Volume 23 Number 1
March/April 2014
www.andersonkill.com
Insurance Policy Construction Principles:
Your Defense Against Purposeful
Ambiguities
nsurance policies
contain both defined
and undefined terms.
As the drafter of your
insurance policy, your
insurance company has
Allen R.
Anna M.
Wolff
Piazza
likely defined a term
when it finds it advantageous to do so, and
may leave other terms undefined and purposefully vague. Policy construction principles have
evolved to protect the policyholder from the
insurance company’s maneuverings in this
regard. Understanding these principles will
prove critical when your insurance company
attempts to benefit from an undefined term,
especially if that term appears in an exclusion.
How Do I Know if a Policy Term is
Ambiguous?
Generally, a policy term is ambiguous if it is
susceptible to two or more reasonable interpretations. Ambiguities can arise in insurance policies
for a number of reasons. Some courts have held
that an undefined term is necessarily ambiguous.
Other courts have held that undefined terms are
not automatically, but can be, or are more likely
to be, ambiguous. Even policy terms that have a
clear meaning may become ambiguous in certain
factual contexts.
How Do Courts Interpret Ambiguous
Policy Terms in My Favor?
Abiding by the principle of contra proferentum,
courts construe ambiguous terms in an insurance
policy against the insurance company and in
favor of the policyholder. This rule derives from
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the fact that insurance policies almost always
constitute adhesion contracts comprised of
prewritten forms with non-negotiable language
imposed by the insurance company.
Contra proferentum applies with even greater
force when an insurance company leaves a term
undefined. As one court
stated, “[W]hen an
insurer fails to define Your insurance
a term in a policy, . . . the
company has likely
insurer cannot take the
position that there should defined a term
be ‘a narrow, restrictive
interpretation of the when it finds it
coverage provided.’” advantageous
State Farm Fire & Cas.
Co. v. CTC Dev. Corp., to do so, and
720 So.2d 1072, 1076 (Fla. may leave other
1998). This rule proves
especially true where terms undefined
an insurance company
and purposely
leaves a term undefined in an exclusionary vague.
clause. See Krombach v.
Mayflower Ins. Co., 827
S.W.2d 208, 210 (Mo. 1992) (“[a]mbiguous provisions of a policy designed to cut down, restrict,
or limit insurance coverage already granted, or
introducing exceptions or exemptions must be
strictly construed against the insurer”); Wojtunik
v. Kealy, No. CV-03-2161-PHX-PGR, 2011 U.S.
Dist. LEXIS 36229, at *23 (D. Ariz. Mar. 31, 2011)
(rule of strict construction in favor of coverage
“applies with even greater force where an ambiguity affects an exclusionary clause”).
“
“
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By Allen R. Wolff and Anna M. Piazza
“Insurance Policy Construction Principles” continued on next page
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Anderson Kill Policyholder Advisor Courts apply the rule of contra proferentum
even more strictly when the ambiguity occurs
in an exclusion because the insurance company,
not the policyholder, bears the burden of proof to
show that the exclusion applies. “Any exclusion
sought to be invoked by the insurer defendant
will be liberally construed in favor of the insured
and strictly construed against the insurer unless
same is clear and unequivocal.” Travelers Indem.
Co. v. Whalley Constr. Co., Inc., 287 S.E.2d 226, 229
(Ga. Ct. App. 1981). See also State Farm Mut. Auto
Ins. Co. v. Jacober, 514 P.2d 953, 962 (Cal. 1973)
(“A layman attempting to interpret an insurance
policy . . . is not likely to have the legal sophistication to deduce what an insurance company
is attempting to accomplish by an ambiguous
exclusionary clause; it is on just such grounds
that our cases have uniformly required that exclusions be ‘conspicuous, plain and clear.’”). “[T]he
burden rests upon the insurer to phrase . . . exclusions in clear and unmistakable language.” State
Farm Mut. Auto Ins. Co., 514 P.2d at 958. “[S]o
long as coverage is available under any reasonable interpretation of an ambiguous clause, the
insurer cannot escape liability.” Id. at 954. Unless
the insurance company meets that burden, it
must extend coverage to the policyholder.
Additionally, contra proferentum applies with
great force to ambiguous exclusions that the
insurance company includes in the policy by
way of endorsement. This principle is important;
endorsements often deviate from standard form
policy language and are tailored to the particular
policyholder’s situation. See San-Nap-Pak Mfg.
