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In Insurance Policy Language: the Contra Proferentem Doctrine and Use of Extrinsic Evidence by SCOTT G

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In Insurance Policy Language: the Contra Proferentem Doctrine and Use of Extrinsic Evidence by SCOTT G Brief-win04-rev. 4/12/04 1:56 PM Page 33 Resolving Ambiguities in Insurance Policy Language: The Contra Proferentem Doctrine and Use of Extrinsic Evidence BY SCOTT G. JOHNSON UNDER THE DOCTRINE of con- doctrine and the modern applica- ized language drafted by the tra proferentem, ambiguities in tion of the rule; the types of extrin- insurer and effectively became contract language are construed sic evidence that courts consider in “contracts of adhesion.”5 against the drafter, typically the trying to resolve ambiguities; and Policyholders typically had no insurer.1 At one time, the exis- application of the contra profer- bargaining power and no effec- tence of an ambiguity in an entem doctrine in cases where the tive means of changing the terms insurance contract resulted in a insured (or its broker) drafts the of the insurance contract. The presumption of coverage for the insurance contract. courts’ logical reaction to this insured. But this is no longer the was to place the onus of ambigu- case. The Contra Proferentem ous terms on the insurers, Indeed, in most jurisdictions Doctrine because they had the better bar- today, the determination that an In noninsurance contract litiga- gaining position and were in a ambiguity must be construed tion, the contra proferentem doc- better position to avoid the ambi- against the drafter comes at the trine is often used as a last resort guity.6 end of a court’s inquiry, not at the to resolve ambiguous contract beginning. Before applying the language or, as one commentator The Modern Rule doctrine of contra proferentem, put it, as “a late-inning After insurance policies were courts first attempt to remove the tiebreaker, one used when the mass marketed, the existence of ambiguity by considering certain more probative and obvious an ambiguity in an insurance extrinsic evidence of the parties’ methods have failed.”2 But contract resulted in a presump- intent. Only if the ambiguity although the contra proferentem tion of coverage in favor of the remains after the extrinsic evi- rule is usually a construction tool insured.7 Although this is still the dence is considered will that of last resort in ordinary contract rule in a small number of jurisdic- ambiguity be construed against litigation, it has been used as an tions, it is not the majority rule.8 the drafter. Thus, the current interpretive rule of first resort in Thus, instead of automatically application of the contra profer- insurance contract disputes.3 construing ambiguities against entem doctrine has done away This was not always the case. the drafter, many courts today with a presumption of coverage Insurance contracts used to be adopt an approach that considers in cases of ambiguous policy lan- construed much as other business the primary standards of interpre- guage, in favor of a fair and contracts,4 but this changed tation—examining the language impartial examination of all prof- when insurance policies became of the clause, public policy, and fered evidence. mass-marketed. Unlike a negoti- the purposes of the transaction as This article discusses the devel- ated business contract, these a whole—and extrinsic evidence opment of the contra proferentem insurance policies used standard- relating to the parties’ negotia- Number 2 • Volume 33 • Winter 2004 • American Bar Association • The Brief • 33 “Resolving Ambiguities in Insurance Policy Language:The Contra Proferentem Doctrine and Use of Extrinsic Evidence” by Scott G. Johnson, published in The Brief, Volume 33, Number 2, Winter 2004 © 2004 by the American Bar Association. Reproduced by permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. Brief-win04-rev. 4/12/04 1:56 PM Page 34 tions, knowledge, and shared were the case, as Judge Posner the other hand, argued that the understanding of disputed ambigu- noted, a written contract would pro- phrase “other integral parts” cov- ous terms.9 If the parties’ intent vide no protection for either party: ered the breakwater because a can be ascertained from this analy- “The fact that parties to a contract breakwater is functionally neces- sis, that intent is enforced. But if disagree about its meaning does not sary to the operation of the slips.29 consideration of the extrinsic evi- show that it is ambiguous, for it if The trial and appellate courts dence does not resolve the ambigu- did, then putting contracts into both found that Travelers’s prof- ity, the contra proferentem rule is writing would provide parties with fered interpretation was the only applied as an interpretative rule little or no protection.”20 reasonable interpretation of the of last resort.10 Thus, an insured cannot create policy.30 