Establishing Ambiguity of Policy Language

How, then, do courts define ambiguity? In most jurisdictions, an ambiguous contractual term is one that is subject to more than one reasonable interpretation. See, e.g., Olson v. Farrar, 809 N.W.2d 1, 10 (Wis. 2012) (“If a word or phrase is susceptible to more than one reasonable interpretation, it is ambiguous.”); Hobbs v. Hartford Ins. Co. of the Midwest, 823 N.E.2d 561, 564 (Ill. 2005) (“Whether an ambiguity exists turns on whether the policy language is subject to more than one reasonable interpretation.”); Auto-Owners Ins. Co. v. Anderson, 756 So. 2d 29, 34 (Fla. 2000) (“If the relevant policy language is susceptible to more than one reasonable interpretation, one providing coverage and the other limiting coverage, the insurance policy is considered ambiguous.”). But this does not mean that a party can simply present an alternative interpretation and thereby create an ambiguity. F.D.I.C. v. Am. Cas. Co. of Reading, Pa., 528 N.W.2d 605, 608 (Iowa 1995); see also Va. Elec., 683 S.E.2d at 526-27 (“The mere fact that the parties disagree about the meaning of the [contract's] terms is not evidence that the [contract's] language is ambiguous.”). Rather, the question is whether, objectively considered, “genuine uncertainty exists as to which one of two or more meanings is the proper one.” F.D.I.C., 528 N.W.2d at 608. Creative interpretations will only be considered if reasonable, and courts “will not strain to find an ambiguity where none exists.” Hobbs, 823 N.E.2d at 564. Ambiguity is not present merely because a provision, read by itself, is susceptible of some uncertainty; rather, whether a disputed term is ambiguous depends on a reading of the contract “as a whole.” Id. at 567-70.

Courts often differentiate between “patent” ambiguities and “latent” ambiguities. Ambiguities are said to be “patent” when more than one reasonable interpretation can be discovered simply by reading the policy, whereas they are “latent” when the policy language appeared clear at the time that the parties entered into the contract, but later events suggest otherwise. See Va. Elec. & Power Co. v. Norfolk So. Ry. Co., 683 S.E.2d 517, 526 (Va. 2009) (“A latent ambiguity exists where language while appearing perfectly clear at the time the contract[ ][is] formed, because of subsequently discovered or developed facts, may reasonably be interpreted in either of two ways.” (quotation omitted)).

Use of Extrinsic Evidence

As noted at the outset, the generally accepted rule is that extrinsic evidence can be used to interpret a contractual term that has been found to be ambiguous. There is less consensus, however, concerning whether extrinsic evidence can be used to answer the threshold question of whether an ambiguity exists in the first place. Although historically courts have not permitted extrinsic evidence to be used to establish ambiguities, today a minority of courts do allow extrinsic evidence to be used to establish latent ambiguities present despite seemingly clear policy language.

Traditionally, courts have looked only to the “four corners” of a policy to determine whether an ambiguity exists. Under this approach, when a policy is unambiguous on its face, courts do not look to extrinsic evidence to ascertain whether the policy might actually be ambiguous. See, e.g., Aetna Casualty & Surety Co. v. Fireguard Corp., 455 S.E.2d 229, 232 (Va. 1995) (“When a contract is complete on its face and is plain and unambiguous in its terms, a court is not free to search for its meaning beyond the contract itself.”). A leading contracts treatise identifies approximately 30 states as following the traditional approach. 6 Peter Linzer, Corbin on Contracts ' 25.15(A) (Joseph M. Perillo ed., Rev. Ed. 2010). In addition to Virginia, jurisdictions exemplifying the traditional approach include New York, Florida, Louisiana, and Hawaii. See R/S Assocs. v. N.Y. Job Dev. Auth., 771 N.E.2d 240, 98 N.Y.2d 29, 32 (N.Y. 2002) (“We have long adhered to the sound rule in the construction of contracts, that where the language is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language.” (quotations and citations omitted)); Kipp v. Kipp, 844 So. 2d 691, 694 (Fla. Dist. Ct. App. 2003) (“As we find no ambiguity in the [contractual] language, it would be inappropriate for this court to consider parol evidence or remand this case for consideration of parol evidence.”); Cadwallader v. Allstate Ins. Co., 848 So. 2d 577, 580 (La. 2003) (“If the policy wording at issue is clear and unambiguously expresses the parties' intent, the insurance contract must be enforced as written.”); State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc., 978 P.2d 753, 762 (Haw. 1999) (“The court should look no further than the four corners of the [contract] to determine whether an ambiguity exists.”). The advantage of the traditional approach is the parties' ability to rely on what the policy actually says, without fear that the contractual terms will be made ambiguous through the introduction of extrinsic evidence.

