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Tuesday, April 22, 2008

Insurer must pay up for drop down clause

Considering that good faith on the part of insurance companies has been so much in the news lately, a recent opinion from U.S. District Court Judge James Rosenbaum merits a mention. In Babinski v. American Family Insurance Group, the judge refused the insurer’s attempt to limit its exposure to a fraction of the policy limits and socked it with a hefty attorney fee award of $35,712.33.

Donald Babinski’s son and daughter-in-law were killed in an auto accident when the son was driving Babinski’s truck. The daughter-in-law’s estate sued the son’s estate, of which Babinski was the personal representative. Donald Babinski had purchased $1 million in insurance coverage from American Family.

After sending a letter acknowledging the existence of liability coverage, American Family later argued that it had to pay only a maximum of $30,000 under a “household exclusion” or “drop-down exclusion.” Rosenbaum quickly disposed of the so-called household exclusion, whereby the policy arguably would not cover any person related to and residing in the household of the operator of the car, observing that Minnesota has held such exclusions invalid since 1979.

He also declined to enforce the drop-down exclusion, which would exclude coverage over the liability limits required by law, and mean the insurer was responsible for only 3 percent of the policy’s face value. Rosenbaum said the insurer used “stealth language” and the policy was vague, ambiguous, misleading and fell far below any ordinary consumer’s reasonable expectation. “This is a $1 million policy, and so it shall remain,” Rosenbaum ordered.

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