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A "Tank" By Any Other Name: Prior Negotiations And Their Effect On The Establishment Of Coverage

March 01, 2011 BY Def Admin

          It is an ordinary, run-of-the-mill Wednesday afternoon, and you receive a request for a quote for property coverage.  The request contains a description of the proposed insured’s business and its property. Noticeably, the request includes a limitation on the insured’s property, such that only certain items would be covered.  After you evaluate the risk, you decide to bind coverage on the property.  You then receive a signed application for coverage, but there is one difference – the limitation contained in the original request is now absent.  Nevertheless, you bind coverage and congratulate yourself on another satisfied client.

            You know what happens next.  A fire destroys a large part of the property and the insured makes a claim.  Your adjuster investigates the loss, reviews the signed application and binder (which contains no limitation on the property covered), and determines that the property was underinsured, triggering the coinsurance penalty section of the policy.  The insured, in an uproar, states that only certain property was covered.  Au contraire, says the adjuster.  Now what?  This article addresses a recent case that examined such a situation.  Ultimately, the court found that a “tank” by any other name – including an unused storage tank – is still a “tank.”  Furthermore, this article will highlight certain aspects of the case that may assist you in binding coverage and protecting your interests.

            In Asphalt Refining and Technology Company, LLC v. Underwriters at Lloyds London, the plaintiff owned an asphalt refining plant upon which were located a number of storage tanks.  No. 10-10863 (11th Cir. Jan. 26, 2011).  The property had previously served as an oil refinery, and the plaintiff converted some of the storage tanks to hold liquid asphalt.  In initially attempting to secure insurance for the property, the plaintiff, through an insurance broker, identified 16 tanks which had been refurbished to store asphalt.  The insurance broker for the plaintiff circulated a blank, unsigned application for insurance to solicit an offer for insurance. The original solicitation, under a category entitled “Tanks & Equipment,” included a notation that only “16 tanks” would be insured; in actuality, there were a number of additional tanks on the property, and many of the others were not in use.  Over the course of the next several months, the defendant indicated an interest in offering insurance on the property.  At that time, the broker prepared a new application for insurance, signed by the plaintiff, which contained the category “Tanks & Equipment” but did not contain any reference or limitation to the number of tanks to be insured.  In fact, the only document listing the “16 tanks” limitation was the original blank, unsigned application.

            After submitting the new, signed application, the defendant bound coverage.  As will happen, the property was severely damaged by an explosion after the binder (but before the policy) was issued.  The explosion included hot asphalt raining from the sky and damage to several of the storage tanks on the property. As a result of the explosion, the plaintiff filed a claim with the defendant seeking payment for the 16 tanks referenced in the original solicitation.  However, the defendant found that all tanks on the plaintiff’s property were covered, which resulted in a significant co-insurance penalty.

            The plaintiff filed a bad faith action in federal district court against the defendant claiming that the parties only intended that 16 tanks should be covered.  The district court, applying Georgia law, granted the defendant’s motion for summary judgment, finding that the term “’tanks’ [...] refers unambiguously to all of the tanks on the property of [the plaintiff] at the time of the fire.”  In addition, the district court found that there was no quantity or number of tanks which were to be insured listed in the binder, that there was no evidence that the defendant ever received a schedule of tanks prior to issuing the binder, and that the listing of 16 tanks prepared by the plaintiff was prepared after the binder had been issued and, indeed, after the loss.  The district court also refused to admit additional, oral (“parol”) evidence to explain the binder since the binder referred unambiguously to “Tanks & Equipment.”  As a result, the district court held that all tanks were insured and the co-insurance penalty required of the plaintiff was appropriate.  The plaintiff appealed.

            The Eleventh Circuit agreed with the district court.  First, the court noted that binders are insurance contracts and that Georgia law is very clear that the “four corners” of a contract control the meaning of the contract.  Furthermore, the court held that parol evidence to explain an ambiguity is not admissible unless an ambiguity is first presented by the face of the contract.  The court stated that neither “the binder nor the signed insurance application contain any qualifying language specifying how many tanks, or which tanks, were insured.”  Rather, “both of these documents—the binder and signed insurance application—specified that coverage was for ‘Tanks & Equipment.’”  Finally, the Eleventh Circuit found no ambiguity and held that a “tank” is not an ambiguous term, holding that it “would be impossible to construe the written term ‘tanks’ as meaning only ‘sixteen tanks’ without resorting to parol evidence.”  The court therefore disagreed with the plaintiff’s argument, which claimed that the course of dealing by the parties indicated that there was an intent to only insure 16 tanks.  In characterizing the plaintiff’s argument, the Eleventh Circuit determined that the plaintiff was attempting to create an ambiguity by admitting parol evidence, rather than using parol evidence to explain an ambiguity.

            The decision in Asphalt Refining reinforces several key points of Georgia law that are noteworthy.  First, the decision emphatically renews the proposition that insurance binders are themselves contracts for insurance. Second, the Eleventh Circuit reiterated that, when contracts contain clear and unambiguous terms, courts will look to the contract alone (such as a binder or an insurance policy) to determine what the parties intended.  So, when reviewing an application for insurance or issuing a binder, make certain that the terms are clear and not capable of multiple interpretations.  Finally, any discussions held prior to the execution of an application for insurance are of little value unless memorialized in the binder.  If only certain portions of a property are to be insured, make certain those portions make it into the binder; otherwise, you could be insuring more (or less) than necessary.  Of course, the overarching point is clear - it is imperative that the insured and the insurer know what is being insured.  By bearing these points in mind, you will be able to issue sound coverage decisions while lessening the potential of litigation.

The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved. 

Editorial Board:

H. Michael Bagley