Unraveling Plain Meaning, Extrinsic Evidence And the Doctrine of Contra Proferentem

As anyone involved with insurance coverage litigation knows, ” contra proferentem” is Latin for “ the insurer loses.” Contra proferentem is a rule of contract interpretation that requires an ambiguous contract term to be construed against the drafter of the contract. 20-129 Appleman on Insurance Law & Practice Archive ' 129.2. Because the insurer is the author or “profferor” of the insurance contract, contra proferentem, when applied, almost always results in a loss for the insurer. That the doctrine is also called the “contra insurer” rule speaks to the fact that, when interpreting insurance policies, courts sometimes forget that general rules of contract construction still apply. But there may be a trend in the right direction.

Specifically, a number of commentators have identified a trend away from strict application of contra proferentem and the “plain meaning rule” and toward the admission of extrinsic evidence, in some states even where a contract is ostensibly unambiguous. This is based on a recognition of the inherent tension between these two rules on one hand, and, on the other hand, the principle that ascertaining the parties' intent in the formation of contract is paramount. The view that extrinsic evidence shall not be considered to resolve ambiguities in a contract is clearly at odds with the goal of ascertaining the parties' intent. This is essentially the view in those states applying the contra proferentem rule as a first resort in cases of ambiguity. The preclusion of extrinsic evidence to answer the question of whether an ambiguity exists in the first instance is also at odds with the goal of ascertaining the parties' intent.

While states do not appear ready to eschew the application of contra proferentem except in limited circumstances, there does appear to be an evolutionary shift toward applying the doctrine as the “last resort” it should be where extrinsic evidence exists regarding the parties' intent. Either way, the role of extrinsic evidence in resolving insurance coverage disputes should not be overlooked by practitioners.

Intent of the Contracting Parties Versus the Plain Meaning Rule

It is axiomatic that the paramount role of the court in construing contracts is to ascertain and effectuate the intent of the contracting parties. See 11 Williston on Contracts ' 32.2, at 396 (4th ed. 1999); 5-24 Corbin on Contracts ' 24.7. Indeed, the first line of Ostrager and Newman's Handbook on Insurance Coverage Disputes sets forth the “well-settled” rule that “insurance contracts must be interpreted to effectuate the intent of the parties at the time the contract was formed.” Ostrager & Newman, 1 Handbook on Insurance Coverage Disputes ' 1.01 at 3. See 14-105 Appleman on Insurance ' 105.3[A.]. Yet, as a practical matter, the goal of ascertaining intent arguably plays second fiddle, or no fiddle at all, when the plain meaning rule is applied.

Under the plain meaning rule, where “policy language is unambiguous, the terms are to be accorded their natural and ordinary meaning.” 2-6 Appleman on Insurance Law & Practice Archive ' 6.1 (2013). See 1-3 Construction Insurance: Coverages and Disputes ' 3-5 (discussing the Virginia decision, TravCo Ins. Co. v. Ward, 284 Va. 547, 736 S.E.2d 321 (2012), holding that policy language excluding “latent defect” clearly and unambiguously excluded damage caused by Chinese drywall according to plain meaning of that term). Moreover, the plain meaning rule holds that, absent ambiguity, a court shall not “look to extrinsic evidence or the circumstances surrounding the formation of the contract,” unless fraud, mutual mistake or public policy reasons exist. See 14-105 Appleman on Insurance ' 105.3 (2014).