Co, Inc. v. Firemen’s Ins. Co., 47 N.Y.S.2d 542, 546,
aff’d, 51 N.Y.S.2d 754 (N.Y. City Ct. 1944) (an
ambiguous endorsement “which was drawn by
the defendant [and “is typewritten unlike the
stereotyped printed language of the policy in
the main”] should be liberally construed in favor
of the plaintiff and strictly construed against
defendant . . . ”).
Where an insurance policy provision is ambiguous, the court — applying contra proferentum —
may adopt any interpretation in favor of coverage
that is reasonable, even if that is not the only
reasonable interpretation. As one court noted,
“[E]ven assuming that the insurer’s suggestions
are reasonable interpretations which would bar
recovery by the claimants, we must nonetheless
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affirm the trial courts’ finding of coverage so
long as there is any other reasonable interpretation under which recovery would be permitted
in the instant cases.” State Farm Mut. Auto Ins.
Co., 514 P.2d at 958-59. “If semantically permissible, an insurance contract will be given such
construction as will
fairly achieve its object
of securing indemnity Where an insurance
to the insured for the
losses to which the policy provision
insurance relates.” Id. at
is ambiguous,
959. See also Champion
Int’l Corp. v. Continental the court —
Cas. Co., 400 F. Supp.
978, 980-981 (S.D.N.Y. applying contra
1975), aff ’d, 546 F.2d proferentum
502 (2d Cir. 1976) (“if
a policy can be reason- — may adopt any
ably construed in favor
interpretation in
of the position asserted
by the insured, he is favor of coverage
entitled to recover”).
To determine the that is reasonable,
meaning of an ambig- even if that is not
uous term, a court will
consider the meaning the only reasonable
that a reasonable person interpretation.
— and not an insurance
expert or an attorney
— would expect it to have. Cincinnati Ins. Co. v.
Davis, 265 S.E.2d 102, 105 (Ga. Ct. App. 1980).
Furthermore, in construing an insurance policy,
courts will consider what a reasonable insured
would expect to be covered. Id.
“
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“Insurance Policy Construction Principles” continued from p1
March/April 2014
How Do These Principles Apply in the
D&O Context?
An insurance company cannot exploit an
ambiguity in its insurance policy or an unresolved factual issue to deny coverage under a
D&O policy. Once the policyholder presents the
insurance company with a claim that fits within
the policy’s insuring agreement, the insurance
company must extend coverage and pay for
the costs of defending the directors/officers/
company until, if ever, it is established that the
claims are not covered by the policy. See Fleming
Fitzgerald & Assocs. v. U. S. Specialty Ins. Co., No.
07-1596, 2008 U.S. Dist. LEXIS 76613, *28-29 (W.D.
Pa. Sept. 30, 2008).
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March/April 2014
Anderson Kill Policyholder Advisor
In situations where it cannot be known
whether the exclusion applies until late in a case
(i.e., instances where a policy excludes coverage
for fraud or for profit to which the policyholder
was not entitled), the insurance company must
extend coverage to the policyholder, often
including the advancement of defense costs, until
the issue is fully and finally resolved — even to
the point of a final, non-appealable result. See
Great Am. Ins. Co. v. Gross, C.A. No. 3:05CV159,
2005 U.S. Dist. LEXIS 8003 (E.D. Va. May 3, 2005).
If the unresolved issue is ultimately determined
in the insurance company’s favor, the insurance
company’s recourse is to seek recovery from the
policyholder of those sums that need not have
been advanced. Indeed, insurance companies
often include clawback provisions in their policies in contemplation of just such a situation. No
reason would exist to include such a provision
unless the insurance company knew that it had
an obligation to extend coverage until the final
adjudication.
Allen R. Wolff is a shareholder in Anderson Kill’s New York
office. Mr. Wolff’s practice concentrates in construction litigation,
insurance recovery, and the nexus between the two, as well as in
complex commercial litigation.
(212) 278-1379
[email protected]
Anna M. Piazza is a shareholder in Anderson Kill’s New York
office. Ms. Piazza’s practice concentrates in insurance recovery
and commercial litigation.
(212) 278-1307
[email protected]
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we inform you that any U.S. federal tax advice
contained in this communication (including
any attachments) is not intended or written to
be used, and cannot be used, for the purpose
of (i) avoiding penalties under the Internal
Revenue Code or (ii) promoting, marketing,
or recommending to another party any transaction or matter addressed herein.
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A D&O’s Success on “the Merits
or Otherwise” Should Eliminate
Insurance Company Attempts to
Recoup Defense Costs
By William G. Passannante
D
&O liability insurance is specifically
designed to protect individual directors
and officers from crushing defense
costs related to claims made against them. The
D&O liability insurance protection works alongside the usual “corporate indemnity” protection
available to many directors and officers.
