Opinion ID: 1879737
Heading Depth: 1
Heading Rank: 6

Heading: The Exclusionary Endorsement Issue.

Text: Another issue we must decide is whether the financial institutions amendatory endorsement of the umbrella policy excludes the Iske-Nearmyer negligence claims from coverage. This endorsement provides in part that the policy does not apply to claims arising out of error or omission or a mistake committed or alleged to have been committed by or on behalf of the insured in the conduct of any of the insured's business activities or the rendering of or failure to render any professional service. The district court found that this language was ambiguous because it could be read to exclude all negligence claims. The court said that [i]f the endorsement were held to bar coverage for all allegations of negligence, the umbrella policy would cover practically nothing.... [The appellants] would be reduced to the status of ... mere premium collectors[s]. The court then construed the exclusion to permit coverage of negligence claims. According to the court, the appellants had potential liability under the policy and, therefore, a duty to defend First Newton because the Iske-Nearmyer petition alleged negligence, a coverable claim. The appellants now argue that the district court erred in finding the endorsement ambiguous and in construing it to allow coverage of all negligence claims. They maintain that the endorsement very specifically excludes any claim arising out of the insured's professional services. The negligence claims against First Newton, they assert, have the bank's professional services as their basis and are, therefore, excluded from coverage. First Newton, on the other hand, argues that the district court was correct in finding that negligence claims do not fall under the exclusion, and we agree. As we have already said, an insurer is not required to defend in an action against an insured unless the action subjects the insurer to potential liability under the insurance policy. McAndrews, 349 N.W.2d at 119; State Farm Auto. Ins. Co. v. Malcolm, 259 N.W.2d 833, 835 (Iowa 1977); 7C Appleman § 4684.01, at 91-92. Hence, the appellants here have no duty to defend First Newton against the negligence claims if such claims are excluded from potential coverage by the amendatory endorsement. Certain well established principles guide our determination of the scope of an insurance policy's exclusionary terms. The insurer, having affirmatively expressed coverage through broad promises, has a duty to define limitations or exclusions clearly and explicitly. Witcraft v. Sundstrand Health & Disability Group Benefit Plan, 420 N.W.2d 785, 790 (Iowa 1988); Malcolm, 259 N.W.2d at 835. The insurer, therefore, has the burden to prove the applicability of exclusions. Malcolm, 259 N.W.2d at 835. When the language of a policy is ambiguous by way of being susceptible to more than one interpretation, we are bound to construe it. See id. at 836; see also North Star Mut. Ins. Co. v. Holty, 402 N.W.2d 452, 454 (Iowa 1987); State Auto. & Casualty Underwriters v. Hartford Accident & Indem. Co., 166 N.W.2d 761, 763 (Iowa 1969). Our construction will be in the light most favorable to the insured because an insurance policy is a contract of adhesion. Malcolm, 259 N.W.2d at 836; Connie's Constr. Co., Inc. v. Fireman's Fund Ins. Co., 227 N.W.2d 207, 210 (Iowa 1975); see also 7C Appleman § 4684.01, at 99-100 (doubt as to liability and [the] insurer's duty to defend should be resolved in favor of the insured). In keeping with that principle, exclusions are strictly construed against the insurer. Malcolm, 259 N.W.2d at 836; Connie's Constr. Co., 227 N.W.2d at 210. The court will ascertain what the insured as a reasonable person would understand the policy to mean, rather than what the insurer actually intended. Central Bearings Co. v. Wolverine Ins. Co., 179 N.W.2d 443, 445 (Iowa 1970); accord Witcraft, 420 N.W.2d at 790; Rodman v. State Farm Mut. Auto. Ins. Co., 208 N.W.2d 903, 906 (Iowa 1973); see also Holty, 402 N.W.2d at 454. Here, we must first decide whether the language in question is ambiguous. Like the district court, we think it is. This language excludes from coverage claims arising from errors, omissions, or mistakes related to First Newton's professional services. Read broadly, the words of the policy could be interpreted to exclude any claim of negligence related to professional services, as the appellants argue, or even all claims of negligence. Construed more narrowly and literally, as First Newton would have us do, the language might instead mean that only claims of errors, omissions, or mistakes are excluded. While we do not, at this point of our analysis, decide what construction is proper, we do think that the language in question is, without violence, susceptible to more than one interpretation. See Malcolm, 259 N.W.2d at 836. As such, it is ambiguous and must be construed by this court. See id. We have never faced a problem of construction similar to this one, so we are guided here by the decisions of other courts. In Aitchison v. Founders