They Could Have Used a Captive: Gustafson Excavating and Septic Systems

 We formed and operate the first series LLC in Montana (named Aegis) for captive insurers.  Several other firms provide key services such as accounting, audit and actuarial work.  Please contact us at 832.330.4101 if you'd like to discuss forming a captive for your company.​​

     In 1971, a jury awarded $21.7 million to the plaintiff in their produce liability case against Beech Aircraft.  The company blamed their loss on the insurance company appointed attorneys, who Beech tried to have removed several weeks before trial.  The loss was the catalyst of Beech’s decision to form a captive insurance company which allowed them to draft the insurance policy, thereby controlling the attorney selection process in the event of future litigation.  Of all the earliest captive cases, Beech best demonstrates the benefit of forming a captive to gain control of the policy drafting process.

     Facts that highlight the importance of controlling the drafting process are not limited to the early captive cases.  The 2016 decision of Atlantic Casualty Insurance Co. v. Gustafson et. al is illustrative.  The case’s facts are very simple.  The defendant owns and operates Gustafson Excavating and Septic Systems.  A homeowner was struck in the eye by debris while watching one of Gustafson’s crews removing brush.  The company contacted their insurance agent who stated their policy provided coverage for the injury.

     The insurance company disagreed, citing the following policy language:

This insurance does not apply to:
* * *
(ii) “bodily injury” to any “contractor” for which any insured may become liable in any capacity:
* * *
As used in this endorsement, “contractor” shall include but is not limited to any independent contractor or subcontractor of any insured, any general contractor, any developer, any property owner, any independent contractor or subcontractor of any general contractor, any independent contractor or subcontractor of any general developer, any independent contractor or subcontractor of any property owner and any and all persons providing services or materials of any kind for these persons or entities mentioned herein.

The insurer argued that the homeowner was a “property owner” within the contract’s definition, meaning the exclusion applied, allowing the insurer to deny coverage.  The insurer made the same argument in a 2013 case tried to Judge Posner who observed, “The exclusion is poorly drafted.” 

     But that is exactly the point.  While contract law governs the formation and interpretation of insurance policies, there are important differences between contracts negotiated between two parties of equal standing and those issued by an insurance company and then sent to the insured.  In the former, parties negotiate all the terms and conditions; in the latter, the insurer either drafts the policy or uses an industry standard document issued by a service such as ISO.  In either case, the insured has no input into the contract’s language.  And the complete lack of drafting control gives the insurer numerous opportunities to write exceptions, exclusions and fine print that are not to the insured’s advantage.        

     This is exactly what happened in this case.  The policy language was so broad that it included, literally, everybody imaginable.  The first court noted, “If viewed on its own, that term would include virtually everyone in the world; even the poorest person at least owns the clothes on his back, thus making him a “property owner” and, therefore, presumably a “contractor” under a broad reading of the statute.” 

     Had the insured had a captive, he would have drafted the policy, preventing this problem from occurring in the first place.  If you think a captive would be an appropriate option for your business, please call us at 832.330.4101 to discuss this option in more detail.
    
     Thanks to the Contract Professor website for discussing this case.