as being so narrow as to preclude the ICD from being triggered. In other words, as long as the shadow cast by an exclusion is dark enough, the ICD should be triggered no matter how narrow the shadow is. Once the court finds any coverage shrouded in a shadow dark enough to trigger the ICD, the court should not proceed to consider how much other coverage is left beyond the shadow's reach.
With respect to degree, I will conclude that an exclusion should not need to completely eliminate the possibility that a policyholder could benefit from the overshadowed coverage in order to trigger the ICD. Instead, the ICD should be triggered if the coverage that remains available "is extremely minimal and affords no realistic protection" even if "there might be some small circumstance where coverage could arguably exist." (8) In other words, the shadow must be very dark, but not necessarily pitch black.
Returning to our campgrounds hypothetical, on my view, the coverage granted by the policy's Wildlife Clause could be rendered illusory by a Terrestrial Animal Exclusion that removes coverage for injuries related to animals that live on land. If virtually all of the dangerous wildlife around the campgrounds are terrestrial animals--bees, bears, and so on--such an exclusion could make the coverage for wildlife-related injuries effectively useless to the policyholder. If the exclusion limits the Wildlife Clause's coverage to only the most far-fetched of scenarios--like an aquatic crab somehow taking a camper's eye out--it makes the coverage illusory.
Once the ICD is triggered--that is, once the court has found a policy to contain illusory coverage--the next question is what the court should do about it. I will conclude that the right remedy for illusory coverage is to reform the offending exclusions--and only the offending exclusions--to conform to the policyholder's reasonable expectations regarding their coverage. Thus, if an insurer denies coverage on the sole basis of an exclusion or set of exclusions that render the coverage illusory, the court should require the insurer to provide coverage if and only if the policyholder had a reasonable expectation that the policy made such coverage available.
After explaining how the ICD works, I will discuss its relationship to the other doctrines that could be implicated by similar fact patterns--namely, contra proferentum and the doctrine of reasonable expectations--and explain why the ICD strikes a better balance than those alternative doctrines between the legitimate interests of policyholders and insurers.
WHAT THE DOCTRINE Is AND WHY IT EXISTS
Enforceability, not Interpretation
Several courts have incorporated the principle that insurance policies should not contain illusory coverage into their interpretations of policies' terms. The Superior Court of Delaware did this in a case in which the manufacturer of respiratory equipment sought coverage for its liability arising out of injuries that miners suffered when the equipment allegedly failed, causing the miners to inhale coal dust. (9) One of the general liability policies under which the manufacturer sought coverage contained an exclusion barring coverage for injuries arising out of the '"emission, discharge, seepage, release [or] escape' of any 'pollutant.'" (10) The issue, therefore, was whether the coal dust floating around in coal mines as a result of the mining was a "pollutant." (11) The court compared the coal dust to "radiation used in medical x-rays" and "chlorine bleach used for cleaning" and concluded that such coal dust was not a pollutant because it was "in a place where [it] was reasonably expected to be" and the miners' exposure to it "was a necessary part of the job." (12)?
However, perhaps sensing that such reasoning was vulnerable to criticism, the court added the following:
Any other interpretation would render the coverage illusory. To permit the Insurers to deny coverage under these circumstances would mean that there could never be coverage for any alleged failure or defect in the respiratory safety equipment manufactured by [the policyholder]. The Insurers could not have been surprised by the fact that the [policyholder], Mine Safety Appliances Company, manufactured safety appliances." (13) Mine Safety seemed to treat the fact that a certain interpretation of an exclusion's language would render coverage illusory as a reason to reject that interpretation. There is nothing wrong with such an approach. Indeed, to the extent that contract interpretation is about ascertaining the nature of the bargain the parties intended to make, (14) it makes sense to be somewhat suspicious of an illusory coverage-creating interpretation of an exclusion. This...