Contra Proferentem Will Remain Alive and Well in NY

In 1929, New York Court of Appeals Chief Judge Benjamin Cardozo wrote in Killian v. Metropolitan Life Insurance Co.: “In the presence of ambiguity we adhere to the construction adverse to the insurer.”¹

This first principle is grounded in the reality of the insurance marketplace, which, with few exceptions, is characterized by insurers’ unilateral control over the drafting of the language of most policy provisions.

Put simply, insurers, not policyholders, are in the business of drafting insurance policies, often hiring large teams of lawyers and former insurance regulators for that function.

Policyholders do not possess those capabilities or experience. As a result, the doctrine of contra proferentem is rooted in consumer protection, recognizing that insurers are the experts in policy drafting and that any ambiguity in policy language is their problem—not their policyholders’.

Additionally, insurers often appear to take coverage positions purportedly based on policy language but inscrutable to the reasonable policyholder. As the great U.S. Circuit Judge Learned Hand explained in Gaunt v. John Hancock Mutual Life Insurance Co. in 1947:

Contra proferentem is more rigorously applied in insurance than in other contracts. ... [I]nsurers who seek to impose upon words of common speech an esoteric significance intelligible only to their craft, must bear the burden of any resulting confusion.[2]

The New York Court of Appeals has never recognized a so-called sophisticated-insured exception to the contra proferentem rule.

However, a recent Law360 guest article discusses at length a May decision in Brooklyn Union Gas Co. v. Century Indemnity Co. that insurers may try to construe as announcing a blanket exception under New York law when a policyholder (1) maintains a large self-insured retention, and therefore supposedly functions as a quasi-insurer, or (2) is sophisticated because it employs or works with insurance professionals and supposedly had significant bargaining power during the insurance procurement process.³

The rationale of the Supreme Court of the State of New York, County of New York, and the thesis of the recent Law360 article, is that such a policyholder is not an insurance naif for whose benefit the canon of contra proferentem was designed. But, respectfully, the assumptions underpinning that rationale are flawed, and the leading New York Appellate Division cases suggest that any exception should be applied only in narrow circumstances rather than on a blanket basis.

Self-Insured Retentions

According to an industry-standard definition, a self-insured retention, or SIR, is “a dollar amount specified in a liability insurance policy that must be paid by the insured before the insurance policy will respond to a loss.”⁴ It is similar to a deductible in the sense that the policyholder is ultimately responsible for the specified amount for a given claim.

But the mere existence of an SIR in a policyholder’s insurance program does not mean that the policyholder functions as the equivalent of an insurance company and is therefore on equal footing with its insurers for all purposes including the application of contra proferentem.

For one thing, SIRs are standard in certain lines of insurance and, for pricing or risk-related reasons, the insurance may be unavailable to the policyholder without a large SIR.

But more importantly, policyholders are typically at the mercy of their insurers when it comes to the management of an SIR, regardless of the involvement of a policyholder’s internal risk management department or insurance broker—a focus of the New York Supreme Court’s analysis in Brooklyn Union Gas.⁵

Typically, insurers assert that they have the right to determine whether the SIR has been properly exhausted under the terms and conditions of the policy drafted and sold by the insurer. Insurers very often challenge a policyholder’s position on SIR exhaustion, and their recalcitrance can hold coverage hostage.

Additionally, for large liabilities that do not involve a gradual erosion of an SIR, but implicate the SIR and the policy’s limits simultaneously, the insurer will typically adjust the entire claim under the terms and conditions of the policy and allocate the SIR amount to the policyholder.

In any event, the SIR is usually a creature of the policy the insurer drafted and sold, and despite its self-insured nomenclature, does not render the policyholder the functional equivalent of an insurance company.

