Most practitioners within the insurance coverage/recovery practice generally understand the concept of the anti-drafter rule known as contra proferentem. La. Civ. Code art. 2056. But some policyholder counsel have an overly optimistic view of the value of an ambiguity argument in a coverage contest. To understand the issue fully, the basic rules that apply to contract interpretation should be reviewed.
An insurance policy may not be interpreted in an unreasonable or strained manner under the guise of contractual interpretation to enlarge (or restrict) its provisions beyond what is reasonably contemplated by unambiguous terms or to achieve an absurd conclusion. Peterson v. Schimek, 1998-1712 (La. 03/2/99), 729 So. 2d 1024, 1029 (citing Valentine v. Bonneville Ins. Co., 1996-1382 (La. 03/17/97), 691 So. 2d 665, 668 and Reynolds v. Select Properties, Ltd., 93-1480 (La. 4/11/94), 634 So. 2d 1180, 1183). Indeed, the rules of construction do not authorize a perversion of the words or the exercise of inventive powers to create an ambiguity where none exists or the making of a new contract when the terms express with sufficient clearness the parties’ intent. When the words of an insurance policy are clear and explicit and lead to no absurd consequences, courts must enforce the contract as written and may make no further interpretation in search of the parties’ intent. La. Civ. Code art. 2046; Peterson, 729 So. 2d at 1028, citing Central La. Elec. Co. v. Westinghouse Elec. Corp., 579 So. 2d 981, 985 (La. 1991). Further, the fact that one party can, in hindsight, create a dispute about the meaning of a contractual provision does not render that provision ambiguous. The clear meaning at the time the contract was entered into must be honored. See Lloyd’s of London v. Transcontinental Gas Pipe Line Corp., 101 F.3d 425, 429-30 (5th Cir. 1996).
“While insurance policies will be strictly construed against the party writing them and while exclusions, if ambiguous, will be construed so as to provide coverage, tortured constructions which seize on every word as a possible source of confusion will be dismissed as mere sophistry.” Bernard v. Chrysler Ins. Co., 1998-1846 (La. App. 3d Cir. 3/24/99), 734 So. 2d 48, 53 (quoting Authement v. Security Indus. Ins. Co. of Donaldsonville, 401 So. 2d 402, 403 (La. App. 1st Cir. 1981)). A contract is considered “ambiguous” only when it is uncertain as to the parties’ intentions and is susceptible to more than one reasonable meaning under the circumstances that can be articulated, after applying established rules of construction.
As shown above, the ambiguity argument is not as “wide open” as some would believe. Yet the policyholder does have some advantages.
First, an insurer is not entitled to the benefit of an ambiguity in a policy it drafted when the addition of a few simple words would have eliminated the ambiguity. See, e.g., Bell v. Farmer’s Ins. Group, 1993-2067, (La. App. 4th Cir. 04/14/94), 635 So. 2d 1305, 1309 (“If it was INA’s intent to provide omnibus coverage only to those who operated vehicles actually leased by LLNL, it could have easily stated so in its definition of ‘hired automobiles.’”). This is especially true in the context of exclusions. Cochran v. B.J. Services Co. USA, 302 F.3d 499, 503 (5th Cir. 2002) (Once a policyholder places its claim within the insuring agreement, the insurance company bears the “heavy” burden of proving the applicability of an exclusion). Consequently, when the insurer is forced to use judicial gloss to reinforce its position or attempts to read words into the policy, there is a powerful argument for ambiguity. Relatedly, if a policy form is commonly available in the market and the insurer fails to use it in his policy, the insurance company faces an uphill battle to explain why the provision it relies on has the same effect.
Second, in determining whether an undefined term in an insurance policy is ambiguous, Louisiana law requires an inquiry into “the context in which [the term] is used and the circumstances surrounding the particular insurance contract.” See, e.g., Commercial Union Ins. Co. v. Advance Coating Co., 351 So. 2d 1183, 1186 (La. 1977) (determining the meaning of the word “water-borne” in an insurance exclusion by looking at “the context of the entire policy” and the surrounding circumstances, including the “nature of the equipment insured” and the risk of loss involved). That is, an exclusion can be unambiguous under some facts and ambiguous under others. Consequently, whether an exclusion is ambiguous must be determined as applied to the circumstance of the loss.
Third, many courts do not permit insurers to interpret their exclusions in such a way as to provide illusory coverage. Boston Old Colony Ins. Co. v. Tiner Assoc., Inc., 288 F.3d 222, 227-28 (5th Cir. 2002). Therefore, if the insurer’s interpretation of a provision would effectively “gut” insurance protection for the policyholder’s usual business, there may be an opportunity to use the illusory-coverage argument.
Fourth, the policyholder need only state one reasonable interpretation of a policy provision in order to prevail on that point. Even if the insurance company also has a reasonable position, the policyholder’s reasonable interpretation will prevail. McAvey v. Lee, 260 F.3d 359, 365 (5th Cir. 2001) (“[E]ven if we accept [the insurer’s] contractual interpretation as a reasonable choice, we are constitutionally required, as Erie held, to apply Louisiana law, which here mandates that we resolve the ambiguity by adopting the other reasonable interpretation that favors coverage for the benefit of the insured.”); see also W.S. McKenzie, H.A. Johnson, 15 La. Civ. Law Treatise, Insurance, and Practice, § 1:4 (4th ed. 2006) (“If the insurance policy is susceptible of two or more reasonable interpretations, then any such ambiguity must be construed in favor of the insured and against the insurer.”).
And finally, the reasonable expectations doctrine provides that under certain circumstances a policy will be interpreted according to what a reasonable policyholder would expect. But this doctrine is a tertiary aid to interpreting insurance policies – a tiebreaker of sorts. It is not a primary argument or a knockout punch, and it is generally imprudent to rely on it exclusively. Doerr v. Mobil Oil Corp. 2000-0947 (La. 12/19/00), 774 So. 2d 119, 127-28.
In summary, a policyholder has a decided – but not outsized – advantage in a policy interpretation contest. The keys to success for the policyholder are to demonstrate “reasonable” interpretations and take advantage of the nuances of Louisiana law to obtain the best result.