In insurance litigation, insureds often argue that, if a provision in an insurance policy is found to be ambiguous, that ambiguity should be resolved in favor of the insured, and against the insurer that drafted the contract, under the doctrine of contra proferentem. However, as demonstrated by the recent case of Catlin Specialty Ins. Co. v. QA3 Fin. Corp., 2014 U.S. Dist. LEXIS 91092 (S.D.N.Y. July 2, 2014), courts in many jurisdictions will consider both the availability of extrinsic evidence of the parties’ intent with respect to the terms of the contract, as well as to the sophistication of the parties, before applying contra proferentem as a last resort.
In Catlin Specialty, the insurer brought a declaratory judgment action against its insured, seeking a ruling concerning the correct application of the liability policy’s limits. The court denied the parties’ cross-motions for summary judgment, and a four-day trial was held, during which extrinsic evidence of the parties’ intent, including emails and prior policies, was presented. At the close of evidence, the insured QA3 requested that the court instruct the jury on contra proferentem. The court refused, and the jury returned a verdict for the insurer.
QA3 moved for a new jury trial pursuant to Federal Rule 59, arguing that the court should have instructed the jury on contra proferentem. The court denied the motion, and in so-doing, provided useful guidance on the application of the doctrine in New York. First, the court noted that the “fundamental, neutral precept of contract interpretation is that agreements are construed in accord with the parties’ intent.” Given that, should a policy be found to be ambiguous, or susceptible of two reasonable interpretations, a court should first consider extrinsic evidence that “may enable the fact finder to resolve the ambiguity.” It is only in cases where there is no extrinsic evidence, or where the extrinsic evidence will not resolve the ambiguity, that the issue become a question of law, which triggers the application of contra proferentem. In this case, because there was “ample extrinsic evidence from which the jury could divine the parties’ intent,” the court found that it was proper to not instruct the jury on contra proferentem.
In addition to the availability of extrinsic evidence, the court also noted that contra proferentem did not apply in this case because of the sophistication of the insured. Specifically, the court found that QA3 was a “sophisticated party that negotiated the terms of the insurance policy,” and that contra proferentem “does not apply where contracts are negotiated by sophisticated parties of equal bargaining power.”
This case provides a useful reminder that insurers would be well-advised to consider the availability of extrinsic evidence, and the sophistication of the insured, to avoid application of contra proferentem in coverage disputes.