A minority of courts, however, have adopted what has sometimes been called the “modern” view, allowing parties to introduce extrinsic evidence to determine whether an ambiguity exists. See, e.g., Ponder v. State Farm Mut. Ins. Co., 12 P.3d 960, 965 (N.M. 2000) (“In abandoning reliance only on the four-corners approach, courts are now allowed to consider extrinsic evidence in determining whether an ambiguity exists in the first instance, or to resolve any ambiguities that a court may discover.”). In addition to New Mexico, courts in Alaska, California, and Vermont and a number of other jurisdictions have employed this approach. See K&K Recycling, Inc. v. Alaska Gold Co., 80 P.3d 702, 712 (Alaska 2003) (“In determining a contract's meaning, '[t]he parties' expectations must be gleaned not only from the contract language, but also from extrinsic evidence.'”); TIG Premier Ins. Co. v. Hartford Accident & Indem. Co., 35 F. Supp. 2d 348, 350 (S.D.N.Y. 1999) (“California courts have repeatedly ruled that '[e]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible.'”); Atkinson v. Town of Westmore, 38 F. Supp. 2d 338, 343 (D. Vt. 1999) (“Extrinsic evidence may be introduced to aid in determining whether [insurance] policy language is ambiguous.” (applying Vermont law)). This “modern” view is based on the idea that because words do not have invariably fixed meanings, “[t]he fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms.” Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., Inc., 442 P.2d 641, 69 Cal. 2d 33, 39 (Cal. 1968).

Case Studies

The Supreme Court of Louisiana provided a classic example of the traditional analysis in the case of Cadwallader v. Allstate Insurance Company, 848 So. 2d 577 (La. 2003) (“Cadwallader II“). There, the court was asked to determine whether foster children resident in the insured's household qualified as “relatives” under an uninsured motorist policy that limited coverage to the insured and “resident relatives,” but did not define the term “relative.”

The intermediate appellate court below had determined that the term “relative” was ambiguous based on a consideration of extrinsic evidence. See Cadwallader v. Allstate Insurance Company, 818 So. 2d 1027, 1029-30 (La. Ct. App. 2002) (“Cadwallader I“). Specifically, the appellate court examined evidence showing that policies of other insurers had explicitly defined “relative” or “family member” to include foster children. Id. at 1029 (noting that the “UM policies of an insurer other than Allstate have defined the term 'resident relative' as specifically including foster children” and that several other policies “specifically include foster children” in the definition of “family member”). Based on this data, the appellate court concluded that the undefined term “resident relative” in the policy in question was ambiguous. Id. at 1029-30. Applying the rule that “[a]mbiguous policy provisions generally are to be construed against the insurer and in favor of coverage,” the appellate court then interpreted the ambiguous term “resident relative” to include foster children, and held that the foster children were entitled to summary judgment as a matter of law. Id.

The Supreme Court of Louisiana disagreed, holding that the clear and unambiguous meaning of “relative” did not include foster children, and that the appellate court had erred by looking beyond the four corners of the policy to the definitions of “relative” and “family member” in other policies. First, the court explained that ambiguity arises only when “each of the alternative interpretations [is] reasonable”; otherwise, “[i]f the policy wording at issue is clear and unambiguously expresses the parties' intent, the insurance contract must be enforced as written.” Cadwallader II, 848 So. 2d at 580. The court then referenced the dictionary definition of “relative,” as well as the common understanding of the meaning of the term shown in cases from within and without Louisiana, to conclude that “relative” was consistently defined to encompass only those related by blood or marriage. Id. at 580-82. Thus, rather than being ambiguous, the term “relative” had a fixed meaning ' it was “a rather simple word with a well-established common sense meaning which is referenced in the insurance policy in a clearly worded context.” Id. at 584. By considering extrinsic evidence, the appellate court had “ignored the fundamental precept that it was required to interpret the term ["relative"] using its plain, ordinary and generally prevailing meaning as set forth in the policy at hand.” Id. at 583-84.

