Disputes over insurance coverage often revolve around the meaning of specific words used in a policy. Norwegian Hull Club vs North Star Fishing Co.currently pending in the US District Court for the Northern District of Florida has a twist – it revolves around the meaning of a space.
Last month, US District Judge Robert L. Hinkle ruled that neither the policyholder nor the insurer was entitled to summary judgment regarding the interpretation of a critical policy provision, arguing that a blank space rendered the clause ambiguous. But as the case now goes to trial, the most interesting part of the district court’s opinion might be its own blank space: contra proferentemthe argument it doesn’t address.
The argument and the decision
In 2016, North Star Fishing purchased a contractor risk policy to cover the construction of a large fishing vessel in Panama City, Florida. Almost three years later, with the ship nearing completion but not yet completed, Hurricane Michael devastated the Florida Panhandle, including Panama City. North Star’s ship, under construction, suffered significant damage that reportedly required more than $100 million to restore the ship to its pre-hurricane condition.
When North Star asked its insurers to reimburse the cost of repairing the ship, the magnitude of those damages became a sticking point. North Star’s policy insured the ship for an agreed value of $77 million. The policy generally incorporates by reference a set of form conditions, the American Institute’s Builder’s Risks Clauses.
These provisions include a price escalation clause designed to adjust the value of the insured property in the event of changes in labor or material costs. However, when the insurers issued the policy, they left a key field in the clause blank:
In the event of an increase or decrease in the cost of labor or materials, or in the event of a change in the specifications or design of the ship… the agreed value will be adjusted accordingly, but any increase is limited to ___________________ per cent of the provisionally declared agreed value and the sum insured will be proportionate adjusted[.]
North Star and its insurers interpret this gap very differently. According to the insurers, the empty field invalidates the price escalation clause under New York law,1 Capping North Star’s potential recovery at the agreed value of $77 million with no upward adjustment. However, according to North Star, the blank simply means that the escalation clause has no upper limit, allowing North Star to invoke the clause and reimburse its full repair costs.
After paying the policy’s initial limits, the insurers filed suit in a Florida federal court, seeking a declaratory judgment that they were not required to pay more. Both the insurers and the policyholder sought summary judgment, each arguing that the escalation clause clearly supported their position.
The court rejected both arguments, instead finding the escalation clause ambiguous.2 Instead of clarifying the ambiguity, the court has started a process in which both sides will present external evidence of the intended meaning of the escalation clause – including its all-important blank space.
The Missing Problem
Most states apply the rule contra proferentem interpret ambiguous language in an insurance policy. Under the majority version of the rule, ambiguous policy language is simply ruled against the insurer and in favor of the cover.
New York isn’t an outlier, since contra proferentem has been a cornerstone of New York insurance law since at least the 1880s.4
In New York, insurance policies are generally subject to standard rules of contract interpretation. And when reviewing other types of contracts, New York courts may consider evidence of the parties’ intent, such as: B. Details surrounding contract negotiations to give meaning to ambiguous language.
But such gathering of external evidence has no place in interpreting an insurance policy. When it comes to insurance, either the policy is clear and must be enforced as written, or the policy is ambiguous and must be interpreted in favor of the policyholder.3
Consistent with these principles, one would expect the court to rule in North Star’s favor and construe the void against its insurers once the court of Norway’s Hull Club found the escalation clause to be ambiguous.
But the verdict of the court contains no discussion of the Venerable contra proferentem Rule. Instead, the court based its key finding – that the proper interpretation of the ambiguous escalation clause could not be resolved by summary judgment – on the New York general contract interpretation precedent that intended the validity of a contract provision containing a space to depend on the parties Importance of determination, as evidenced by examination of external evidence.
These cases did not concern insurance policies and therefore had no reason to apply the insurance specific contra proferentem Rule to replace the consideration of external evidence.
Admittedly, insurers have clouded New York before contra proferentem Wasser by arguing that courts should apply the rule as a last resort, relevant only when ambiguities in insurance policies cannot be addressed in other ways, such as by B. the review of external evidence, can be solved.