The conflict between the plain meaning rule and the fundamental goal of ascertaining the contracting parties' intent has been observed and discussed by several commentators. See 5-24 Corbin on Contracts ' 24.7; Ed E. Duncan, The Demise of Contra Proferentem As the Primary Rule of Insurance Contract Interpretation in Ohio and Elsewhere, 41 Tort & Ins. L.J. 1121 (Summer 2006) (“Duncan Article”); see also Margaret N. Kniffin, Conflating and Confusing Contract Interpretation and the Parol Evidence Rule: Is the Emperor Wearing Someone Else's Clothes?, 62 Rutgers L. Rev. 75, 97 (Fall 2009) (“Corbin and others have pointed out that examination of extrinsic evidence, including all surrounding circumstances, can reveal ambiguity that the court would not otherwise have detected.”); Harry G. Prince, Contract Interpretation in California: Plain Meaning, Parol Evidence and Use of the “Just Result” Principle, 31 Loy. L.A. L. Rev' 557 (Jan.1998) (“Prince Article”) (criticizing the plain meaning rule as holding little value as illustrated by California decisions such as Pacific Gas & Electric v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 442 P.2d 641, 69 Cal. Rptr. 561 (1968) and others). As Corbin on Contracts states:

There is universal agreement that the first duty of the court is to put itself in the position of the parties at the time the contract was made. It is wholly illogical for the court to do this without being informed by extrinsic evidence of the circumstances surrounding the making of the contract.

5-24 Corbin on Contracts ' 24.7.

This rule is followed by a majority of states. 5-24 Corbin on Contracts ' 24.7. In a number of states, however, courts will enforce an unambiguous insurance contract as written, but in doing so purport to look to the perspective of a reasonable layperson in the insured's or purchaser's position. See 1-3 Construction Insurance: Coverages and Disputes ' 3-5, n.51 (listing cases from Wisconsin, Georgia, Nebraska, New Hampshire, New York, Kansas and New Jersey); see also, e.g., Community Action for Greater Middlesex County, Inc. v. Am. Alliance Ins. Co., 254 Conn. 387, 399-400, 757 A.2d 1074, 1081, (2000). Yet, how is this “context” provided when no evidence of context is permitted?

In addition to this paradox, another fallacy of the plain meaning rule is the belief that “words ha[ve] absolute and constant referents.” Pacific Gas & Electric, 442 P.2d at 644. Indeed, the nature of the English language makes it relatively easy to insist that a word or a common phrase can have more than one reasonable interpretation. As stated by Justice Oliver Wendell Holmes: “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the times in which it is used.” Towne v. Eisner, 245 U.S. 418, 425 (1918); 5-24 Corbin on Contracts ' 24.7, n.79.

A prime example of this is Pacific Gas & Electric, wherein the trial and appellate courts issued conflicting decisions regarding the “plain meaning” of the term at issue, both of which were rebuked by the California Supreme Court. 442 P.2d at 646; Prince Article at 577-78 & n.111. The courts sought to construe a repair contract that called for the defendant to “indemnify” Pacific Gas & Electric “against all loss, damage, expense and liability resulting from ' injury to property, arising out of or in any way connected with the performance of this contract.” Remanding the case for a retrial, the California Supreme Court held that the trial court must preliminarily consider extrinsic evidence surrounding the contract's formation to determine the intent of the parties in order to resolve the facial ambiguity caused by the inclusion of a term (“indemnify”) applied either to contracting parties or third parties. 442 P.2d at 644-46. The court held such evidence is to be admitted if the trial court makes a preliminary determination that such evidence supports “a meaning to which the language of the instrument is reasonably susceptible.” Id.; Prince Article at 579, n.123. In so holding, the Pacific Gas & Electric court is credited with abolishing the plain meaning rule in California. 5-24 Corbin on Contracts ' 24.7

Notably, this approach is consistent with the Restatement, Section 214, which demands “inquiry into the meaning attached to the words by each party and into what each knew or had reason to know” due to the potential for latent ambiguity absent evidence of context. Restatement (Second) of Contracts 214, Comment b. (1981); Prince Article at 580, n.124. Restatement Section 212(1), also provides, “[t]he interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances. ' ” Restatement (Second) of Contracts 212(1) (1981). Thus, questions of fact exist if interpretation of a disputed term “ depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.” Restatement (Second) of Contracts 212(2).