Cadwallader II exemplifies the traditional method; the court determined that, due to common usage and case law, the term “relative” was unambiguous and should be construed without reference to other policies or other extrinsic evidence. The traditional method allows parties to rely on dictionary definitions in crafting contracts, reducing uncertainty and excluding post hoc “clarifications.” However, in the view of critics of the four-corners rule, the traditional, closed-universe approach of Cadwallader II also demonstrates why some jurisdictions have developed a more expansive view of what may be considered by the court. In the view of these critics of the traditional approach, evidence extrinsic to the four corners of the contract may indicate a reasonable possibility that the parties intended to use particular words in ways not captured by their dictionary definitions.

Ponder v. State Farm Mutual Automobile Insurance Company illustrates the more expansive “modern” approach. 12 P.3d 960 (N.M. 2000). There, the Supreme Court of New Mexico addressed whether the insureds' married daughter, who lived in a separate residence, qualified as a “relative” for purposes of “stacking,” that is, aggregating, the multi-vehicle coverage provided by her parents' uninsured motorist's policy. This policy defined a “relative” as one “related to [the insured] by blood, marriage or adoption who lives with [the insured].” Id. at 965. Because the trial court had found that the adult daughter did not live with her insured parents, an express requirement under the policy, the Supreme Court agreed that “[t]he express language of the State Farm policy is not ambiguous.” Id. at 965. This ruling would have concluded the analysis in Louisiana, where extrinsic evidence is not considered in establishing ambiguity. However, in Ponder, the Supreme Court of New Mexico held that “the inquiry does not end” with the policy's unambiguous language:

New Mexico ' no longer restrict[s] contract interpretation to language found within the four corners of an insurance policy. The Mark V, Inc. Court recognized that “[w]ithout a full examination of the circumstances surrounding the making of the agreement, ambiguity or lack thereof often cannot properly be discerned.” In abandoning reliance only on the four-corners approach, courts are now allowed to consider extrinsic evidence in determining whether an ambiguity exists in the first instance, or to resolve any ambiguities that a court may discover. ' “[I]f ambiguities cannot be resolved by examining the language of the insurance policy, courts may look to extrinsic evidence such as the premiums paid for insurance coverage, the circumstances surrounding the agreement, the conduct of the parties, and oral expressions of the parties' intentions.” Id. (internal citations omitted).

While the Ponder court declined to consider the parties' subjective intentions, it did examine certain extrinsic evidence ' including what the parties had expressed to each other prior to the automobile accident regarding the daughter's coverage and the payment of additional premiums for the daughter's use of that vehicle ' in order to determine whether an ambiguity existed. Id. at 965-67. Looking at conversations between the parties, where one of the insureds had been assured by the insurer that her daughter was “fully covered,” and at the insureds' payment of additional premiums, the court determined that an ambiguity had been created despite the otherwise clear and unambiguous policy language that appeared, on its face, to prevent the daughter from qualifying as a “relative.” Id. at 966. In construing the now-present ambiguity in favor of coverage for the daughter, the court held that “where the policy is found to be unclear and ambiguous, the court's construction of an insurance policy will be guided by the reasonable expectations of the insured.” Id. at 967 (quotations and citation omitted).

Ponder demonstrates that, in some jurisdictions, the apparently clear and unambiguous language of the policy may not provide definite assurance for either the insurer or the policyholder. This is because some courts accept extrinsic evidence not only to resolve ambiguities, but actually to create ambiguities in the first instance. Such a rule may give rise to special challenges for insurers in jurisdictions that construe policy ambiguities against the insurer as the drafter of the policy and in favor of coverage. Ultimately, the end result of the adoption by some jurisdictions of the “modern” rule may be higher insurance premiums due to the increased risk that courts may find there to be coverage in circumstances where facially clear and unambiguous policy language is to the contrary.

Robert D. Goodman is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Julianne Ams and Dustin N. Nofziger are associates in the New York office of Debevoise.

In insurance coverage disputes, the interpretation of contractual terms is often the key issue on which the case turns. The insurer usually contends that the policyholder's losses, as alleged, fall outside the unambiguous provisions of the contract, while the policyholder takes the opposite position or argues that the contractual terms are ambiguous. If the court finds that a contractual term is ambiguous, extrinsic evidence, such as evidence of prior negotiations, may be admissible to resolve that ambiguity, or the court may, as a last resort, resolve the ambiguity through the application of presumptions of contract interpretation. Thus, it is important for practitioners to understand how courts assess the threshold question of whether an ambiguity exists. Traditionally, ambiguity was assessed by considering only the “four corners” of the contract. However, some jurisdictions now adhere to a “modern view” that allows extrinsic evidence to be considered in establishing contractual ambiguity. This article provides an overview of these approaches and offers a case study representing each method.

