It’s all relative in new State Farm household exclusion case

Donya Tyree Hooks and her brother, Donald Hooks, owned an apartment building on Green Street in Chicago. Donald lived in the building; Donya did not. The property was insured with State Farm Fire and Casualty Company.

The building was damaged in a fire on March 4, 2001 and a building tenant, Sharon Conner Hooks, was injured.

Sharon was married to Donald at the time of the fire.

Sharon sued Donya, but not Donald, for the injuries she sustained in the fire, alleging that Donya failed to provide or maintain working smoke and carbon monoxide detectors; that she negligently allowed “tenants with connections to drug activity” to go into the basement where the fire started; and that she failed to provide an emergency escape light in the common hallways.

Donya tendered Sharon’s suit to State Farm. State Farm initially provided a defense pursuant to a reservation of rights, but ultimately withdrew that defense and filed the declaratory suit that gave rise to State Farm Fire and Casualty Co. v. Hooks, 2006 WL 1676212 (Ill.App. 1st Dist. 6/19/06).

State Farm contended that Sharon was an insured under Donya’s policy and, in general, an insurer has no obligation to defend a suit by one insured against another.

Specifically, State Farm relied on the policy definitions to establish who was supposed to be insured under the contract: “‘You’ and ‘your’ mean the ‘named insured’ shown in the Declarations. Your spouse is included if a resident of your household. ‘We’, ‘us' and ‘our’ mean the Company shown in the Declarations.” Donya and Donald were named insureds under the policy – and Donald’s spouse, Sharon, the plaintiff in the underlying case, would also be included within this definition.

The policy also separately defined insured to mean “you and, if residents of your household... a. relatives.” The policy also separately defined insured to mean “you and, if residents of your household... a. relatives.”

The liability coverage of the policy contained an exclusion purporting to excuse State Farm from defending against any claim for “bodily injury to you or any insured within the meaning of part a. or b. of the definition of insured. This exclusion also applies to any claim made or suit brought against you or any insured to share damages with or repay someone else who may be obligated to pay damages because of the bodily injury sustained by you or any insured within the meaning of part a. or b. of the definition of insured. (Bolded terms are terms defined in the policy.)

The trial court accepted State Farm’s interpretation and agreed that it had no duty to defend or indemnify Donya Hooks against her ex-sister-in-law’s suit (by the time the case reached the summary judgment stage in the Cook County Chancery Court, Donald and Sharon’s marriage had ended). The Appellate Court, however, in a unanimous opinion written by Justice Joseph Gordon, reversed.

The Appellate Court’s decision is grounded in the severability provision of the State Farm policy. That provision read, “This insurance applies separately to each insured. This condition shall not increase our limit of liability for any one occurrence.”

Construing a similar provision in the 1975 case of United States Fidelity & Guaranty Co. v. Globe Indemnity Co., 60 Ill.2d 295, 327 N.E.2d 321, 323 the Illinois Supreme Court found, “the severability clause provides each insured with separate coverage, as if each were separately insured with a distinct policy, subject to the liability limits of the policy.” Essentially, then, Sharon could not sue Donald (which she didn’t) because she’d be an insured under ‘his’ policy – but she could sue Donya because she did not come within the definition of an ‘insured’ when the policy was analyzed in terms of Donya.

State Farm argued that this conclusion would be inconsistent with State Farm Fire and Casualty Co. v. Guccione, 171 Ill.App.3d 404, 525 N.E.2d 595 (2nd Dist. 1988). In Guccione, a named insured, Anthony Guccione, was accused of negligently discharging a firearm in the direction of his stepson, Gus Kazas, causing injury to Gus. Prior to the shooting, at least, Anthony, Gus, and Gus’ mother had all lived under the same roof (presumably, although the opinion does not discuss this, not as an entirely happy family).

Discussing the severability clause in Guccione, the Appellate Court stated (525 N.E.2d at 597), “even if we view Anthony Guccione as a separately insured party, the exclusionary clause still applies. That provision states that the personal liability coverage does not apply to ‘bodily injury to you or to any insured within the meaning of part (a) or (b) of the definition of insured.’ Since, as we have previously seen, Gus Kazas falls within the definition of insured as that term is defined in the policy, the personal liability coverage afforded to Anthony Guccione does not apply to bodily injuries suffered by Kazas.”

