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Does Contra Proferentem Apply to the “Sophisticated Insured”?

On May 11, 2022, Justice Lebovits of the New York County Supreme Court issued a decision in Century Indemnity Company v. Brooklyn Union Gas Company, 2022 N.Y. Slip Op. 50388(U), holding that the doctrine of contra proferentem (construing ambiguous contract language against the drafter) “does not govern interpretation of insurance policies when the policyholder is sophisticated.”

A leading insurance treatise explains contra proferentem and its application to insurance disputes as follows:

The most frequently employed principle of interpretation . . . is contra proferentem, which roughly translated means “against the drafter” or “against the offeror.” This is the rule that an ambiguous provision in an insurance policy—one that is subject to two reasonable interpretations—is interpreted against the drafter. Since the drafter of an insurance policy is almost always the insurer, for practical purposes this translates into a rule that ambiguous policy language is interpreted in favor of coverage. Literally thousands of reported decisions have applied this rule.

Kenneth S. Abraham & Daniel Schwarcz, Insurance Law & Regulation 41 (6th ed. 2015).

In Brooklyn Union—a complex case concerning excess coverage for contributions to environmental remediation of the Gowanus Canal in New York City—Justice Lebovits declined to apply the contra proferentem doctrine to resolve an ambiguous policy provision concerning per occurrence limits, explaining:

The First Department has held that contra proferentem does not govern interpretation of insurance policies when the policyholder is sophisticated. (See Westchester Fire Ins. Co. v MCI Communications Corp., 74 AD3d 551, 551 [1st Dept 2010].)

In Westchester Fire, the parties contested on appeal whether contra proferentem should apply to the construction of an endorsement to the underlying insurance policy. Defendant MCI . . . argued that contra proferentem applied whether or not MCI was a sophisticated policyholder. Westchester Fire Insurance . . . argued the doctrine did not apply, on the ground that MCI was a large company that had a separate risk-management department and obtained insurance through the Johnson & Higgins brokerage.  The First Department agreed with Westchester Fire Insurance. The Court’s decision held in categorical terms that contra proferentem “would be inapplicable to this sophisticated policyholder.”

The contra proferentem principle focuses on the drafting of the contract and not the sophistication of the parties, per se.  Thus, reflexively denying the benefit of the doctrine to a “sophisticated insured”—without consideration of what if any role the insured may have played in the drafting of the policy—would seem improper.  Importantly, while the First Department’s brief decision in Westchester Fire does, as Justice Lebovits observed, appear to impose a categorial rule for sophisticated insureds, the earlier case it relied on for this proposition, Cummins, Inc. v. Atlantic Mut. Ins. Co., 56 A.D.3d 288 (1st Dep’t 2008), actually focused on the insured’s role in drafting the policy.  Id. at 290 (declining to apply contra proferentem because “the basic concept and terms originated with plaintiff [insured], [] plaintiff is sophisticated and was instrumental in crafting various parts of the agreement”) (emphasis added).  The Restatement of the Law of Liability rejects a “sophisticated insured” exception to contra proferentem, observing that “[b]y placing the responsibility for residual ambiguity on the party that is most in control of the language of the policy, the contra proferentem rule provides an important incentive to draft terms clearly regardless of the sophistication of the policyholder.”

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