Guns and Rose Gardens

• Ronald J Panko
• November 2009
• 

Should homeowners insurers pay a liability benefit when someone in the insured's household commits murder?

Some already have, due to the circumstances of cases, although such coverage was not their intent. Two cases illustrate how that can happen--one involving the shootings at Columbine High School in 1999 in Colorado and the other, the Richard Baumhammers killing spree in 2000 in western Pennsylvania.

In both, children of the policyholders killed several people.

Four insurers reportedly settled the Columbine case in 2001. The Baumhammers case was not resolved until December 2007, when the Pennsylvania Supreme Court ruled that the Donegal Mutual Insurance Co. had to pay a liability benefit, but capped it at $300,000.

Homeowners insurance generally provides policyholders with a modest amount of liability insurance, usually about $300,000. However, insurers specifically exclude liability coverage when an insured or a member of the insured's household intentionally commits a crime.

State laws do not require insurers to provide such coverage. Nevertheless, a bill introduced in the Illinois legislature last January would require each insured gun owner to buy at least $1 million in liability insurance, to cover damages resulting from negligent or willful acts involving use of the insured's firearm. The bill, sponsored by state Sen. Kenneth Dunkin, was tabled April 9.

Tom Baker, the William Maul Measey professor of law and health sciences at the University of Pennsylvania, said he doubts that Dunkin's bill would ever become law. He said liability insurers would argue that they should not be held financially responsible for terrible crimes, that all people who buy liability insurance would end up paying the cost and that insurance to protect criminals is not appropriate. "Those would be the arguments, and they would be quite successful in the legislature," he said.

Regulation by Insurance?

When insurers agree to cover risks, they become actively involved in their management. Baker refers to this as the concept of "regulation by liability insurance." In a 2004 paper he co-authored with Thomas O. Farrish, when both were with the University of Connecticut School of Law, Baker argued that private insurance institutions play governmental roles.

"If the core ‘governmental' activities have become the traditional ‘insurance' activities of risk spreading and loss prevention, then insurance is governance, and accordingly, all insurance institutions are governmental," they wrote. "Liability insurance has the capacity to translate tort law's incentives into prices and directives."

Insurers become involved in gatekeeping, loss prevention, engagement with public regulators, elimination or reduction of liability, management of loss costs and research and education. But when there are risks they choose not to accept, they engage in selective exclusion. And personal lines liability insurers have adopted this strategy as their only approach to gun-related injuries when intentional harm is involved, wrote Baker and Farrish.

"This hands-off approach to gun ownership makes sense, because the intentional harm exclusion means that only a very small percentage of gun injuries are even potentially covered by liability insurance," they wrote. "There is no effort to engage in gun-related prevention through underwriting or pricing, and gun risks do not play a role in personal-lines insurance gatekeeping."

In the Donegal Mutual case, the court found that the insureds, Andrejs and Inese Baumhammers, were negligent in three areas: procuring adequate mental health treatment for their 34-year-old son, Richard; failing to take away his handgun; and failing to notify appropriate authorities that their son possessed a handgun.

On April 28, 2000, their son committed attacks at four locations within a few hours, killing five and wounding one. Baumhammers was found guilty of 19 charges by a jury on May 9, 2001, and is on death row in Pennsylvania. He has appealed his case to the U.S. Supreme Court.

The Donegal policy provided a liability limit of $300,000 per occurrence and defined "occurrence" as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions, which results, during the policy period in...bodily injury or property damage," according to an article by attorneys Claudia D. McCarron and Paulyne A. Gardner-Smith of the law firm Nelson Levine deLuca & Horst.

Donegal filed a declaratory judgment action seeking a determination that it owed no duty to defend the parents. The Pennsylvania Supreme Court concluded that the shooting spree was not an expected result of the parents' negligence and thus could be deemed an accident under terms of the policy. But, while the Baumhammers sought a $300,000 benefit for each of the six shootings, the court ruled that the parents' "negligence constituted but a single ‘occurrence' for purposes of coverage."

‘Tricky Situation'

The two killers in the Columbine massacre, Eric Harris and Dylan Klebold, were seniors at Columbine High School. They killed 12 students and a teacher, and injured 21 others, before committing suicide. Three people were injured while trying to escape.

According to published reports, four insurers agreed to pay at least $2.9 million in a settlement involving the families of the shooters, 36 other families and two men who supplied the guns.

Should the insurance companies have accepted the settlement? Baker said that in this civil suit, the tort claim against the parents of the shooters probably would have been negligence: that the parents should have taken precautions.

