Contra proferentem and ambiguity and against the drafter and against the insurer and north dakota and johnson

The case assigned in class dealing with this doctrine, Vargas, is a fairly straightforward analysis of the terms of an aviation insurance policy providing coverage "only to occurrences, accidnts or losses which happen...within the USA, its territories or possessions, Canada or Mexico." As you know, the 2nd Circuit discovered an ambiguity in this wording and, applying the doctrine of contra proferentem, held for the estate of the pilot. Yet the doctrine has become a bit more complicated since this 1981 decision. This mini-essay brings out a few of those complexities.

Origins of Contra Proferentem

This doctrine doesn't bulk large in contract law generally, but arose in insurance contracts because of the "take it or leave it" nature of most policies of insurance. These "contracts of adhesion" put the burden on the insurer to be unambiguous in the terms of the coverage. Any unclarities (ambiguities) would be resolved in the insured's favor.

An ambiguity in law is not an instance in which two interpretations of a clause or provision are possible; it is when two or more interpretations are reasonable. Of course, determining ambiguity is often a pretty subjective undertaking. Often a clause is construed to be unambiguous and judgment is rendered for the insurer. For example, an insured owned and operated a marina that included various buildings, docks, berths for boats and a breakwater. However, the breakwater was located 120 feet away from the dock and was designed to limit wave action in the marina. The breakwater was damaged in a storm. Plaintiff's policy included coverage for "slips consisting of metal slips, walkways, ramps, pilings, power cables, and other integral parts collectively called 'slips." Plaintiff argued that the breakwater was included in the "other integral parts," while the insurer argued that "slips" only included things that were physically attached to the slips themselves. Ambiguity? The court decided that there was no ambiguity but that the insurer's interpretation was the only reasonable one. Coverage was denied (Newport, 162 F3d 789 (3d Cir 1998)).

Modern Doctrine of Contra Proferentem

Thus, the establishment of true ambiguity is often not an easy process. Once ambiguity is established, however, current law in almost all jurisdictions permits the introduction of extrinsic evidence by both parties to establish their respective interpretations as the more likely. This extrinsic evidence may not consist of a party's undisclosed subjective intent, motive or opinion about the meaning of the policy. Instead, the relevant intent is "objective"--that is, the objective intent as evidenced by expressed acts, words or conduct of the parties expressed to the other party or to others.

One case in which subjective extrinsic evidence was disallowed was the Prudential case (119 Cal Rptr 2d 823, 2002). Plaintiffs were a 19 year old college student and one of her parents. The parent had a health policy with Prudential providing medical coverage to employees' dependents aged 19-24 who were "enrolled as a full-time student in school." The daughter had taken a quarter off from school (she was a sophomore) when she suffered an accident. The parent submitted an affidavit in which she said it was her belief that her daughter remained a "full time student" under the terms of the policy at the time of the accident. Coverage was denied and the appellate court upheld the denial.

Thus, the extrinsic evidence must be objective evidence. In addition, this objective (usually written) evidence must arise from before the time of the accident or incident where coverage was sought. The most powerful type of extrinsic evidence for a court is, not unexpectedly, written evidence from the discussion between insured and insurer at the time of the acceptance of the policy. In addition, post-issuance conduct of parties provides another source of evidence about the parties' intentions in issuing and accepting a policy. As one scholar has said, "In fact, the parties' conduct after a contract is formed is considered to be one of the most persuasive items of extrinsic evidence of the parties' mutual intention (S. Johnson, "Resolving Ambiguities in Insurance Policy Language, available online)."

A typical example where post policy conduct might be relied on is when the insurer or insured testifies about post policy coverage discussions they had and the resulting conduct of the parties. For example, Sweeney had a farm policy covering accidents involving "farm implements" but excluding coverage for "motor vehicles." Sweeney used his pickup in the farm operation. You see it coming. His pickup was involved in an accident on the farm. Sweeney argued that his pickup was used as a "farm implement," and that coverage should be extended. But the insurer was able to show that subsequent to issuance of the policy, Sweeney had come to the office to increase his coverage (unsuccessfully) when the agent informed him that the pickup would not be covered. (419 NW 2d 179 (ND 1988)).

Conclusion

Only if the ambiguity remains after all extrinsic evidence is taken into consideration will a court then apply the contra proferentem doctrine in favor of the insured. And, even this isn't universally the case. The court will also examine the nature of the insurance policy. If it is a policy obtained through a broker (representing the insured), the assumption will probably be that the insured could have demanded greater clarity in the policy and the unclarity will be construed against the insured. But if it is a policy issued by and written by the insurer (a standard form policy), the burden will rest on the insurere and contra proferentem will be invoked.

Thus we see that the doctrine of contra proferentem, quite simply presented in our casebook, is a bit more complicated than first meets the eye. But you probably wouldn't have expected it any other way....