Ins. Co., 166 Cal.App.2d 432, 435, 333 P.2d 178, 180 (1958), an insurance policy indemnified the insured for claims arising from negligent acts, errors or omissions [committed in] the conduct of insured's business. The claim in question alleged that the insured had made an error in a business transaction. In finding that coverage existed under the language quoted above, the court noted that the insurer had not... asserted that the word `error' ... is modified by the word `negligent.' Id. at 438, 333 P.2d at 182. In other words, the policy covered  negligence, errors or omissions. Id. at 441, 333 P.2d at 184 (emphasis added). The court then found that the insurer intended the word [`error' ] to have its ordinary meaning, thereby providing separate coverage for claims that were not based on omissions or negligent acts. Id. at 438, 333 P.2d at 182. We think this reading indicates a very literal approach to interpreting the language of insurance policies. Another example of literal interpretation is in Burns v. American Casualty Co., 127 Cal.App.2d 198, 273 P.2d 605 (1954). There, two insurance policies covered claims based on malpractice, error or mistake, and another policy covered claims of malpractice, error, negligence or mistake. All of the policies concerned claims arising from the insured's professional services. Id. at 202-03, 273 P.2d at 608. The plaintiffs contended that these words of the policies should be read together to mean, simply, malpractice. Id. at 203, 273 P.2d at 608. The court disagreed, saying that each word indicated coverage of a separate type of claim. See id. at 203, 273 P.2d at 608-09. According to the court, mistake, error, and negligence necessarily mean more than the narrow term malpractice. Id. at 203, 273 P.2d at 608-09. In a case that, like the present one, involved an exclusionary term, an insurance agent's professional negligence policy said that it did not apply to claims brought about by the dishonest, fraudulent, criminal, or malicious acts or omissions of the insured. National Sur. Corp. v. Musgrove, 310 F.2d 256, 258-59 (5th Cir.1962). The insurer claimed that this exclusion encompassed not just ordinary fraud but also the broad concept of legal fraud. Id. at 260. The court found this construction to be unreasonable. Id. at 261. It said that the ordinary insurance agent would be unlikely to think that such exclusionary language would encompass so all embracing a concept as `legal fraud.' Id. The court pointed out that the words of the policy should be given their literal, ordinary meaning because a broader construction would rob the insured of the very coverage he assumed he was getting. Id. We think the broad reading urged by the appellants here would do just that to First Newton: if negligence claims were excluded, the bank would be deprived of the coverage it thought it was getting. The amendatory endorsement lists error, omission, and mistake as the only bases for excluded claims. Negligence is not mentioned. In Aitchison, Burns, and National Surety, by contrast, the proffered constructions were, at least, based on words actually contained in the policies; in National Surety, for example, the insurer said that the word fraudulent included legal fraud. Here, however, the appellants urge us to add negligence to the other three bases for excluded claims. This we will not do. The appellants had a duty to define their policy exclusions clearly and explicitly. See Malcolm, 259 N.W.2d at 835. They failed to do so. Furthermore, we think the literal approach to construction as demonstrated in Aitchison, Burns, and National Surety is appropriate here. In those cases the courts gave effect to the ordinary meanings of the words in question. See National Sur., 310 F.2d at 261; Aitchison, 166 Cal.App.2d at 438, 333 P.2d at 182; cf. Burns, 127 Cal.App.2d at 203, 273 P.2d at 608-09. This approach seems to be the simplest way of ascertaining what the insured as a reasonable person would understand the policy to mean. See Central Bearings Co., 179 N.W.2d at 445. By construing the words of a policy literally, we can avoid giving the insurer the benefit of hidden meanings that a reasonable person could not, without special knowledge, divine. Here, we do not think a reasonable person would understand the words error, omission, and mistake to include the concept of negligence. Instead, we think the amendatory endorsement excluded, in the context of professional services, claims based on only the first three terms, thereby allowing coverage of negligence claims. This strict construction of the exclusions, see Malcolm, 259 N.W.2d at 836; Connie's Constr. Co., 227 N.W.2d at 210, will ensure that the understanding of the insured, not the insurer, prevails, see Central Bearings Co., 179 N.W.2d at 445. In summary, we hold that the amendatory endorsement of the umbrella policy does not exclude any negligence claims against First Newton. Accordingly, the appellants have potential liability under this policy and, therefore, a duty to defend First Newton. See Malcolm, 259 N.W.2d at 835; 7C Appleman § 4684.01, at 91-92.