In its discussion of contra proferentem in light of a policyholder’s SIR, the Brooklyn Union Gas court relied upon the Appellate Division’s principal case on the subject, Loblaw Inc. v. Employers’ Liability Assurance Corp., from 1982.⁶

But in declining to apply contra proferentem in the policyholder’s favor, Loblaw dealt with very specific circumstances where the policyholder managed workers’ compensation claims through a licensed insurance adjusting company, and the policy at issue was specifically sold and purchased as an excess or reinsurance policy to apply in conjunction with the policyholder’s self-insurance program.⁷

In short, Loblaw dealt with a policyholder that arguably really did function as an insurer of sorts—but that is an anomaly not typical of most policyholders with SIRs. Therefore, the mere existence of an SIR does not place a policyholder on equal footing with its insurer, and should not be a bar to the application of contra proferentem.

Supposed Bargaining Power

It is also a fallacy to assume that large corporate policyholders have transactional bargaining power with their insurers that would nullify the basis for the consumer protections provided by the contra proferentem doctrine.

The Brooklyn Union Gas court focused on the policyholder’s use of internal risk managers and prominent insurance brokers as indicia of the policyholder’s experience with insurance and presumed ability to negotiate policy terms.⁸

But the reality faced by even the largest corporate policyholders is that, while these resources may give them some bargaining power on premium pricing and the amount of coverage limits, policyholders generally do not have equal bargaining power as insurers.

The policyholder generally does not have the ability to negotiate most terms and conditions of a given policy, which are likely to be industry-standard or standard operating procedure for the insurer.

So many of the arguably ambiguous provisions that have been heavily litigated—pollution exclusions, for example—are standard provisions that the insurance industry forces upon even the largest and most profitable policyholder. The reality is that policyholders rarely are in a position to effectuate changes to most policy provisions at the time they purchase their policies.

The better-reasoned New York appellate decisions recognize that a narrow exception to contra proferentem may be made, if at all, only where the policyholder had equal bargaining power and actually did negotiate the specific policy language at issue.

The precedent cited by the Brooklyn Union Gas court ultimately leads back to Cummins Inc. v. Atlantic Mutual Insurance Co. in 2008, where the Appellate Division declined to apply contra proferentem because “the basic concept and terms [of the policy] originated with” the policyholder, which was “instrumental in crafting various parts of the agreement.”⁹

Similarly, in Morgan Stanley Group Inc. v. New England Insurance Co. in 2000, the U.S. Court of Appeals for the Second Circuit recognized that “there is no general rule in New York denying sophisticated businesses the benefit of contra proferentem.”

The court held that no less a sophisticated entity than Morgan Stanley was potentially entitled to the benefit of the doctrine “because Morgan Stanley (although sophisticated) did not negotiate its coverage terms.”¹⁰

Thus, New York is in the good company of many other states that do not recognize a blanket exception to contra proferentem for so-called sophisticated insureds. For example, California,¹¹ Delaware¹² and many other courts¹³ typically do not apply such an exception. This is a sound result because insurers—not their policyholders—are in the business of insurance.

Consideration of Extrinsic Evidence

Finally, the recent Law360 article suggests that New York courts typically consider extrinsic evidence—of a policyholder’s supposed sophistication, circumstances surrounding issuance of the policy, etc.—rather than automatically apply contra proferentem in favor of coverage upon a finding of ambiguous policy wording.

Although some New York federal courts making Erie guesses have derided contra proferentem as a doctrine of last resort, the New York Court of Appeals has generally not treated it as such.

Rather, the New York Court of Appeals has generally treated contra proferentem as a first principle, applying it in the first instance where there is contractual ambiguity in an insurance policy.¹⁴ The few exceptions appear to be outliers.¹⁵

Policyholders should take heart that the necessary protections of contra proferentem are alive and well under New York law, and insurance companies’ contentions to the contrary in coverage litigation are not well-taken. The New York Court of Appeals has never adopted the limitations on contra proferentem for which the insurance industry advocates.

