construing insurance policy language: doctrine of...

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Presenting a live 90-minute webinar with interactive Q&A

Construing Insurance Policy Language:

Doctrine of Reasonable Expectations,

Illusory Coverage and More Leveraging Policy Interpretation Arguments for Insurers and Policyholders

Today’s faculty features:

WEDNESDAY, AUGUST 12, 2015

Robert Friedman, Principal, Friedman, Palm Beach, Fla.

Verne A. Pedro, Lead Litigation Counsel, Ellis Ged & Bodden, Point Pleasant, N.J.

David L. Plaut, Partner, Hanna & Plaut, Austin, Texas

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

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© Copyright 2015. Friedman P.A. All Rights Reserved.

KEY INSURANCE POLICY INTERPRETATION RULES

Strafford Publications August 12, 2015

Robert H. Friedman Friedman P.A. Palm Beach, FL [email protected]

© Copyright 2015. Friedman P.A. All Rights Reserved. 6

ANATOMY OF AN INSURANCE POLICY

• Declarations Page

• Insuring Agreement

• Definitions

• Conditions

• Exclusions

• Endorsements


DECLARATIONS PAGE


INSURING AGREEMENT


DEFINITIONS


CONDITIONS


EXCLUSIONS


ENDORSEMENTS


GENERAL RULES OF CONTRACT INTERPRETATION

• Read as a Whole

• Plain Meaning

• Defer to Definitions

• Consider the Context

• Ejusdem Generis

• Expression of One Thing is to the Exclusion of Another

• Contra Proferentem


THEORIES OF INSURANCE POLICY INTERPRETATION

Corbin Williston

Reasonable Expectations Strict Constructionist

Contextual Plain Meaning

“Interpretation” “Construction”

“Liberal” “Conservative”


RESOLVING AMBIGUOUS POLICY LANGUAGE

• What is Ambiguity?

• Use of Extrinsic Evidence

• Contra Proferentem

• Reasonable Expectations


USE OF EXTRINSIC EVIDENCE: DUTY TO DEFEND

• “Four Corners” (“Eight Corners”) Rule

• Alleged Facts v. “True” Facts

• Who Can Use “True” Facts?


WILLISTON APPROACH

• Strict Four Corners: Wisconsin

Fernandez v. Strand, 63 F. Supp.2d 949

(E.D. Wis. 1999)

• Four Corners With Exceptions: Florida

Victoria Select Ins. Co. v. Vrchota Corp.,

805 F. Supp.2d 1337 (S.D. Fla. 2011)


CORBIN APPROACH

• All Extrinsic Evidence Allowed: California

Montrose Chem. Corp. v. Superior Court,

861 P.2d 1153 (Cal. 1993)

• Only Policyholder’s Extrinsic Evidence Allowed: New York

Fitzpatrick v. American Honda Motor Co., Inc.,

78 N.Y.2d 61 (N.Y. 1991)


CONTRA PROFERENTEM

• Rule of Last Resort?

• Sophisticated Policyholders

• Policyholder-Drafted Language


DOCTRINE OF REASONABLE EXPECTATIONS

“The objectively reasonable expectations of applicants and intended beneficiaries of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations.”

Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 HARV. L. REV. 961, 967 (1970)


REASONABLE EXPECTATIONS SPLIT OF AUTHORITY

• Corbin Camp: Alaska, Hawaii, Iowa, Massachusetts, Missouri, New Jersey, New York, North Carolina, Pennsylvania, Tennessee, U.S. Virgin Islands

• Williston Camp: Florida, Idaho, Illinois, Michigan, North Dakota, Ohio, South Carolina, South Dakota, Vermont, Washington

• “Ambiguity” Camp: Everywhere else


“ABSOLUTE” POLLUTION EXCLUSION


POLLUTION EXCLUSION & REASONABLE EXPECTATIONS

• Corbin Camp: Arizona, Arkansas, California, Illinois, Indiana, Louisiana, Maine, Maryland, Massachusetts, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, South Carolina, Utah, and Wyoming

• Williston Camp: Alaska, Florida, Kansas, Minnesota, Mississippi, Nebraska, Oklahoma, Pennsylvania, South Dakota, Texas, U.S. Virgin Islands, Virginia, West Virginia, and Wisconsin

• Hamlet Camp: Alabama, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Iowa, Kentucky, Michigan, Montana, New Mexico, North Dakota, Oregon, Rhode Island, Tennessee, Vermont, and Washington


PRACTICE TIPS

Forum Shopping

Know Your Judge

Getting to a Jury

Know Where You Stand

Insurance Policy Interpretation: Key Rules for Insurers and Insureds Verne A. Pedro 732-892-5161 [email protected]

A Florida professional corporation with offices in New Jersey and New York. Managing attorney, C. Glen Ged. NJ offices: 1101 Richmond Ave., Suite 201, Pt Pleasant Beach, NJ 08742 97 Lackawanna Ave., Suite 301, Totowa, NJ 07512 | 201 Sumner Ave., Seaside Heights, NJ 08751 NY office: 591 Midland Ave., Staten Island, NY 10303

I. Regulatory Estoppel


Form of judicial estoppel Prohibits insurers from making representations to regulators then switching position when policyholders make claims.

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Regulatory Estoppel

• When applied, the doctrine bars insurers’ reliance on particular policy provisions, such as exclusions.


