Is Insurance Coverage Fully Contradicted by an Exclusion or Limitation?

When your insurance policy grants you coverage and then takes it away it is called illusory coverage. (To give and then taketh away!)  For example, if the policy covers you for “X” but elsewhere in the policy it excludes or completely limits the coverage of “X”, then you are not really being covered for “X.”  The insurance coverage is an illusion.  In this instance, an insured will make this argument that coverage is illusory because, if successful, a court will interpret the policy as providing coverage to the insured.  

Now, for insurance coverage to be illusory, the coverage needs to be fully contradicted by an exclusion or limitation.  The exclusion or limitation needs to swallow up the coverage, meaning it takes away the very coverage the policy afforded.  The coverage is an illusion.  But, if the exclusion or limitation does not completely engulf the coverage, then the policy will not be deemed illusory because the exclusion or limitation does not contradict the coverage.

Illusory coverage is typically raised in an insurance coverage declaratory relief action.  The insured either sues or counter-sues the insurer arguing for a declaration from the court that coverage is illusory.  An example can be found in the case discussed here.

Make sure you consult with qualified insurance counsel when you are involved in an insurance coverage dispute so that all arguments to maximize insurance coverage are put on the table.


Please contact David Adelstein at or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.


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