Reed Smith on Contra Proferentem and the Not So "Hapless" Sophisticated Insured: An Analysis of Farmers Automobile Insurance Association v. St. Paul Mercury Insurance Company

Under the doctrine of contra proferentem, insurance policy ambiguities are construed against the insurer, in favor of coverage. In Farmers Automobile Insurance Association v. St. Paul Mercury Insurance Company, the Seventh Circuit, in interpreting Illinois law, applied the rule of contra proferentem, but questioned the validity of the rule when applied to a sophisticated commercial entity. This commentary examines Farmers, and discusses several reasons that contra proferentem should remain applicable to sophisticated commercial entities.
Farmers bought an insurance policy from St. Paul that covered employment wrongful acts, which was defined to include any breach of duty in connection with the unlawful treatment of an employee. The policy contained an exclusion for, “any [] violation of the Fair Labor Standards Act... [or] other similar provisions of any federal, state or local [] law...” (emphasis added). Farmers alleged that coverage was triggered when its claims adjustors filed a class action in state court, seeking overtime pay pursuant to the Illinois Minimum Wage Law. St. Paul refused coverage on the basis that the class action did not trigger coverage under the policy’s exclusion.
Although Farmers used the word “similar” in its own policies, it argued, that the word was vague, and should be construed against St. Paul as the insurer under contra proferentem.
The Seventh Circuit, in an opinion written by Judge Richard A. Posner, stated that the rationale in favor of contra proferentem is “feeble,” when it comes to a sophisticated commercial entity. The court criticized the Illinois Supreme Court’s opinion in Outboard Marine Corporation v. Liberty Mutual Insurance Company, which had declined to limit contra proferentem to commercially unsophisticated individuals. 
Sophisticated policyholders should be aware that case law, such as Farmers, may make the application of contra proferentem increasingly more difficult. But there are a number of considerations supporting application of the doctrine to sophisticated commercial entities. Specifically, contra proferentem should apply to sophisticated policyholders because otherwise policy ambiguities nearly always benefit insurers, who maximize profits by delaying the paying of claims. Construing ambiguities in favor of coverage makes it difficult for the insurer to exploit ambiguities in policies, it combats strategic ambiguity, facilitates quicker resolution of the coverage disputes, and encourages a more uniform body of law.
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