Ambiguity Defined

The parol evidence rule provides that, as a matter of substantive contract law, evidence that is extrinsic to the four corners of an integrated contract cannot be used to vary or contradict a contract's terms. See Heyman Assocs. No. 1 v. Ins. Co. of the State of Pa. , 653 A.2d 122, 135 (Conn. 1995). But extrinsic evidence is admissible to explain an ambiguous contractual term, because such explanatory evidence cannot be said to create a variance or contradiction. See Id.

How, then, do courts define ambiguity? In most jurisdictions, an ambiguous contractual term is one that is subject to more than one reasonable interpretation. See, e.g., Olson v. Farrar , 809 N.W.2d 1, 10 (Wis. 2012) (“If a word or phrase is susceptible to more than one reasonable interpretation, it is ambiguous.”); Hobbs v. Hartford Ins. Co. of the Midwest , 823 N.E.2d 561, 564 (Ill. 2005) (“Whether an ambiguity exists turns on whether the policy language is subject to more than one reasonable interpretation.”); Auto-Owners Ins. Co. v. Anderson , 756 So. 2d 29, 34 (Fla. 2000) (“If the relevant policy language is susceptible to more than one reasonable interpretation, one providing coverage and the other limiting coverage, the insurance policy is considered ambiguous.”). But this does not mean that a party can simply present an alternative interpretation and thereby create an ambiguity. F.D.I.C. v. Am. Cas. Co. of Reading, Pa. , 528 N.W.2d 605, 608 (Iowa 1995); see also Va. Elec., 683 S.E.2d at 526-27 (“The mere fact that the parties disagree about the meaning of the [contract's] terms is not evidence that the [contract's] language is ambiguous.”). Rather, the question is whether, objectively considered, “genuine uncertainty exists as to which one of two or more meanings is the proper one.” F.D.I.C., 528 N.W.2d at 608. Creative interpretations will only be considered if reasonable, and courts “will not strain to find an ambiguity where none exists.” Hobbs, 823 N.E.2d at 564. Ambiguity is not present merely because a provision, read by itself, is susceptible of some uncertainty; rather, whether a disputed term is ambiguous depends on a reading of the contract “as a whole.” Id. at 567-70.

Courts often differentiate between “patent” ambiguities and “latent” ambiguities. Ambiguities are said to be “patent” when more than one reasonable interpretation can be discovered simply by reading the policy, whereas they are “latent” when the policy language appeared clear at the time that the parties entered into the contract, but later events suggest otherwise. See Va. Elec. & Power Co. v. Norfolk So. Ry. Co. , 683 S.E.2d 517, 526 (Va. 2009) (“A latent ambiguity exists where language while appearing perfectly clear at the time the contract[ ][is] formed, because of subsequently discovered or developed facts, may reasonably be interpreted in either of two ways.” (quotation omitted)).

Use of Extrinsic Evidence

As noted at the outset, the generally accepted rule is that extrinsic evidence can be used to interpret a contractual term that has been found to be ambiguous. There is less consensus, however, concerning whether extrinsic evidence can be used to answer the threshold question of whether an ambiguity exists in the first place. Although historically courts have not permitted extrinsic evidence to be used to establish ambiguities, today a minority of courts do allow extrinsic evidence to be used to establish latent ambiguities present despite seemingly clear policy language.

Traditionally, courts have looked only to the “four corners” of a policy to determine whether an ambiguity exists. Under this approach, when a policy is unambiguous on its face, courts do not look to extrinsic evidence to ascertain whether the policy might actually be ambiguous. See, e.g., Aetna Casualty & Surety Co. v. Fireguard Corp. , 455 S.E.2d 229, 232 (Va. 1995) (“When a contract is complete on its face and is plain and unambiguous in its terms, a court is not free to search for its meaning beyond the contract itself.”). A leading contracts treatise identifies approximately 30 states as following the traditional approach. 6 Peter Linzer, Corbin on Contracts ' 25.15(A) (Joseph M. Perillo ed., Rev. Ed. 2010). In addition to Virginia, jurisdictions exemplifying the traditional approach include New York, Florida, Louisiana, and Hawaii. See R/S Assocs. v. N.Y. Job Dev. Auth. , 771 N.E.2d 240, 98 N.Y.2d 29, 32 (N.Y. 2002) (“We have long adhered to the sound rule in the construction of contracts, that where the language is clear, unequivocal and unambiguous, the contract is to be interpreted by its own language.” (quotations and citations omitted)); Kipp v. Kipp , 844 So. 2d 691, 694 (Fla. Dist. Ct. App. 2003) (“As we find no ambiguity in the [contractual] language, it would be inappropriate for this court to consider parol evidence or remand this case for consideration of parol evidence.”); Cadwallader v. Allstate Ins. Co. , 848 So. 2d 577, 580 (La. 2003) (“If the policy wording at issue is clear and unambiguously expresses the parties' intent, the insurance contract must be enforced as written.”); State Farm Fire & Cas. Co. v. Pac. Rent-All, Inc. , 978 P.2d 753, 762 (Haw. 1999) (“The court should look no further than the four corners of the [contract] to determine whether an ambiguity exists.”). The advantage of the traditional approach is the parties' ability to rely on what the policy actually says, without fear that the contractual terms will be made ambiguous through the introduction of extrinsic evidence.