The courts explained that an ambiguity merely by urging a all specifically listed items in the Resolving Ambiguities conflicting interpretation of the pol- policy definition of “slips” that pre- Mutual Intent icy. Similarly, language is not ceded the phrase “and other inte- The fundamental rules of contract ambiguous just because courts have gral parts” were physically attached interpretation are based on the interpreted the language differ- to the structures on which the premise that the interpretation ently.21 Nor is policy language boats were berthed.31 Accordingly, must give effect to the “mutual ambiguous because a relevant term the courts found that the only rea- intention” of the parties.11 Thus, is not defined in the policy.22 An sonable construction of the phrase the primary purpose of interpreta- ambiguity exists where the language “and other integral parts” meant tion is to discover that intent and is susceptible to two or more reason- parts consistent with the items to make it effective.12 able interpretations23—only where mentioned before the phrase.32 Whenever possible the parties’ reasonable persons can fairly and Because the breakwater was unat- intent is found solely in the con- honestly differ in their interpreta- tached and located 120 feet away, tract’s written provisions.13 In ascer- tion of that language. If the insured’s and served a very different func- taining the parties’ intent, courts proffered interpretation is not rea- tion from the slips, it could not be will look to the plain meaning of sonable, there is no ambiguity.24 considered an “other integral part” the words as viewed in the context Newport Associates Development covered by the policy.33 of the contract as a whole.14 But Co. v. Travelers Indemnity Company Here, the insurance policy lan- equally important are “the require- of Illinois illustrates these princi- guage was unambiguous, the courts ments of reasonableness and con- ples.25 The insured owned and applied the plain and ordinary text.”15 Contract terms are inter- operated a marina that included meaning of the language, and there preted using the ordinary and various buildings, docks, berths for was no need to go any further. If popular meaning a layperson would boats, and a breakwater. The policy language is ambiguous, how- use.16 If the parties use language breakwater, located 120 feet from ever, the parties may attempt to intended to have a special meaning the end of the dock, was designed remove the ambiguity by submit- or required in a technical sense, this to limit wave action in the ting extrinsic evidence. usage or meaning will control.17 marina.26 In December 1992 the Extrinsic Evidence When an insurance provision is breakwater was damaged in a Limitations. Generally, the parol unambiguous, the court will go no storm, and Newport sought cover- evidence rule bars the introduction further; it must construe the lan- age for the breakwater damage of extrinsic evidence to vary or guage according to its plain and from Travelers, its property insurer. contradict the terms of a com- ordinary meaning.18 For ambiguous Travelers provided coverage using pletely written contract.34 But the insurance contract language, a dif- a manuscript policy drafted by parol evidence rule does not apply ferent analysis is required. Newport’s broker that included where the extrinsic evidence is coverage for “Slips, consisting of being submitted to clarify or aid in Language metal slips, walkways, ramps, pil- the interpretation of an ambiguous Insurance policy language is not ings, power cables, and other inte- contract.35 Thus, when policy lan- considered ambiguous simply gral parts collectively called guage is reasonably susceptible to because the insurer and the insured ‘slips.’”27 Travelers denied the two or more interpretations, parties disagree about its meaning.19 If that claim because the insured “slips” in most jurisdictions may introduce did not include the breakwater, extrinsic evidence of their intent Scott G. Johnson is a partner at reasoning that the coverage to support their interpretation of Robin, Kaplan, Miller & Ciresi LLP, applied only to the slips them- the contract, without running in Minneapolis, Minnesota. He can be selves and their physically attached afoul of the parol evidence rule. reached at [email protected]. component parts.28 Newport, on An important limitation on the 34 • The Brief • American Bar Association • Winter 2004 • Volume 33 • Number 2 “Resolving Ambiguities in Insurance Policy Language:The Contra Proferentem Doctrine and Use of Extrinsic Evidence” by Scott G. Johnson, published in The Brief, Volume 33, Number 2, Winter 2004 © 2004 by the American Bar Association. Reproduced by permission. All rights reserved. This infor- mation or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval sys- tem without the express written consent of the American Bar Association. Brief-win04-rev.
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