Contra Proferentem Doesn’t Always Mean ‘Against the Insurer’

Insurance Law360
July 21, 2016

By Paul Sullivan and Jeffrey Gordon
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Despite best efforts, ambiguities are inevitable in contracts. The doctrine of contra proferentem shifts the risk of ambiguity to the party that drafted the contract. The doctrine is frequently applied against insurers where the policy at issue was provided by the insurer with no input from the insured. However, the doctrine is a basic principle of contract law and not merely limited to the world of insurance. Application of the doctrine against insurers makes little sense where the contract language at issue has been agreed to by sophisticated parties. And it makes no sense at all to apply the doctrine where the contract language at issue has been drafted by a broker working on behalf of an insured.

The Translation of Contra Proferentem is not “the Insurance Company Loses”

Contrary to what sometimes appears to be common understanding, the English translation of the Latin phrase contra proferentem is not “the insurance company loses.” See Jefferson Block 24 Oil & Gas LLC v. Aspen Insurance U.K. Ltd., 652 F.3d 584, 598 (5th Cir. 2011) (referring to doctrine as “the contra-insurer rule.”) It literally means “against the offeror.” U.S. Fire Insurance Co. v. General Reinsurance Corp., 949 F.2d 569, 573-74 (2d Cir. 1991). When the doctrine is applied, ambiguous provisions are to be construed against the drafter of a contract. Id.

The rationale is that “the party drafting an agreement should bear responsibility for any ambiguities in it, as ‘he is likely to provide more carefully for the protection of his own interests than for those of the other party.’” Dardovitch v. Haltzman, 190 F.3d 125, 141 (3d Cir. 1999) (citing Restatement (Second) of Contracts § 206 cmt. A).

All documents contain ambiguities. From the U.S. Constitution to local zoning ordinances, from complex corporate merger agreements to simple sales contracts, each produces disagreements and puzzlement over the meaning of terms. See Bayless Manning, “Hyperlexis and the Law of Conservation of Ambiguity: Thoughts on Section 385,” The Tax Lawyer, Fall 1982, p. 12. Insurance policies are no exception, whether drafted by the insurer, the insured or as a product of negotiation between the parties. An ambiguity is not necessarily the result of poor drafting. Poor drafting causes unnecessary confusion, but well-drafted documents may contain multitudes of ambiguities. Ambiguity in a document can be addressed by defining more terms, for example, but it cannot always be eliminated completely.

Application of Contra Proferentem does not Result in a Determination of the Parties’ Intent

The fundamental goal of contract interpretation is to determine the intent of the parties at the time of contract formation. Klapp v. United Insurance Group Agency Inc., 663 N.W.2d 447, 456 (Mich. 2003). This is a neutral inquiry. Courts examine the plain language of the contract first because it is the best way to determine the parties’ intent. If the plain language is determined to be ambiguous, courts often permit consideration of extrinsic evidence as to the parties’ intended meaning, as the next step in the construction of the contract. Morgan Stanley Group Inc. v. New England Insurance Co., 225 F.3d 270, 275-76 (2d Cir. 2000). Some courts have found that contract terms are ambiguous if reasonably susceptible to more than one interpretation. See e.g., New Castle City, Delaware v. National Union Fire Insurance Co. of Pittsburgh, PA, 243 F.3d 744, 750 (3d Cir. 2001). A term, however, is not ambiguous just because parties offer different interpretations of its meaning.

Contra proferentem is not a rule of contract interpretation. Klapp, 663 N.W.2d at 456. It does not aid the court in determining the meaning of the terms at issue or the intent of the parties. Id. Rather, it is a “rule of policy” that “directs the court to choose between two or more possible reasonable meanings” based on which party the interpretations favor. Id. (quoting 5 Corbin, Contracts (rev. ed., 1998), § 24.27, p. 306).

Many courts relegate the doctrine to a tiebreaker to be used only as a last resort. Schering Corp. v. Home Insurance Co., 712 F.2d 4, 10 n.2 (2d Cir. 1983) (“contra preferentem is used only as a matter of last resort, after all aids to construction have been employed but have failed to resolve the ambiguities ... [t]o conclude otherwise would require every ambiguously drafted policy to be automatically construed against the insurer”); United States Fire Insurance Co. v. General Reinsurance Corp., 949 F.2d 569, 573-74 (2d Cir.1991) (tracing evolution of contra proferentem rule and noting that New York law has become increasingly reluctant to apply the rule except “as a matter of last resort after all aids to construction have been employed but have failed to resolve the ambiguities,” and commenting that it is not appropriate to apply the rule where the contract is between two insurers and generally inappropriate if both parties are sophisticated) (internal citations omitted).

In some states, the doctrine is a more critical part of the analytical framework for contract construction. For example, in Iowa, contra proferentem is not considered a “tiebreaker,” but a strong rule providing that ambiguous language is to be “strictly construed against the drafter.” Shelby County State Bank v. Van Diest Supply Co., 303 F.3d 832, 838 (7th Cir. 2002) (noninsurance case). Similarly, in Delaware, ambiguity in an insurance policy is construed against the insurer without inquiry into the parties’ actual intent because an “insurance contract is one of adhesion.” New Castle, 243 F.3d at 750 (citation omitted).