Some insurance companies have argued
that “improper” advancement of defense costs
by the corporation pursuant to corporate indemnity statutes somehow permits the insurance
company to “recoup” defense costs they previously advanced by re-litigating the policyholder’s entitlement to defense costs even after a
successful defense. In one recent case, the
insureds under a D&O liability insurance policy
asserted that under Delaware law, since their
defense had been “successful on the merits or
otherwise,” that corporate indemnification was
beyond being second-guessed by the D&O
liability insurance company. Order Affirming
Commissioner’s Report and Recommendation,
HLTH Corporation v. New Hampshire Ins. Co.,
C.A. No. 07C-09-102 RRC (July 23, 2013). This
inquiry involves a determination of whether
the advancement of defense costs would be
“permissive indemnification” as opposed to
“mandatory indemnification” under corporate
indemnification statutes.
A policyholder may request a threshold legal
determination regarding whether the D&Os
were entitled to mandatory indemnification
because they have “been successful on the
merits or otherwise in defense of” the underlying
matter within the meaning of Section 145(c).
Del. Code Ann. tit. 8, § 145(c) (2008). Under
Section 145 and established Delaware practice,
that determination is to be made by the court as
a threshold matter, prior to discovery, because
“[t]his approach . . . avoids, where possible,
prolonged and expensive discovery into the
facts behind a particular dismissal, settlement,
“D&O’s Success” continued on next page
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Anderson Kill Policyholder Advisor March/April 2014
“D&O’s Success” continued from p3
or plea.” Hermelin v. K-V Pharmaceutical Co., 54
A.3d 1093, 1111 (Del. Ch. 2012). Thus, if the court
determines that the D&Os are entitled to mandatory indemnification, then none of the extensive
litigation on permissive indemnification issues is
necessary. Under section 145(c), “Any result other
than conviction must be considered success in a
criminal action.” Merritt-Chapman & Scott Corp.
v. Wolfson, 321 A.2d 138, 141 (Del. Super. 1974).
Thus, the phrase “successful on the merits or
otherwise” permits indemnification if a defendant
is successful on a “technical” defense even if that
does not involve the defendant being adjudged
“innocent.” See, e.g., Perconti v. Thornton Oil Corp.,
2002 WL 982419, at *4 (Del. Ch. May 3, 2002). In a
situation in which the D&Os were acquitted, or had
charges dismissed — even on supposedly “technical grounds” — Delaware law mandates indemnification of their defense costs, and the insurance
company argument that the corporation “improperly”
advanced defense costs must fail.
Moreover, if a D&O is “successful on the merits
or otherwise” under section 145(c), the D&O is
entitled to indemnification without the necessity
of any analysis of the requirements of section
145(a). See, e.g., Perconti at *3 (“[i]f the former
officer is ‘successful on the merits or otherwise’ in a
proceeding described in Section 145(a), then he is
entitled to indemnification regardless of whether or
not he acted in good faith or in what he perceived
to be the best interests of the corporation.”) Green
v. Westcap Corp. of Delaware, 492 A.2d 260, 265
(Del. Super. 1985); Hermelin at 1114 (contrasting
requirements of section 145(a) and 145(c)); Donald
J. Wolfe, Jr. & Michael A. Pittenger, Corporate and
Commercial Practice in the Delaware Court of
Chancery § 8.02[a] [2] (2012).
States with corporate indemnification statutes
that largely favor the ability of individual D&O’s to
protect themselves via advancement of defense
costs also may put to rest recent insurance company
arguments regarding attempted “recoupment” of
defense costs.
William G. Passannante is co-chair of Anderson Kill’s Insurance
Recovery Group and a shareholder in the firm’s New York office. A
leading lawyer for policyholders in the area of insurance coverage,
Mr. Passannante has appeared in cases throughout the country
and has represented policyholders in litigation and trial in major
precedent-setting cases.
(212) 278-1328
[email protected]
Anderson Kill’s Policyholder Advisor newsletter is published bimonthly by Anderson Kill. The newsletter informs
clients, friends and fellow professionals of developments in insurance coverage law. The articles appearing in this
newsletter do not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon
engagement with respect to specific factual situations. If you require more information, legal advice or an opinion with
respect to a specific situation, please contact our editorial board:
Editorial
Insurance Recovery Group Chairs
Finley T. Harckham, International Editor
(212) 278-1543 or [email protected]
William G. Passannante, Co-Chair
(212) 278-1328 or [email protected]
Mark Garbowski, Editor-in-Chief
(212) 278-1169 or [email protected]
Robert M. Horkovich, Chair
(212) 278-1322 or [email protected]
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