Contra proferentem is a foundational legal principle with particular importance in insurance law. It mandates that any ambiguities in an insurance policy are construed against the insurer and in favor of the insured. The doctrine recognizes that insurance policies generally are contracts of adhesion, in which the insurer wields the “power of the pen,” and the insured is invited to accept the terms of the pre-written agreement with little to no alteration. Contra proferentem mitigates the inherent inequality of an arrangement where insurers generally have sole drafting authority and insureds, often with limited bargaining power, must accept the insurers’ terms as written. By resolving ambiguities in those terms against the insurer, courts are able to counterbalance some of this inequity and find coverage for policyholders.
Contra proferentem is a powerful tool for policyholders looking to establish coverage. Where an insurer has denied coverage under an ambiguous provision—i.e., one capable of more than one reasonable interpretation—the doctrine directs courts to adopt the interpretation that favors coverage. That is, if the insured offers a reasonable interpretation of a disputed policy provision that would provide coverage, the court must find in their favor even if the insurer’s interpretation is arguably the more “accurate reflection of the parties’ intent” (AIU Ins. Co. v. Superior Ct.) There are hundreds of court decisions across the country to this effect.
It is no surprise that insurers clamor for exceptions to contra proferentem, and with some success. For example, in ECB USA, Inc. v. Chubb Ins. Co. of N.J., the U.S. Court of Appeals for the Eleventh Circuit, applying New Jersey law, declined to apply contra proferentem to interpret an insurance policy in favor of a “sophisticated” insured, holding, “the rules tending to favor an insured that has entered into a contract of adhesion are inapplicable where, as here, both parties are sophisticated commercial entities with equal bargaining power.” Courts in other jurisdictions have articulated similar exceptions, with varying explanations as to what qualifies as a sufficient level of “sophistication.” For example, in AIU Ins. Co. v. Superior Ct., the Supreme Court of California, applying its own law, held that “where the policyholder does not suffer from lack of legal sophistication or a relative lack of bargaining power, and where it is clear that an insurance policy was actually negotiated and jointly drafted, we need not go so far in protecting the insured from ambiguous or highly technical drafting.” Similarly, in Six Flags, Inc. v. Westchester Surplus Lines Ins. Co., the U.S. Court of Appeals for the Fifth Circuit, applying Louisiana law, held that “the presumption does not apply where the insured is a sophisticated commercial entity that itself drafts or utilizes its agent to secure desired policy provisions.” And, in Eagle Leasing Corp. v. Hartford Fire Ins. Co., the Fifth Circuit, applying Missouri law, declined to apply contra proferentem “in the commercial insurance field when the insured is not an innocent but a corporation of immense size, carrying insurance with annual premiums in six figures, managed by sophisticated business men, and represented by counsel on the same professional level as the counsel for insurers.”
To be sure, other courts have recognized the danger of setting precedents about the interpretation of standard policy clauses based on the supposed “sophistication” of a corporate insured when the same terms will be applied later against a broader class of insurance consumers. As the Washington Supreme Court wrote in Boeing Co. v. Aetna Casualty & Surety Co.:
The critical fact remains that the policy in question is a standard form policy prepared by the company’s experts, with language selected by the insurer. The specific language in question was not negotiated, therefore, it is irrelevant that some corporations have company counsel. Additionally, this standard form policy has been issued to big and small businesses throughout the state. Therefore it would be incongruous for the court to apply different rules of construction based on the policyholder because once the court construes the standard form coverage clause as a matter of law, the court’s construction will bind policyholders throughout the state regardless of the size of their business.
More concerning, however, are attempts by insurers to avoid the application of contra proferentem by explicitly contracting out of it. In some policies, insurers add provisions specifically repealing any policy interpretation presumption in favor of either party. Below is an example:
The provisions, stipulations, exclusions and conditions of the Policy are to be construed in an evenhanded fashion between the Insureds and us. Where the language of this Policy is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant provisions, stipulations, exclusions and conditions without regard to authorship of the language and without any presumption or arbitrary interpretation or construction in favor of either the Insureds or us.
While it is a basic tenet of contract law that parties can contract out of almost any default rule, in the context of insurance policies, the contractual waiver of contra proferentem is particularly troubling. Contra proferentem combats the adhesive nature of insurance contracts by protecting insureds from the harmful outcomes of unclear language which they had no hand in drafting. The reader may note the inherent unfairness of allowing insurers to easily avoid its application by foisting a contractual waiver on its insured—buried somewhere in the small print of a lengthy policy—the same adhesive contract against which the doctrine is meant to protect.
Whether courts will enforce such waivers in an insurance contract remains to be broadly tested, though there is some case law to suggest that certain courts may uphold such contractual waivers in certain contexts. For example, in Hudson Spec. Ins. Co. v. N.J. Transit Corp., while ultimately determining that the supposed ambiguity could be resolved simply by reading two purportedly conflicting provisions in tandem, the U.S. District Court for the Southern District of New York appears to accept the validity of the policy’s express waiver of contra proferentem with respect to its arbitration clause. “To begin with,” the court wrote, “the arbitration clause states in no uncertain terms that ‘where the language of this Policy is deemed to be ambiguous or otherwise unclear, policy construction or interpretation will not be presumed to favor any party; no liability or burden will be assigned or assumed by the drafting of this Policy.’”
Although negotiating power may be limited, policyholders should work diligently with their brokers and legal counsel during underwriting to identify and remove any clauses attempting to waive contra proferentem or otherwise limit the insured’s interpretative protections, or at least limit the waiver to any terms that are actually negotiated. Where this is not possible, brokers and policyholder-side legal counsel can also help document the insurer’s positions on the applicability of key provisions during the underwriting process, providing crucial evidence in the event of a disputed claim.
[View source.]