Among those states apparently following the Restatement's unrestricted consideration of extrinsic evidence are: Arizona, Smith v. Melson, Inc., 659 P.2d 1264, 1266 (Ariz. 1983) (“When interpreting an agreement, the court may always consider the surrounding circumstances.”); Potter v. U.S. Specialty Ins. Co., 209 Ariz. 122, 98 P.3d 557 (Ariz. Ct. App. 2004) (looking to the “language of the contract in view of the surrounding circumstances,” including the common-sense meaning, the purpose of the provision, and the specialized meaning of an undefined term in the relevant industry); New Hampshire, R. Zoppo Co. v. City of Dover, 475 A.2d 12, 15 (N.H. 1984) (“In interpreting a contract, our inquiry focuses on the intent of the contracting parties at the time of the agreement” and “[t]he language of a written contract will be given the interpretation that best reflects the parties' intentions.”); New Mexico, C.R. Anthony Co. v. Loretto Mall Partners, 112 N.M. 504, 510, 817 P.2d 238, 244 (N.M. 1991) (holding that “extrinsic evidence may be offered to aid the court in the threshold determination involving the interpretation of contract terms,” and remanding case for full evidentiary hearing on the question of mutual mistake); and Washington, Berg v. Hudesman, 801 P.2d 222, 229-30 (Wash. 1990) (abandoning the plain meaning rule in announcing new rule that “extrinsic evidence is admissible as to the entire circumstances under which the contract was made, as an aid in ascertaining the parties' intent,” even where a contract appears facially unambiguous).

The abolishment of the plain meaning rule can, however, have unwelcome consequences for insurers when combined with a more subjective “reasonable expectations” standard or an inclination by the court to apply contra proferentem despite the existence of extrinsic evidence. In New Mexico, for example, the court considered a facially unambiguous policy provision barring the insureds' married, nonresident daughter from stacking uninsured motorist benefits, but credited extrinsic evidence to support a finding that the insureds still had a “reasonable expectation” of coverage. Ponder v. State Farm Mut. Auto. Ins. Co., 12 P.3d 960 (N.M. 2000); see also United Nuclear Corp. v. Allstate Ins. Co., 285 P.3d 644 (N.M. 2012) (holding that the court need not bind itself to “prior judicial exploration of the origins of the language employed in the exclusion” and construing term “sudden” in exception to pollution exclusion to mean “unexpected,” rather than assigning any temporal meaning because any ambiguity must be construed in favor of the insured). These cases show that unfettered consideration of extrinsic evidence is not always good for insurers.

Intent of the Parties Versus the Doctrine of Contra Proferentem

In whatever manner a court determines the existence of an ambiguity in a contract, whether through an initial examination of contextual evidence or a rigid “four corners” review, the existence of ambiguity is a crucial determination. Where an insurance contract is held to be ambiguous (a legal question), the doctrine of contra proferentem will likely be considered.

Thus, an important question is whether contra proferentem should be applied as a first resort or as a last resort and “tie breaker” where two equally plausible interpretations of a term are proffered or at least where the insured has offered a “reasonably plausible” construction. The latter has been described as the “better reasoned modern view of contract law.” Ostrager & Newman at 1.01[c], p.17; Jeffrey Stempel, Reassessing the “Sophisticated” Policyholder Defense in Insurance Coverage Litigation, 42 Drake L. Rev. 807, 821 (1993); see also, e.g., Pitcher v. Principal Mut. Life Ins. Co., 870 F. Supp. 903, 915 (S.D. Ind. 1994), aff'd, 93 F.3d 407 (7th Cir.1996) (describing the rule as “a tie breaker when there is no other sound basis for choosing one contract interpretation over another.”).