But the Hooks court distinguished Guccione on the facts (2006 WL 1676212 at *5): “Under both policies, in order for someone to qualify as an ‘insured,’ that person must be both a relative of the named insured and reside in the same domicile as the named insured. In Guccione, the underlying plaintiff, Gus, met both requirements in that he was related to and living with both of the named insureds, Anthony and Tessie.... Although Gus’s relationship to Anthony would appear to be that of stepson, the declaratory plaintiff in that case did not contend that he was not Anthony’s relative because of a lack of consanguinity.”

State Farm was the plaintiff in Guccione as well; one can hardly have expected State Farm to raise this argument. On the other hand, the Guccione court did not address the absence of any blood tie between Anthony and Gus. The point that the Hooks court stressed, however, was that, unlike Anthony and Gus, Sharon and Donya never lived under the same roof. (2006 WL 1676212 at *5.)

Referring to the policy definition of “insured” therefore (“you and, if residents of your household... a. relatives”) Sharon was not an insured under Donya’s ‘separate’ coverage: They were not residents of the same household.

The Hooks court goes on to discuss the ‘business purposes’ behind “family exclusion” clauses, noting that two of the commonly stated justification for these provisions is to prevent “collusion between resident household members” or “to keep premiums down by excluding those individuals most likely to be injured, namely, resident family members.” The court concluded: “Interestingly, each of [these]... business reasons would emphasize the need for a combined familial and residence-sharing relationship in order to come within the underlying business purpose. Thus, the application of the severability clause to narrow the scope of the exclusion to permit coverage for a claim against an insured residing in a separate domicile is by no means inconsistent with the foregoing articulated business purposes.” (2006 WL 1676212 at *8).

Under Hooks it is clear that and insurer can refuse to defend its insured against a suit brought by related persons living with the insured. Left unresolved by the Hooks case is whether it is the ‘living together’ or the familial relationship that justifies the exclusion.

Other insurance companies have crafted an exclusion to attempt to prevent persons from suing a named insured with whom they reside, whether or not the person suing has any familial relationship with the insured.

For example, in Peters v. Farmers Ins. Co. of Washington, 2003 WL 734208 (Wash.App. 2003), an unpublished opinion, Daniel Peters rented an “upstairs bedroom” from David Wearn, a colleague of his from work. Peters sued Wearn after falling down the stairs leading to his rented bedroom. This mishap may not have fatally wounded their friendship, however: Wearn settled with Peters for $180,000, but he didn’t pay his erstwhile tenant any of that money; he merely assigned his claims against Farmers to Peters (2003 WL 734208 at *2). Farmers thereafter refused to pay – based on an exclusion which purportedly excused the insurer from defending or indemnifying against claims of “bodily injury to any resident of the residence premises except a residence employee” – and this was affirmed by the Washington court.

Similarly, in Illinois Farmers Ins. Co. v. Neumann, 596 N.W.2d 685 (Minn.App. 1999), the underlying tort claimant, Barbara Brenny, was a ‘sublessee’ of the apartment rented by Farmers’ insured, Katina Neumann. Brenny argued, unsuccessfully, that the absence of any “social relationship” between with Ms. Neumann should have been taken into account concerning the applicability of the exclusion pertinent in that case. But the tort claimant and the defendant insured did reside in the same apartment.

Certainly, insurers are entitled to be protected against collusive claims. However, family or resident exclusions, like other “provisions that limit or exclude coverage are to be construed liberally in favor of the insured and ‘most strongly against the insurer.’” See, National Union Fire Ins. Co. of Pittsburgh v. Glenview Park District, 158 Ill.2d 116, 632 N.E.2d 1039, 1042 (1994); see also, State Farm Mutual Automobile Ins. Co. v. Villicana, 181 Ill.2d 436, 692 N.E.2d 1196, 1199 (1998). Moreover, insurance policies are to be construed “as a whole, taking into account the type of insurance for which the parties have contracted, the risks undertaken and purchased, the subject matter that is insured and the purposes of the entire contract.” Crum & Forster v. Resolution Trust Corp., 156 Ill.2d 384, 620 N.E.2d 1073, 1078 (1993); see also, Lenny Szarek, Inc. v. Maryland Casualty Co., 357 Ill.App.3d 584, 829 N.E.2d 871, 874 (1st Dist. 2005) (“court must construe the policy as a whole”). An exclusion drawn so broadly as to encompass all likely collusive scenarios would leave precious little that was covered; it is unlikely, however, that so broad an exclusion would survive ordinary policy analysis.