I have written and spoken quite a bit about “illusory coverage” under some insurance policies. To me, “illusory coverage” means that an insured’s policy covers essentially nothing of significance that the insured does. An example I’ve often used is a tree service company that bid on the removal of 19 trees my wife and I lost following a tornado that came across our property. This company had an ISO CGL policy with 42 endorsements attached, one being an endorsement that excluded “ongoing operations” and “your work,” the latter term meaning “completed operations.” In other words, the insured essentially had no coverage for his primary, and most dangerous, business activity. To me, the coverage he bought was illusory in that it really didn’t cover the risks for which it was purchased.

Unfortunately, most courts don’t agree with my interpretation of “illusory coverage.” If there is ANY coverage under the policy, the insurance contract is usually deemed to not provide illusory coverage. Most recently, this was the case in Travelers Prop. Cas. Co. v. H.E. Sutton Forwarding Co., No. 21-719 (M.D. Fla. Aug. 24, 2023), as reported by attorney Randy Maniloff in his Coverage Opinions newsletter:

Court Denies Coverage For “Air Horse One:” The Challenge To Establishing Illusory Coverage

So, responding to such claim denials by suing on the basis of “illusory coverage” is probably most often a lost cause. But, to me, it raises a professional liability question with regard to the agent and/or insurer that provided this coverage…or, rather, lack thereof. Is knowingly selling an insurance product you know doesn’t cover an insured’s business activities a fraudulent act. To me, it’s inarguably unethical if done knowingly, but is it fraud?

Or, if it’s done out of ignorance, does it constitute negligence such that the loss is potentially covered under the agent’s or insurer’s E&O professional liability policy? I’ve discussed this in another blog post:

If Not Illusory, Is It Fraudulent?

What do you think? If you have an opinion, feel free to comment below.

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Bill Wilson

Founder at InsuranceCommentary.com
One of the premier insurance educators in America on form, coverage, and technical issues; Founder and director of the Big “I” Virtual University; Retired Assoc. VP of Education and Research from Independent Insurance Agents & Brokers of America. Reprint Request Information