Like the shift away from the plain meaning rule, there also appears to be a recent shift away from applying contra proferentem as a first resort, and toward application of contra proferentem as a last resort after considering extrinsic evidence. See Susan Randall, Freedom of Contract in Insurance, 14 Conn. Ins. L.J. 107, 120-122 & n.43 (2007) (recognizing recent advocacy “for adherence to usual contract rules” and listing cases supporting increasing application of those rules by courts), (citing, inter alia, Klapp v. United Ins. Group Agency, Inc., 663 N.W.2d 447, 456 (Mich. 2003) (ruling, over heady dissent, that contra proferentem applies only if the parties' intent cannot be discerned through use of conventional rules of interpretation, including examination of relevant extrinsic evidence)); see Duncan Article at n.88 (observing that the “majority rule” or at least the “modern view” has been stated as embracing contra proferentem as a last resort). But see, e.g., Washington Nat'l Ins. Corp. v. Ruderman, 117 So. 3d 943 (Fla. 2013) (demonstrating reflexive application of the doctrine of contra proferentem in Florida upon a superficial finding of ambiguity in an insurance policy, without resort to extrinsic evidence).

With respect to the doctrine generally, Appleman observes: “courts unanimously hold that insurance contracts must be interpreted in favor of a policy holder or beneficiary, wherever possible, and strictly construed against the insurer in order to afford the protection which the insured was endeavoring to secure when applying for insurance.” 14-105 Appleman on Insurance ' 105.3 at n.370. See Conn. Ins. Guaranty Ass'n v. Fontaine, 900 A.2d 18, 24, n.7 (Conn. 2006) (contra proferentem rule is applied “more rigorously ' in the context of insurance contracts than in other contracts”).

The rationales supplied for the application of contra proferentem are varied. The most common is that ambiguities should be construed against the insurer “[s]ince the insurer is the author ('profferor') of the insurance contract[.]” 14-105 Appleman on Insurance ' 105.3 at n.370. Restatement (Second) of Contracts 206. Explained more fully:

The party who actually does the writing of an instrument will presumably be guided by his own interests and goals in the transaction. He may choose shadings of expression, words more specific or more imprecise, according to the dictates of these interests. ' A further, related rationale for the rule is that [s]ince one who speaks or writes, can by exactness of expression more easily prevent mistakes in meaning, than one with whom he is dealing, doubts arising from ambiguity are resolved in favor of the latter.

Fontaine, 278 Conn. at 789, n.7 (citation and internal quotation marks omitted). See also Restatement (Second) of Contracts 206, cmt. a (echoing this rationale). A second rationale is that insurance policies are take-it-or-leave-it “contracts of adhesion,” which is “a variation on the first rationale (drafter is responsible) that focuses more on the insureds' side and their inability to vary the terms of the agreement.” 1-5 New Appleman on Insurance Law Library Edition ' 5.02 at n.51 (2014) (identifying additional rationales including that insurers are more capable of absorbing the risk and that searching for the intent of the insured would be strained and artificial when it comes to interpreting policy forms).

But as Appleman points out, insurance policies are often based on forms, drafted by the ISO rather than a single insurance company, and are not completely contracts of adhesion either, since “most policies have optional endorsements that can alter certain provisions of the policy.” 1-5 New Appleman on Insurance Law Library Edition ' 5.02 at nn.52-54.

Further, as sophisticated insureds often negotiate their policies and are sometimes even involved in drafting policy provisions, some courts have recognized exceptions to contra proferentem in these circumstances. See Newport Assocs. Dev. Co. v. Travelers Indem. Co., 162 F.3d 789, 794 (3d Cir. N.J. 1998) (“When a contract is drafted by the insured or jointly negotiated, the doctrine [of contra proferentem ] does not apply.”) (citation omitted); Vought Aircraft Indus. v. Falvey Cargo Underwriting, Ltd., 729 F. Supp. 2d 814, 824 (N.D. Tex. 2010) (reaching a similar holding); Hazel Glenn Beh, Reassessing the Sophisticated Insured Exception, 39 Tort & Ins. L.J . 85 at n.44 (Fall, 2003) (listing cases and observing that “the primary factor that leads to rejecting contra-insurer construction rules [in recent cases] is the drafting history of the contract language”). See also Stempel Article at 848-55 (listing factors courts should consider concerning the policyholder's status and involvement in negotiation and drafting to assist courts in determining a contract's meaning).

