The Doctrine of Illusory Coverage is a common law doctrine that Florida courts have confirmed is a part of Florida’s insurance law. See e.g., Zucker for BankUnited Financial Corp. v. U.S. Specialty Insurance Co., 856 F.3d 1343, 1352 (11th Cir. 2017). Illusory coverage occurs when coverage is implicitly given under the provisions of a policy but then “taken away by virtue of a prohibition or exclusion contained in the same by policy, or by virtue of a strict legal definition.” See 7 Couch on Insurance 3d § 101:20. The doctrine is most frequently applied when a premium is allocated to a specific type of coverage but that coverage ultimately turns out to be functionally nonexistent due to the terms of the policy. Id.
Florida courts have held that in order for an exclusion to render a policy’s coverage illusory, the exclusion must “completely contradict the insuring provisions” and “eliminate all – or at least virtually all – coverage in a policy.” BITCO Natl. Ins. Co. v. Old Dominion Ins. Co., 379 F.Supp. 3d 1230, 1242 (N.D. Fla. 2019). When an exclusion renders coverage under a policy illusory, the court is required to find the policy ambiguous and resolve the ambiguity in favor of the insured and coverage. See, e.g., Tire Kingdom, Inc. v. First S. Ins. Co., 573 So. 2d 885, 885 (Fla. 3d DCA 1990). In other words, when an exclusion swallows the insuring agreement, the court will prohibit an insurer from relying on the exclusion to bar coverage for the underlying loss. See, e.g.,. Amerisure Ins. Co. v. Auchter Co., 2017 WL 3584896, at *23—*25 (M.D. Fla. Mar. 30, 2017) (holding that Landmark American Insurance Company’s Exterior Insulation and Finish System [“EIFS”] Exclusion rendered coverage illusory because it totally eliminated coverage for damage to non-defective components of the project caused by the insured’s defective work if EIFS is found anywhere on the project and determining that the exclusion could not be enforced).
To date, Florida courts have rarely determined that an exclusion renders a policy’s coverage illusory, even when said exclusion is very broad. The Eleventh Circuit in AIX Specialty Ins. Co. v. Members Only Mgmt. LLC, 793 F. App’x. 1001 (11th Cir. 2019), recently confirmed that an insurer faces a high burden in establishing illusory coverage. In Members Only, a lawsuit filed against the insured, a nightclub, alleged that the insured served too much alcohol to a patron and that the patron subsequently drove home, lost control of her vehicle, and caused the death of her passengers. The complaint specifically alleged that the insured knowingly furnished alcohol to a patron who was habitually addicted to alcohol, thereby causing the death of the passengers. The insurer agreed to defend the insured pursuant to a reservation of rights and subsequently filed a declaratory action, seeking a declaration that the Absolute Liquor Liability Exclusion extinguished the insurer’s duty to defend and indemnify the insured from the underlying action. 793 F. App’x. at 1002.
The Absolute Liquor Liability Exclusion barred coverage for any bodily injury for which the insured may be held liable by reason of: (1) causing or contribution to the intoxication of any person; (2) the furnishing of alcohol beverages to a person under the legal drinking age or under the influence of alcohol; or (3) any statute, ordinance, or regulation relating to the sale, gift, distribution or use of alcohol beverages. The exclusion specified that it applied to any insured who serves or furnishes beverages, with or without a charge, and to any insured who permits others to bring alcoholic beverages onto its premises for consumption. The insured argued that the exclusion was so broad that it rendered coverage illusory. Specifically, the insured contended that since it was a nightclub that permitted patrons to bring in alcohol for consumption, “any claim for bodily injury could theoretically bear connection to alcohol and thus be barred under the Absolute Liquor Liability Exclusion.” Id. at 1004.
The Eleventh Circuit concluded that the insured’s argument must fail because the exclusion did not eclipse coverage under the policy. The court acknowledged that “[n]o doubt, the Absolute Liquor Liability Exclusion is a significant exclusion given [the insured]s business” but then concluded that the exclusion did not “swallow [the policy’s] coverage whole.” Id. The court opined, for example, that the insured could be sued by a sober patron who tripped and fell in a dimly lit hallway. Such a bodily injury claim would have no relation to alcohol. Id. The court therefore concluded that the exclusion did not render coverage illusory and that the insurer was entitled to apply the exclusion to bar coverage for the underlying lawsuit. Based on this recent decision, it is unlikely that a Florida court would render coverage illusory even if the exclusion relied on by the insurer precludes coverage for a majority of the claims that could potentially be asserted against the insured. As long as coverage is not completely eclipsed by the exclusion, it appears Florida courts will enforce the exclusion as written.