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Regulatory Estoppel

Statement to a regulatory agency

Taken opposite position in litigation from that previously presented to the agency.

Hussey Copper v. Royal Ins. Co., 2009 U.S. Dist. LEXIS 81830 (W.D. Pa. 2009)

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Regulatory Estoppel

• Most regulatory estoppel cases involve applicability of pollution exclusion


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Regulatory Estoppel

Simon Wrecking Co., Inc. v. AIU Ins. Co., 541 F. Supp.2d 714, 717 (E.D. Pa. 2008)

Nav-Its, Inc. v. Selective Insurance Co., 183 N.J. 110, 119, 869 A.2d 929 (2005)


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II. Illusory Coverage

•Means that the policy, when read as a whole provides no coverage at all. Only where there is no possibility under any set of facts for coverage is the policy deemed illusory

•The fact that claim is outside scope of coverage does not, without more, render the policy illusory.


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Illusory Coverage

The concept of illusory coverage has been viewed "as an independent means to avoid an unreasonable result when a literal reading of a policy unfairly denies coverage." Jostens, Inc. v. Northfield Ins. Co., 527 N.W.2d 116, 118 (Minn. Ct. App. 1995).


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Illusory Coverage

• The doctrine of illusory coverage is best applied where a part of the premium is specifically allocated to a type or period of coverage that turns out to be functionally non-existent.


33

Illusory Coverage

• When policy provisions, limitations, or exclusions completely contradict the insuring provisions, insurance coverage becomes illusory.

34

Illusory Coverage

Narrow coverage is not illusory coverage.

Coverage is not illusory unless benefits would not be paid under any circumstances.

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III. Unconscionability

• Doctrine allows courts to render unenforceable a contract that is unreasonably favorable to one party while precluding a meaningful choice of the other party.

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Unconscionability

Insured has burden of proving contract term is unconscionable.

37

Unconscionability

Procedural unconscionability - pertains to the facts surrounding the formation of the contract.

Substantive unconscionability -

pertains to the legality and fairness of the contract terms.


38

Unconscionability

Inquiry involves:

(a) whether terms are commercially reasonable and fair,

(b) purpose and effect of terms,

(c) one-sidedness of terms, and

(d) other similar public policy concerns.


39

Questions

40 Verne A. Pedro

[email protected]


The “Plain Language” view of policy construction

favors freedom of contract

● Insurance policies are contracts.

● The rights and duties they create and the rules

governing their interpretation are those generally pertaining

to contracts.

● Court’s primary concern in construing written contract

(policies) is to ascertain the true intent of the parties as

expressed in the instrument.

42


Policy language is paramount

● The court must examine the policy as a whole, seeking

to harmonize all provisions and render none meaningless.

● In construing a policy, the court may not rewrite the

policy or add to its language.

43


Policies should be enforced as written

● Policy language given its plain, ordinary meaning unless

something else in the policy shows the parties intended a

different, technical meaning.

● If an insurance contract uses unambiguous language,

the courts must enforce it as written.

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Ambiguity is a question of law

● Whether a contract is ambiguous is a question of law for the court.

● If a contract as written “can be given a definite or certain legal

meaning,” then it is unambiguous as a matter of law and rules of

construction related to resolving questions of ambiguity cannot be

used.

● Only if an insurance policy remains ambiguous despite these

canons of interpretation should courts construe its language against the

insurer in a manner that favors coverage.

45


Intent and subjective expectations irrelevant

● Neither evidence of the parties’ intent with regard to

coverage nor argument that the policy could have been

drafted more clearly can create an ambiguity

● No ambiguity simply because a policy could have been

drafted to resemble other policies.

46


Extrinsic evidence not allowed to create an ambiguity

● Extrinsic evidence may not be used to create an

ambiguity.

● “Parol evidence is not admissible for the purpose of

creating an ambiguity.”

● Many courts allow extrinsic evidence only to resolve an

ambiguity.

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Patent v. Latent Ambiguity

● A patent ambiguity is evident on the face of the contract.

● A latent ambiguity arises when a contract which is

unambiguous on its face is applied to the subject matter with

which it deals and an ambiguity appears by reason of some

collateral matter.

● If a latent ambiguity arises from this application, parol

evidence is admissible for the purpose of ascertaining the true

intention of the parties as expressed in the agreement.

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Patent v. Latent Ambiguity in Ongoing Litigation:

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Contra Preferentum doctrine

● An ambiguous contract will be interpreted against its author.

● In the insurance context, it operates so that ambiguous policy

provisions are construed against the insurer and in favor of

coverage.

● If the policy interpretation offered by the insured of an

ambiguous provision is reasonable, it will be adopted even if the

insurer's interpretation is objectively more sensible, “as long as

that [the insured's] construction is not unreasonable.”

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Sophisticated Insureds Rule

● Should contra-preferentum rule apply to insurance-

coverage disputes between sophisticated parties?

● In the commercial insurance field the insured is not an

innocent but a corporation of immense size, carrying insurance

with annual premiums in six figures, managed by sophisticated

business people and represented by counsel on the same

professional level as the counsel for insurers.

● In substance the authorship of the policy is attributable to both

parties alike.

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Questions?

Thank you!

David L. Plaut [email protected]

Hanna & Plaut, LLP (512) 472-7700

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