Contra Proferentem – Not Always: When In Doubt – Rule Against the Insurer

Contra Proferentem – Not Always: When In Doubt – Rule Against the Insurer

The doctrine of contra proferentem, which ordinarily guides courts to interpret ambiguous insurance contract language against the insurer-drafter and in favor of finding coverage for the insured policy holder, does not always apply. However, in a coverage dispute between two insurance companies the Minnesota Court of Appeal was called upon to interpret the policies and resolve the dispute in Economy Premier Assurance Co. v. Western National Mutual Insurance Co., A13-0621 (Minn.App. 11/25/2013) [enhanced version available to lexis.com subscribers].

FACTS

Luke Hylden was driving his father’s pickup truck when he collided with another car and injured the driver Sheila Smith. Hylden’s father had lent him the truck because the car Hylden usually drove, owned by his mother, was broken down. Hylden was insured under the policies that each of his parents had taken out for his and her respective vehicle. Hylden’s father’s insurer, Economy Premier, paid damages to the victim and then sued Western National, the insurer for Hylden’s mother, seeking a declaratory judgment for reimbursement stating that Western National, not Economy Premier, is responsible for the primary coverage. The district court interpreted the policy language and granted summary judgment to Western National.

Luke’s parents are divorced, and Luke, then 18 years old, was living with his mother. She owned two vehicles insured by Western National Mutual Insurance Company. Hylden was an insured driver under that policy, and he customarily drove his mother’s Ford LTD. But the LTD was inoperable in March 2009, pending repair. Hylden got permission from his father to drive his Ford F-150 pickup truck. Hylden’s father insured the F-150 under a policy issued by Economy Premier Assurance Company. Hylden was also an insured under that policy. After the collision, Smith negotiated with Economy Premier and Western National, settling on a total payment of $212, 000.

Economy Premier claims that Western National has the primary coverage for Hylden’s collision even though the pickup he was driving is expressly identified in Hylden’s father’s Economy Premier policy. It argued to the district court that the pickup constituted a “temporary loaned vehicle” as that term appears in Hylden’s mother’s Western National policy.

ANALYSIS

Economy Premier’s argument must overcome a general presumption against that automobile insurance typically follows the vehicle rather than the driver. Economy Premier issued the policy that covers the specific vehicle involved in the collision.

The first paragraph of the amended “other insurance” provision of Western National’s policy is nearly identical to the provision found in Western National’s standard policy, but the second paragraph, which includes the disputed term “temporary loaned vehicle,” is only present in a Minnesota-specific amendment to the policy. The Minnesota-specific amendment also defines “rental vehicle” and “temporary loaned vehicle,” terms included in the second paragraph of the amended “other insurance” provision. Western National’s policy therefore effectively creates two categories of vehicles for purposes of its “other insurance” provision in Minnesota insurance policies like the one issued to Hylden’s mother: those vehicles (such as “rental vehicles” or “temporary loaned vehicles”) for which Western National assumes primary liability coverage, and those vehicles (such as “temporary substitute” vehicles) for which it will provide only excess insurance coverage over the coverage provided by some other insurer.

Economy Premier urged that because Western National drafted an ambiguous “other insurance” provision. As a result Western National’s coverage is primary. The allegedly ambiguous provision states that Western National will provide primary coverage for any accident that occurs while an insured is driving a “temporary loaned vehicle” but only excess coverage if the insured is driving a “temporary substitute” vehicle. Economy Premier contends that the truck fits the definition of a “temporary loaned vehicle” because it was loaned to Hylden as a replacement for “your covered auto” being serviced or repaired.” Western National countered that the truck was instead a “temporary substitute” for Hylden’s “covered auto,” insisting that the “temporary loaned vehicle” category applies only to vehicles provided temporarily by repair shops while a covered vehicle is being serviced. Because the policy does not expressly support either position, Economy Premier maintains that an ambiguity arises and that the ambiguity must be resolved by applying the doctrine of contra proferentem.

Contra proferentem has a usual application. In the typical coverage contest between an insurer and its insured, ambiguous terms in the insurance policy are construed in favor of the insured. This rule of construction recognizes the disparity in bargaining power that typically exists between an insurer and an insured, particularly since insurance contracts are often contracts of adhesion. Likewise, undefined terms subject to multiple interpretations are interpreted in favor of coverage.

Contra proferentem is well established in contract and insurance law. The common law has recognized the doctrine for centuries before there was a United States. The doctrine’s basic rationale is that the proponent of a term is more likely aware of its possible ambiguities, especially when dealing with standard-form contracts. In the general context of contract law, contra proferentem has historically been regarded as a last resort, used only when other interpretive methods have failed to reveal the parties’ intent.

Economy Premier gave the court no reason to conclude that Minnesota law is committed to construing ambiguous contract terms against the insurer to favor a different insurer who is a stranger to the contract. The court of appeal found no Minnesota case applying the doctrine in a suit between two insurers competing to avoid primary coverage. The court of appeal concluded that it was convinced that applying the doctrine here would remove it from its primary rationale.

Contra proferentem, in Minnesota, appropriately does not apply in a coverage suit between insurers.

The language of the second paragraph of the amended “other insurance” provision, which introduces the term “temporary loaned auto,” appears to account for the requirement under Minnesota law that the drivers of vehicles on loan must maintain liability insurance for vehicles that they rent or vehicles they borrow from repair garages, specifically while their primary vehicle is being repaired.

The “other insurance” provision and definition of “temporary loaned vehicle” are both found only in the state-specific endorsements to the policy rather than in the body of the main contract. This distinction is specific to the Minnesota endorsement. Western National rightly highlights the context in which the term “temporary loaned vehicle” appears. The term is paired with and follows “rental vehicles” in the provision detailing vehicles for which Western National offers primary coverage. The use of the word “customer” in the definition of a “temporary loaned vehicle” also belies Economy Premier’s reading of the contract. “Customer” in this context refers contextually to the individual “who is provided the replacement vehicle,” and the policy defines a vehicle as temporarily loaned when it is “a replacement for ‘your covered auto’ being serviced or repaired regardless of whether the customer . . . is charged a fee for the use of such vehicle.” A child, borrowing a car from his father, can never be considered a “customer” of his father.

Reading Western National’s entire policy from a neutral perspective convinced the court of appeal that Hylden was not driving a “temporary loaned vehicle” when he collided with Smith and that Economy Premier, not Western National, is obligated to provide primary coverage for Smith’s damages.

ZALMA OPINION

Courts will usually apply contra preferentem to provide coverage an insurer did not intend to provide to aid an insured if the court could find ambiguity in the language. Using the doctrine is fair because of the uneven bargaining power of the insured and the insurer. However, the reason for the doctrine of contra preferentem disappears when the dispute is between two insurers, one of whom is a stranger to the contract.

Insurers should keep their promises and try not to pass their liability on to another insurer unless there is clear and unambiguous policy language and clear and unambiguous facts. They did not exist here.

    By Barry Zalma, Attorney and Consultant

Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.

Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.

Mr. Zalma can be contacted at Barry Zalma or zalma@zalma.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.

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