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Vague Contract Terms Do Not Always Mean the Insurer Loses

Insurance Law360
September 30, 2019

By Jennifer L. Gibbs
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A seminal rule of contract construction is the contra proferentem doctrine — summarized as “the contract is construed against the drafter.”[1] This rule is a long-standing principle of common law contract interpretation, deriving from the Latin maxim “verba fortius accipiuntur contra proferentem” — “words must be construed against those who use them.”[2] In the insurance context, where the doctrine is often applied, some interpret the Latin phrase to mean: “The insurer loses.”[3] 

Application of the doctrine, however, is not automatic. In most jurisdictions, the doctrine applies only if a policy term or phrase is first deemed by the court to be ambiguous.[4] Courts applying the doctrine in that instance have held that “it is consistent with both reason and justice that any fair doubt as to the meaning of its own words should be resolved against such party.”[5] 

Notably, courts have declined to apply the contra proferentem doctrine where the parties to the contract are sophisticated parties or when the terms have been substantially negotiated by both parties. In the insurance context, courts are trending away from applying the doctrine in claims involving sophisticated insureds. 

For example, in UBS Financial Services Inc. v. XL Specialty Insurance Co.,[6] a recent case decided by the U.S. Court of Appeals for the First Circuit, the court did not apply the rule because the parties to the contract were determined to be sophisticated parties with equal bargaining power. In that case, the insurance policies at issue excluded coverage for:

Any Claim in connection with any proceeding set forth below, or in connection with any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any such proceeding or any fact, circumstance or situation underlying or alleged therein:

Unión de Empleados de Muelles de Puerto Rico PRSSA Welfare Plan, et al. v. UBS Financial Services Incorporated of Puerto Rico, et al., Case No. 10-1141, U.S. District Court, District of Puerto Rico.

The [2009] investigation by the Securities and Exchange Commission captioned “in the Matter of UBS (Certain Puerto Rico Bonds and Funds)” SEC File No. FL-3491.[7] 

The policies provided coverage for UBS against claims alleging wrongful acts made during the policy period and included a “notice of claim endorsement” requiring written notice of any claim “as soon as practicable after it is first made ... but in no event later than ninety (90) days after the expiration of the Policy Period.”[8] The policies also contained an “interrelated claims” provision mandating that all claims resulting from interrelated wrongful acts constitute a single claim.[9] 

UBS sought to recover policy proceeds for defense costs it incurred as a result of two civil actions, two regulatory investigations and hundreds of Financial Institutions Regulatory Association arbitrations. Coverage was denied based on the specific litigation exclusion and because the occurrences at issue took place after the policy period ended.[10] The district court granted summary judgment in favor of the insurers. 

The appellate court recognized that insurance contracts are generally viewed as adhesion contracts under Puerto Rico law, requiring construction in favor of the insured. The court also observed that Puerto Rico’s public policy disfavors exclusionary clauses and thus promotes their strict construction. The court reasoned that these principles seek to protect a weaker party when there is disparity at the bargaining table.[11] The court specifically noted: 

Yet those concerns are not present here, since the terms of the Specific Litigation Exclusion are clear, and the parties negotiated the Policy at arm’s length. UBS, a sophisticated financial player, engaged Marsh, “a large and respected broker with expertise in the Puerto Rican market,” and together they negotiated the terms of the Policy. Moreover, UBS received advice and suggestions from Covington & Burling LLP concerning the Specific Litigation Exclusion. UBS therefore could have reasonably expected that it bargained for the plain reading construction we give the exclusion today. 