"That would be pretty vanilla from the perspective of the liability insurance companies, that they would cover the claim," he said. If they had taken the case to court, it might not have been tough to win, "but the potential damages, I assume, were just astronomical," he said. "What I imagine happened was that the plaintiffs' lawyers made offers that were for the limits of the insurance policies... What explains the fact that there was a settlement was the high-profile nature of the shootings and the fact that the potential damages against the parents, if the parents lost, would have been very large." Baker added that he did not know all the facts of the case.

Should the insurance companies have fought against paying any benefit? While it would have been easy to argue that the children were "moral monsters," Baker said it would have been a "tricky situation" to portray the parents that way. If the insurers had refused the settlement offer, a trial against the parents might have resulted in a $20 million verdict. "Then there could have been litigation about whether a reasonable insurance company should have accepted that offer," he said. "So if I were the insurance companies, I'd have gone right where they went."

Reporting on the settlement in 2001, CNN said the Klebolds had $1.3 million in liability insurance, while the Harrises had $300,000. Baker said $300,000 is a common amount provided by a homeowners policy and that the Klebolds' extra $1 million of coverage was probably from an umbrella policy.

No Intent to Cover Murder

Three of the four largest writers of homeowners insurance in the United States, as ranked by A.M. Best, report that they specifically exclude coverage for liabilities stemming from damages caused intentionally, such as by using a gun to commit a crime.

However, two of them, State Farm and Farmers, reportedly paid the settlement in the Columbine case.

Dick Luedke, spokesman for State Farm, said the company would provide liability coverage in connection with the firing of a gun subject to other provisions in the policy, "most notably the intentional acts exclusion." He added that each claim is unique, "so we wouldn't make any blanket statements."

Regarding indemnification of homeowners in the event a child of insureds living at home uses a gun on a killing spree, Luedke said, "Again, it depends so much on the individual circumstances, so that is not [a question] specific enough for us to make a statement."

Farmers said coverage depends on the "ultimate facts of the case, the laws of the state in which the contract is written and the specific policy language in that state," said Jerry Reinig, senior vice president of property product management, in an e-mail reply. "Typically, where the harm arises out of the intentional act of any insured, which would include the child living at home, there would be no coverage for either defense or indemnity. Most states recognize that an allegation of negligence against the parents does not create coverage where the underlying act is caused by the intentional act committed by an insured. An action may be defended where the circumstances surrounding the discharge of the firearm are not initially clear."

Farmers' intent on liability coverage when insureds fire a gun, however, is that it results from an accident. "Bodily injury or property damage is specifically excluded from coverage if it is caused intentionally by or at the direction of an insured or results from any intentional act of any insured where the results are reasonably foreseeable," Reinig wrote.

Nationwide Insurance Co.'s product and pricing team said in an e-mail response: "Intentional criminal acts are not covered by the homeowners policy. The homeowners policy does not cover criminal defense. In the event of civil suits, general hypothetical coverage opinions cannot be made without knowledge of the specific facts of each case. Indemnification questions are also fact-specific and cannot be answered in advance, based on hypothetical questions."

Allstate Insurance Co. did not respond to the liability question.

None of the companies said their umbrella policies cover murder with guns, although Luedke, of State Farm, said, "Again, we toss out the caveat that each circumstance is different."

If Illinois state Sen. Dunkin's bill were to become law, it would specifically require insurance coverage even for "willful acts." Ideally, that would bring into play Baker's concept of regulation by insurance.

"And the way that regulation works is that people get charged a price according to their perceived risk, and then insurance companies manage the claims and try to get people to change their behavior," he said.

However, regulation by insurance works under tort law, which is civil liability. "So if you're talking about drug-related or gang-related violence, those are people that are not in civil law," Baker said. "That's a population, for better or worse, that we're dealing with through criminal law. So that's outside the reach of insurance companies. And that's another reason, if you're thinking about dealing with gun violence, insurance is not going to be an effective way of dealing with it."

Learn More:

Donegal Mutual Insurance Co.

A.M. Best Company # 00318

Distribution: Independent agencies

State Farm Group

A.M. Best Company # 00088

Distribution: Exclusive agencies

Allstate Insurance Group

A.M. Best Company # 00008

Distribution: Exclusive agencies, independent advisers

Farmers Insurance Group

A.M. Best Company # 00032

Distribution: Exclusive and independent agents

Nationwide Group

A.M. Best Company # 05987

Distribution: Independent contractors

For ratings and other financial strength information visit www.ambest.com.

By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com