¹ Killian v. Metro. Life Ins. Co., 251 N.Y. 44, 48 (1929).
² Gaunt v. John Hancock Mut. Life Ins. Co., 160 F.2d 599, 602 (2d Cir. 1947).
³ Brooklyn Union Gas Co. v. Century Indem. Co., 2022 NY Slip Op 31514(U) (Sup. Ct.).
⁴ IRMI Glossary, Self-Insured Retention (SIR), (last visited Aug. 17, 2022).
⁵ Brooklyn Union Gas Co. v. Century Indem. Co., 2022 NY Slip Op 31514(U) (Sup. Ct.).
⁶ 85 AD2d 880 (4th Dep’t 1981), aff’d on other grounds 57 NY2d 872 (1982).
⁷ Id. at 880-881.
⁸ Brooklyn Union Gas Co. v. Century Indem. Co., 2022 NY Slip Op 31514(U) (Sup. Ct.).
⁹ 56 A.D.3d 288, 290 (1st Dep’t 2008).
¹⁰ Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270, 280 (2d Cir. 2000).
¹¹ AIU Ins. Co. v. Superior Ct., 51 Cal. 3d 807, 823–24 (1990) (“FMC unquestionably possesses both legal sophistication and substantial bargaining power ... . [The insurers] have presented no evidence suggesting that the provisions in question were actually negotiated or jointly drafted. ... Indeed, the evidence that is before us reveals that such provisions, drafted by the insurers, are highly uniform in content and wording. For the above reasons, we interpret their contents, if ambiguous, in favor of coverage.”).
¹² E.g., Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 390 (D. Del. 2002) (“Generally speaking, [] Delaware and Illinois courts continue to strictly construe ambiguities within insurance contracts against the insurer and in favor of the insured in situations where the insurer drafted the language that is being interpreted regardless of whether the insured is a large sophisticated company. ... Therefore, should the court find an ambiguity in the endorsements section, it will construe it against National Union.”).
¹³ St. Paul Fire & Marine Ins. Co. v. MetPath, Inc., 38 F. Supp. 2d 1087, 1091–92 (D. Minn. 1998) (applying New Jersey law) (“St. Paul argues that these rules of construction for insurance contracts, commonly referred to as contra proferentem, should not apply to the Defendants because they are large, sophisticated companies who utilized an insurance broker in obtaining the Policy. ... The Court disagrees. ... [T]he dispositive question is not merely whether the insured is a sophisticated corporate entity, but rather whether the insurance contract is negotiated, jointly drafted or drafted by the insured. ... In the instant case, St. Paul has not pointed this Court to any evidence in the record indicating that MetPath negotiated or jointly drafted the Policy with St. Paul. Thus, the Court concludes that, under New Jersey law, the doctrine of contra proferentem is applicable to the instant case.”); Emmis Commc’ns Corp. v. Illinois Nat’l Ins. Co., 323 F. Supp. 3d 1012, 1023–24 (S.D. Ind. 2018), rev’d and remanded, 929 F.3d 441 (7th Cir. 2019), withdrawn from bound volume, opinion withdrawn on reh’g, 937 F.3d 836 (7th Cir. 2019), and aff’d, 937 F.3d 836 (7th Cir. 2019) (“INIC argues that this rule of contract interpretation [contra proferentem] should not apply in this case because ‘Emmis is a sophisticated corporate insured who was assisted by a broker in negotiating the terms of the manuscript EVENT(S) Exclusion,’ and ‘the equal bargaining power between Emmis and INIC, as evidenced by Emmis’ direct input into the language of the EVENT(S) Exclusion with Illinois National’s underwriter supports application of the EVENT(S) Exclusion that Emmis specifically agreed to include.’ ... [T]here is no evidence in the record to support a finding that Emmis had the sophistication and bargaining power necessary to negotiate the language used in the INIC Policy, let alone that it exercised that power such that the policy language should not be construed against INIC. ... Accordingly, the language defining Event # 2 is subject to the rule of contra proferentem[.]”).
¹⁴ E.g., Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304, 486 N.Y.S.2d 873 (1984).
¹⁵ E.g., State v. Home Indem. Co., 66 N.Y.2d 669 (1985).