The court then held that “because the district court applied the exclusion as we have construed it, we adopt its analysis and see no need to rehash it here.”[12] 

Similarly, in Universal Cable Productions LLC v. Atlantic Specialty Insurance Co.,[13] a recent case in the U.S. Court of Appeals for the Ninth Circuit, the court found the typical policy reasons to utilize contra proferentem did not apply, stating that neither party provided a reason to protect the insured or the insurer from any ambiguous drafting in an insurance policy. In that case, the insured brought suit against its insurer for denying coverage pursuant to the policy’s war exclusion, for losses incurred when insured had to move its production from Israel due to conflict with Hamas.[14] 

The policy at issue included the following exclusions: 

  1. War, including undeclared or civil war; or 
  2. Warlike action by a military force, including action in hindering or defending against an actual or expected attack, by any government, sovereign, or other authority using military personnel or other agents; or 
  3. Insurrection, rebellion, revolution, usurped power, or action taken by the governmental authority in hindering or defending against any of these. Such loss or damage is excluded regardless of any other cause or event contributed concurrently or in any sequence to the loss. 
  4. Any weapon of war including atomic fission or radioactive force, whether in time of peace or war...[15]

Universal’s broker initially sent to Atlantic for inclusion in the policy the first three exclusions (which reflect standard ISO language). Atlantic subsequently edited some of the policy language and added the fourth war exclusion. 

The appellate court reviewed the underlying court’s grant of summary judgment in favor of Atlantic. Notably, the district court had concluded that Universal was a sophisticated party and was aware of the customary meaning of the provisions in the insurance context. The district court thus held that the typical concerns animating contra proferentem did not exist. The district court also declined to apply contra proferentem in favor of Atlantic in part because the language mirrored Atlantic’s own forms — and the forms of many insurers — and did not warrant a presumption in favor of Atlantic’s interpretation either.[16] 

The court then held that Atlantic breached its contract when it denied coverage and reversed the district court’s entry of summary judgment in favor of Atlantic on the first and second war exclusions and remanded the case for the court to address the third war exclusion.[17] 

As the above cases illustrate, when a coverage dispute involves a potentially ambiguous term, both policyholder and carrier lawyers should not assume a court will automatically construe the term against the drafter. If both parties come forward with reasonable interpretations of a disputed word or term, and both are sophisticated entities with equal bargaining power, insureds should not be overly optimistic that the contra proferentem doctrine will result in a ruling in their favor. 

Jennifer Gibbs is a partner at Zelle LLP. 

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice. 

[1] See Republic National Bank v. Northwest National Bank, 578 S.W.2d 109 (Tex. 1978). 

[2] See Siegelman v. Cunard White Star, 221 F.2d 189 (2d Cir. N.Y. 1955). 

[3] See Regen O’Malley & Greil I. Roberts, Unraveling Plain Meaning, Extrinsic Evidence and the Doctrine of Contra Proferentem, Ins. Coverage L. Bulletin (Sept. 2014). 

[4] Gonzales v. Mission American Ins. Co., 795 S.W.2d 734, 737 (1990) (“where an ambiguity exists in a contract, the contract language will be construed strictly against the party who drafted it since the drafter is responsible for the language used.”). 

[5] RentWay’s, Inc. v. O’Neill Milk & Cream Co., 136 N.E.2d 271, 273 (Ct. App. N.Y. 1955). 

[6] 929 F.3d 11 (1st Cir. 2019). 

[7] Id. at 16 (referring to the exclusionary language as “The Specific Litigation Exclusion”). 

[8] Id

[9] Id. at 17. 

[10] Id. at 19. 

[11] See Herrera v. First Nat'l City Bank, 3 P.R. Offic. Trans. 1004, 1009 (1975) (noting, in the context of adhesion contracts in general, that interpretation of an “obscure” clause should favor the “economically weaker [party who] ... had nothing to do with its drafting”); see also Meléndez Piñero v. Levitt & Sons of Puerto Rico, Inc., 1991 P.R.-Eng. 735848, 129 D.P.R. 521, 547 (1991) (noting that typically, “the terms of an insurance contract are not negotiated by the parties”). 

[12] Id. at 24-25. 

[13] 929 F.3d 1143 (9th Cir. 2019). 

[14] Id

[15] Id. at 1149. 

[16] Id. at 1153. 

[17] Id. at 1162.

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