A minority of courts, however, have adopted what has sometimes been called the “modern” view, allowing parties to introduce extrinsic evidence to determine whether an ambiguity exists. See, e.g., Ponder v. State Farm Mut. Ins. Co. , 12 P.3d 960, 965 (N.M. 2000) (“In abandoning reliance only on the four-corners approach, courts are now allowed to consider extrinsic evidence in determining whether an ambiguity exists in the first instance, or to resolve any ambiguities that a court may discover.”). In addition to New Mexico, courts in Alaska, California, and Vermont and a number of other jurisdictions have employed this approach. See K&K Recycling, Inc. v. Alaska Gold Co. , 80 P.3d 702, 712 (Alaska 2003) (“In determining a contract's meaning, '[t]he parties' expectations must be gleaned not only from the contract language, but also from extrinsic evidence.'”); TIG Premier Ins. Co. v. Hartford Accident & Indem. Co. , 35 F. Supp. 2d 348, 350 (S.D.N.Y. 1999) (“California courts have repeatedly ruled that '[e]ven if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible.'”); Atkinson v. Town of Westmore , 38 F. Supp. 2d 338, 343 (D. Vt. 1999) (“Extrinsic evidence may be introduced to aid in determining whether [insurance] policy language is ambiguous.” (applying Vermont law)). This “modern” view is based on the idea that because words do not have invariably fixed meanings, “[t]he fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms.” Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., Inc. , 442 P.2d 641, 69 Cal. 2d 33, 39 (Cal. 1968).

Case Studies

The Supreme Court of Louisiana provided a classic example of the traditional analysis in the case of Cadwallader v. Allstate Insurance Company , 848 So. 2d 577 (La. 2003) (“ Cadwallader II “). There, the court was asked to determine whether foster children resident in the insured's household qualified as “relatives” under an uninsured motorist policy that limited coverage to the insured and “resident relatives,” but did not define the term “relative.”

The intermediate appellate court below had determined that the term “relative” was ambiguous based on a consideration of extrinsic evidence. See Cadwallader v. Allstate Insurance Company , 818 So. 2d 1027, 1029-30 (La. Ct. App. 2002) (“ Cadwallader I “). Specifically, the appellate court examined evidence showing that policies of other insurers had explicitly defined “relative” or “family member” to include foster children. Id. at 1029 (noting that the “UM policies of an insurer other than Allstate have defined the term 'resident relative' as specifically including foster children” and that several other policies “specifically include foster children” in the definition of “family member”). Based on this data, the appellate court concluded that the undefined term “resident relative” in the policy in question was ambiguous. Id. at 1029-30. Applying the rule that “[a]mbiguous policy provisions generally are to be construed against the insurer and in favor of coverage,” the appellate court then interpreted the ambiguous term “resident relative” to include foster children, and held that the foster children were entitled to summary judgment as a matter of law. Id.

The Supreme Court of Louisiana disagreed, holding that the clear and unambiguous meaning of “relative” did not include foster children, and that the appellate court had erred by looking beyond the four corners of the policy to the definitions of “relative” and “family member” in other policies. First, the court explained that ambiguity arises only when “each of the alternative interpretations [is] reasonable”; otherwise, “[i]f the policy wording at issue is clear and unambiguously expresses the parties' intent, the insurance contract must be enforced as written.” Cadwallader II, 848 So. 2d at 580. The court then referenced the dictionary definition of “relative,” as well as the common understanding of the meaning of the term shown in cases from within and without Louisiana, to conclude that “relative” was consistently defined to encompass only those related by blood or marriage. Id. at 580-82. Thus, rather than being ambiguous, the term “relative” had a fixed meaning ' it was “a rather simple word with a well-established common sense meaning which is referenced in the insurance policy in a clearly worded context.” Id. at 584. By considering extrinsic evidence, the appellate court had “ignored the fundamental precept that it was required to interpret the term ["relative"] using its plain, ordinary and generally prevailing meaning as set forth in the policy at hand.” Id. at 583-84.

