Construing Insurance Policy Language: Doctrine of Reasonable Expectations, Illusory Coverage and More

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1 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 WEDNESDAY, AUGUST 12, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: 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 The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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KEY INSURANCE POLICY INTERPRETATION RULES Strafford Publications August 12, 2015 Robert H.

13 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 Copyright Friedman P.A. All Rights Reserved. 13

14 THEORIES OF INSURANCE POLICY INTERPRETATION Corbin Williston Reasonable Expectations Strict Constructionist Contextual Plain Meaning Interpretation Construction Liberal Conservative Copyright Friedman P.A. All Rights Reserved. 14

17 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) Copyright Friedman P.A. All Rights Reserved. 17

18 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) Copyright Friedman P.A. All Rights Reserved. 18

20 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) Copyright Friedman P.A. All Rights Reserved. 20

21 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 Copyright Friedman P.A. All Rights Reserved. 21

23 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 Copyright Friedman P.A. All Rights Reserved. 23

25 Insurance Policy Interpretation: Key Rules for Insurers and Insureds Verne A. Pedro 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ 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.

26 I. Regulatory Estoppel Form of judicial estoppel Prohibits insurers from making representations to regulators then switching position when policyholders make claims. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

Regulatory Estoppel When applied, the doctrine bars insurers reliance on particular policy provisions, such as exclusions. A Florida professional corporation with offices in New Jersey and New York.

27 Regulatory Estoppel When applied, the doctrine bars insurers reliance on particular policy provisions, such as exclusions. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

28 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 (W.D. Pa. 2009) 28

Regulatory Estoppel Most regulatory estoppel cases involve applicability of pollution exclusion A Florida professional corporation with offices in New Jersey and New York. Managing attorney, C.

29 Regulatory Estoppel Most regulatory estoppel cases involve applicability of pollution exclusion 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

30 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) 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

31 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. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

32 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). 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

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 nonexistent.

33 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 nonexistent. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

34 When policy provisions, limitations, or exclusions completely contradict the insuring provisions, insurance coverage becomes illusory. Illusory Coverage 34

35 Illusory Coverage Narrow coverage is not illusory coverage. Coverage is not illusory unless benefits would not be paid under any circumstances. 35

36 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. 36

37 Unconscionability Insured has burden of proving contract term is unconscionable. 37

38 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. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

39 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. 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 Lackawanna Ave., Suite 301, Totowa, NJ Sumner Ave., Seaside Heights, NJ NY office: 591 Midland Ave., Staten Island, NY

40 Questions Verne A. Pedro 40

42 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 Hanna & Plaut, LLP. All Rights Reserved.

43 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 Hanna & Plaut, LLP. All Rights Reserved.

44 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 Hanna & Plaut, LLP. All Rights Reserved.

45 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 Hanna & Plaut, LLP. All Rights Reserved.

46 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 Hanna & Plaut, LLP. All Rights Reserved.

47 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 Hanna & Plaut, LLP. All Rights Reserved.

48 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 Hanna & Plaut, LLP. All Rights Reserved.

50 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 Hanna & Plaut, LLP. All Rights Reserved.

51 Sophisticated Insureds Rule Should contra-preferentum rule apply to insurancecoverage 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 Hanna & Plaut, LLP. All Rights Reserved.

Presenting a live 90 minute webinar with interactive Q&A. Today s faculty features:

Presenting a live 90 minute webinar with interactive Q&A Insurance Policy Interpretation: Key Rules for Insurers and Insureds Leveraging the Doctrine of Reasonable Expectations, Contra Proferentem, Unconscionability