April 14, 2010 – The "family exclusion clause" of a homeowner's insurance policy precludes coverage of wrongful death and survivorship damages where half the damages would ultimately accrue to an insured person through intestacy, the court of appeals held yesterday.

In Wendy M. Day v. Allstate Indemnity Company, 2008AP2929 (April 13, 2010), the court reversed a grant of summary judgment in favor of Wendy M. Day (Wendy Day), who sought wrongful death and survivorship claims after her daughter died in 2006.

The complaint alleged that while staying with her father (Clinton Day) and stepmother (Holly Day), the child was left unattended in the bath, suffered a severe seizure and died. The child frequently experienced severe epileptic seizures. Wendy Day alleged Holly Day's negligent supervision caused the child's death.

Holly and Clinton Day maintained a homeowner's insurance policy with Allstate. The policy insured against "damages which an insured person becomes legally obligated to pay because of bodily injury." Id. at ¶ 3, footnote 1. Without determining Holly Day's liability, the court contemplated whether the policy should cover damages on the wrongful death and survivorship claims against Holly Day, an insured person, in the event she were found liable.

The wrongful death statute allows recovery when death is caused by wrongful or negligent acts. Similarly, the survivorship statute allows a decedent's estate to recover in tort where survival would have allowed the decedent to maintain a tort action. In the event that Holly Day was found to be negligent, the Allstate policy would cover damage amounts awarded to the deceased child's estate. The issue is whether the family exclusion clause bars coverage.

A family exclusion clause within the Allstate policy limits coverage by excluding losses for "bodily injury to an insured person ... whenever any benefit of this coverage would accrue directly or indirectly to an insured person." Id. at ¶ 3.

The court concluded that Clinton Day would benefit from the coverage since any damage award paid by Allstate to the decedent's estate would accrue to him by intestacy.  That is, under the survivorship and wrongful death statutes, half the damage awards paid by Allstate under the policy would funnel through the child's estate to Clinton Day, as her father. The other half of any damage award would pass to Wendy Day, as her mother.

In making its determination, the court noted the purpose of family exclusion clauses: to protect insurers from situations in which close family ties might prevent an insured person from cooperating to assist an insurance company's administration of the case. Id. at ¶ 7.

The court also noted that a recovery waiver of wrongful death and survivorship awards would not prevent the enforceability of a family exclusion clause, stating that "permitting an insured to disclaim his or her interest would encourage the type of collusion that family exclusion clauses are designed to prevent." Id. at ¶ 14. Proof of collusion is generally not required.

Finally, the court pointed out that even though Wendy Day — who would be entitled to half the damage awards — is not an insured person, her status is inconsequential. The family exclusion clause analysis, the court concluded, focuses on whether any of the damages award would accrue to any insured person. Here, half of any damage award would accrue to Clinton Day.

The appeals court reversed the grant of summary judgment in favor of Wendy Day and remanded with directions to grant summary judgment in favor of Allstate.

By Joe Forward, Legal Writer, State Bar of Wisconsin