Cadwallader II exemplifies the traditional method; the court determined that, due to common usage and case law, the term “relative” was unambiguous and should be construed without reference to other policies or other extrinsic evidence. The traditional method allows parties to rely on dictionary definitions in crafting contracts, reducing uncertainty and excluding post hoc “clarifications.” However, in the view of critics of the four-corners rule, the traditional, closed-universe approach of Cadwallader II also demonstrates why some jurisdictions have developed a more expansive view of what may be considered by the court. In the view of these critics of the traditional approach, evidence extrinsic to the four corners of the contract may indicate a reasonable possibility that the parties intended to use particular words in ways not captured by their dictionary definitions.

Ponder v. State Farm Mutual Automobile Insurance Company illustrates the more expansive “modern” approach. 12 P.3d 960 (N.M. 2000). There, the Supreme Court of New Mexico addressed whether the insureds' married daughter, who lived in a separate residence, qualified as a “relative” for purposes of “stacking,” that is, aggregating, the multi-vehicle coverage provided by her parents' uninsured motorist's policy. This policy defined a “relative” as one “related to [the insured] by blood, marriage or adoption who lives with [the insured].” Id. at 965. Because the trial court had found that the adult daughter did not live with her insured parents, an express requirement under the policy, the Supreme Court agreed that “[t]he express language of the State Farm policy is not ambiguous.” Id. at 965. This ruling would have concluded the analysis in Louisiana, where extrinsic evidence is not considered in establishing ambiguity. However, in Ponder, the Supreme Court of New Mexico held that “the inquiry does not end” with the policy's unambiguous language:

New Mexico ' no longer restrict[s] contract interpretation to language found within the four corners of an insurance policy. The Mark V, Inc. Court recognized that “[w]ithout a full examination of the circumstances surrounding the making of the agreement, ambiguity or lack thereof often cannot properly be discerned.” In abandoning reliance only on the four-corners approach, courts are now allowed to consider extrinsic evidence in determining whether an ambiguity exists in the first instance, or to resolve any ambiguities that a court may discover. ' “[I]f ambiguities cannot be resolved by examining the language of the insurance policy, courts may look to extrinsic evidence such as the premiums paid for insurance coverage, the circumstances surrounding the agreement, the conduct of the parties, and oral expressions of the parties' intentions.” Id. (internal citations omitted).

While the Ponder court declined to consider the parties' subjective intentions, it did examine certain extrinsic evidence ' including what the parties had expressed to each other prior to the automobile accident regarding the daughter's coverage and the payment of additional premiums for the daughter's use of that vehicle ' in order to determine whether an ambiguity existed. Id. at 965-67. Looking at conversations between the parties, where one of the insureds had been assured by the insurer that her daughter was “fully covered,” and at the insureds' payment of additional premiums, the court determined that an ambiguity had been created despite the otherwise clear and unambiguous policy language that appeared, on its face, to prevent the daughter from qualifying as a “relative.” Id. at 966. In construing the now-present ambiguity in favor of coverage for the daughter, the court held that “where the policy is found to be unclear and ambiguous, the court's construction of an insurance policy will be guided by the reasonable expectations of the insured.” Id. at 967 (quotations and citation omitted).

Ponder demonstrates that, in some jurisdictions, the apparently clear and unambiguous language of the policy may not provide definite assurance for either the insurer or the policyholder. This is because some courts accept extrinsic evidence not only to resolve ambiguities, but actually to create ambiguities in the first instance. Such a rule may give rise to special challenges for insurers in jurisdictions that construe policy ambiguities against the insurer as the drafter of the policy and in favor of coverage. Ultimately, the end result of the adoption by some jurisdictions of the “modern” rule may be higher insurance premiums due to the increased risk that courts may find there to be coverage in circumstances where facially clear and unambiguous policy language is to the contrary.

Robert D. Goodman is a partner in the New York office of Debevoise & Plimpton LLP, where he co-chairs the firm's Insurance Litigation Practice Group. Julianne Ams and Dustin N. Nofziger are associates in the New York office of Debevoise.