Even in states like New York, where contra is viewed as a tiebreaker rule of “last resort,” it is often applied in the insurance context. Morgan Stanley, 225 F.3d at 275-76 (“[i]f the extrinsic evidence does not yield a conclusive answer as to the parties’ intent, a court may apply other rules ... including, the rule of contra proferentem, which generally provides that where an insurer drafts a policy any ambiguity . should be resolved in favor of the insured.”) (citation omitted). This is not a surprise as insurance forms are often provided by insurers without negotiation.

In the context of a true contract of adhesion, the doctrine’s allocation of risk to the party drafting the contract makes sense. The drafter controls the language and often has the expertise. While ambiguities are not always completely avoidable, the drafter can make efforts to protect its interests and avoid drafting errors. See Twin City Fire Insurance Co. v. Delaware Racing Association, 840 A.2d 624, 630 (Del. 2003) (“application of the contra preferentem rule is particularly appropriate in cases where ‘alternative formulations indicate that these provisions could easily have been made clear.’”) The other party is often unfamiliar with the subject matter and is not really in a position to negotiate in any event. There are generally only two options: take it or leave it. The public policy rationale for application of the rule is easy to understand where the insured is unsophisticated and bargaining power is unequal.

Contra Proferentem and the Sophisticated Insured

However, the application of the doctrine is not appropriate when the insured is a sophisticated entity with significant bargaining power. Large corporations typically have a risk management department and are often represented by brokers who provide underwriting expertise and their own bargaining power. For this reason, courts often apply a “sophisticated insured” exception to the doctrine. See Christopher R. Parr and Elizabeth V. Kniffen, "The Underwriter’s Role Against Contra Proferentem," Insurance Law360, Jan. 11, 2012. These courts do not construe the ambiguity against either party when the policy is negotiated by sophisticated parties. Westowne Shoes Inc. v. City Insurance Co., 82 F.3d 420 (Table), (7th Cir. 1996) (the insured’s “status as a sophisticated business entity rendered it at least equal to [the insurer], rendering inapplicable the rationale for the doctrine of contra preferentem”); Schering, 712 F.2d at 10 n.2 (“a number of courts have recognized that in cases involving bargained-for contracts, negotiated by sophisticated parties, the underlying adhesion contract rationale for the doctrine is inapposite”); Catlin Specialty Insurance Co. v. QA3 Financial Corp., 36 F. Supp. 3d 336, 342 (S.D.N.Y. 2014) (“[c]ontra proferentem does not apply where contracts are negotiated by sophisticated parties of equal bargaining power”); RTG Furniture Corp. v. Industrial Risk Insurers, 616 F. Supp. 2d 1258, 1266 n.6 (S.D. Fla. 2008) (contra proferentem “applies only where the insurance policy under consideration is drafted by the insurer”); Vought Aircraft Industries Inc. v. Falvey Cargo Underwriting LTD., 729 F. Supp. 2d 814, 824 (N.D. Tex. 2010).

Along the same line, courts have held that contra proferentem does not apply in disputes between insurance companies. See Employers Reinsurance Corp. v. Mid-Continent Casualty Co., 358 F.3d 757, 767 (10th Cir. 2004) (some courts decline to apply the rule to reinsurance contracts because “the parties typically have comparable bargaining power in negotiating the terms of their contracts.”)

Contra Proferentem and the Broker Form

Certainly, application of the doctrine of contra proferentem against insurers makes little sense where the parties to the insurance contract are both sophisticated. It is impossible to rationalize application of the doctrine when the insured (or its representative) proffered the contractual language at issue. Insureds have argued that contra should be applied against the insurer even where the form was “offered” by the insured’s representative, an insurance broker. However, shifting risk of contract ambiguity to an insurer where the broker provides the policy language is difficult to justify from either a public policy or legal analytical standpoint. As a matter of contract law, insurers should be treated on equal footing as any other company. In terms of public policy, each party to a contract should be encouraged to work toward a clear expression of the parties’ intent to avoid disputes down the road. Allocating drafting risk to the insurance company does not advance this cause at all when it did not provide the contract language.

Analytically, it stands to reason that when the insured drafts the policy, the doctrine of contra proferentem would apply against the insured, as the drafter of the instrument, for the same reasons it has been often applied against the insurer. The drafting party chooses the language, can take steps to protect its interests and should bear the consequences of any drafting errors. Instead, in states applying the sophisticated insured exception, courts typically decline to apply contra proferentem against the insured.

In states that do not apply the sophisticated insured exception, or where the rule is being applied as a rule of last resort after extrinsic evidence does not resolve the issue, contra proferentem should apply against the insured where the language at issue was provided by the broker, as the agent for the insured. We are unaware of any reported case that has specifically ruled this way. But, if the rationale underlying the doctrine of contra proferentem is correct, its application should work both ways in the analysis of the construction of an insurance contract. Ambiguities should be construed against the drafter, whether it was the insurer or the insured.

—By Paul Sullivan and Jeffrey Gordon, Zelle LLP

Paul Sullivan is a partner and Jeffrey Gordon is an associate in Zelle's Boston office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.