This view is not without legal support, particularly from decisions by federal courts purporting to apply New York law.
But the New York Court of Appeals, the final arbiter of New York law, has generally not backed down contra proferentem to such close quarters.4 And decisions by the New York Court of Appeals regarding New York law in a matter trump Erie conjectures by federal courts that sit differently as to what New York law might be. In particular, the insurer does not appear to have argued otherwise in its briefing to the Norwegian Hull Club.
And even if New York’s application of contra proferentem were more limited than the majority approach, it is not clear whether New York law applies at all in Norway’s Hull Club.
Based on the year 2021 North American Elite Insurance Co. v Space Needle LLC Saga before a New York State Court of Appeals,5 North Star argued that the policy’s choice-of-law clause was unenforceable under a Washington statute that invalidates such provisions. The court adjourned that issue pending trial, on the theory that “summary judgment would be denied under any potentially applicable choice of law.”
But whatever confusion there may be regarding the supremacy of contra proferentem under New York law does not extend to Washington, North Star’s place of residence or Florida where the damage occurred, thereby resolving any ambiguity in the policyholder’s favor without considering external evidence.6
As a result, if the Norwegian Hull club’s decision depended on a New York-specific request contra proferentemthen the court should have considered whether it was applying the correct body of law before denying North Star’s motion for summary judgment and bringing the case to trial.
In short, the Norwegian Hall Club’s decision should not be viewed as a roadmap for assessing void ambiguity in insurance policies.
filling in the gap
Each ambiguous provision in an insurance policy is like a blank space – a gap that could reasonably be filled with competing interpretations. Among his other virtues is the teaching of contra proferentem cuts the Gordian knot that these gaps would otherwise create and eliminates potentially lengthy and expensive reviews of external evidence with a clear, simple rule that ambiguities are resolved to the policyholder’s advantage.
By not applying contra proferentemthe Norwegian Hull Club court sent itself and the parties down an unnecessary rabbit hole when it could have easily interpreted the ambiguous escalation clause in North Star’s favor and found cover.
The gap in Norway’s Hull Club’s decision underscores the importance of the contra proferentem Rule.
Policyholders should be able to rely on courts to resolve any resulting confusion in favor of coverage when ambiguous wording slips through the cracks – or is forced upon them by their insurers. And insurers should not be allowed to profit from the omissions or errors. Policyholders must carefully manage these issues, both when purchasing new policies and when seeking coverage under existing policies.
(This article originally appeared in Law360.)
1 Although the Norwegian Hull Club policy was purchased by a Washington company to insure a development project in Florida, the policy contains a choice of law clause that refers to New York law.
2 Norwegian Hull Club et al. v. North Star Fishing Co. LLC et al., ND Fla. No. 5:21-cv-00181, Dct. No. 74 (02/08/2023).
3 See eg JP Morgan Sec. Inc. vs. Vigilant Ins. co37 NY3d 552, 561-62 (2021); Regarding Viking Pump27 NY3d 244, 257-58 (2016).
4 See footnote 5 above; see also Coast Sur. Co. vs. Gillette Co.64 NY2d 304 (1984).
5 See North Am. Elite Ins. Co. v Space Needle, LLC, 200 AD3d 425 (NY App. Div. 2021); see also Jeffrey Mikoni, “How Forum-Selection and Choice-of-Law Provisions in Insurance Policies Can Affect Coverage”.
6 See Queen Anne Park Homeowners Ass’n Vs State Fire Fire & Cas. Co., 183 Wn.2d 482, 491 (2015), cited Milk Country Ins. Co. v. district83 Wn.2d 353, 358 (1974) (“It is Hornbook law that when a term in an insurance policy is ambiguous, the meaning and construction most favorable to the insured shall apply, even though insurers may have intended a different meaning .”); Washington Nat’l Ins. corp against Ruderman, 117 So. 3d 943, 952 (Fla. 2013) (“Under Florida law, because the policy is ambiguous, it must be construed against the insurer and in favor of coverage without recourse to external evidence.”).
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