Likewise, courts typically will not apply the doctrine in cases where insurance policy language is statutorily mandated. See Restatement (Second) of Contracts 206, cmt. b. (noting “no direct application” of rule “to cases where the language is prescribed by law,” as sometimes applies to insurance policies, bills of lading, and other standardized documents.); Terra Indus. v. Commonwealth Ins. Co. of Am., 981 F. Supp. 581, 589 (N.D. Iowa 1997) (holding that the application of contra proferentem to terms of insurance policies dictated by statute is “clearly at odds with the greater weight ' and what this court finds to be the better reasoned ' of authority in other jurisdictions.”).

To the extent that no exception to the rule applies, whether contra proferentem is applied strictly as a first resort or, alternatively, as a last resort after consideration of extrinsic evidence remains a key question. The Ohio Supreme Court's attempts to answer this question are illustrative of the legal discourse nationwide. Discussing the evolution of Ohio law, one commentator cites the supreme court's decision in Westfield Insurance Co. v. Gelatis, 797 N.E.2d 1256 (Ohio 2003), opining that although ” Gelatis does not hold outright ' that intent of the parties prevails over contra proferentem, the opinion does lay the groundwork for such a conclusion.” Duncan Article at n.77.

Notably, the Ohio supreme court's Gelatis decision was, in part, a reaction to its 1999 decision, Scott-Pontzer v. Liberty Mutual Fire Insurance Co., 710 N.E.2d 1116 (Ohio 1999), where the “prevalence of contra proferentem over the intention of the parties perhaps reached its zenith ' and the importance of the intention of the parties its nadir.” Duncan Article at n.28. Gelatis overruled Scott-Ponzer's holding that ambiguous language in a business auto policy provided uninsured/underinsured motorist coverage to the insured's employees even where an accident occurred outside of the course and scope of employment. Gelatis , 797 N.E.2d at 1265-66. The Gelatis court lambasted Scott-Pontzer as a “preposterous” and “beguiling” decision that “ignored the intent of the parties” and ultimately led to “chaos in the courts.” Gelatis, 797 N.E.2d at 1263, 1269.

Yet, the Gelatis decision is somewhat schizophrenic because, while the court made clear that “the intent of the parties is paramount,” id. at 1270, it held fast to the rule that “when a written contract is standardized between parties of unequal bargaining power, an ambiguity will be construed in favor of the nondrafting party.” See Gelatis , 797 N.E.2d at 1262; Safeco Ins. Co. of Am. v. White, 913 N.E.2d 426, 433 (Ohio 2009). The specific limitations on the rule revived in Gelatis were: 1) that it shall not be applied “so as to provide an unreasonable interpretation of the words of the policy”; and 2) that a plaintiff not a party to the allegedly ambiguous contract “is not in a position to urge” that it “be construed strictly against the other party.” Gelatis, 797 N.E.2d at 1262 (citing Morfoot v. Stake, 190 N.E.2d 573 (Ohio 1963) and Cook v. Kozell, 199 N.E.2d 566 (Ohio 1964)).

The recent evolution of the rule of contra proferentem is also apparent in the recent Connecticut decisions of Fiallo v. Allstate Ins. Co., 51 A.3d 1193 (Conn. App. 2012) and Lexington Insurance Co. v. Lexington Healthcare Group, Inc., 84 A.3d 1167 (Conn. 2014) (en banc). The Fiallo court was faced with two potential methods of payment for uninsured/underinsured motorist insurance coverage. The method was intended to be determined by a code printed on the declarations page ' if one code was specified, the coverage would be limited at a certain amount; if the other code was specified, the entirety of the judgment would be covered. The declarations page did not specify one code or the other. Facing this ambiguity, the court noted that “the canon of contra proferentem need not be applied automatically.” Fiallo, 138 Conn. App. at 340, 51 A.3d at 1202 (citation omitted). The court thus remanded the case for the trial court to ascertain the parties' intent by way of extrinsic evidence. Id . at 1207. See also Fontaine, 278 Conn. at 788, 900 A.2d at 24 (“Thus, having concluded that the relevant policy language is ambiguous, we ordinarily would be free to consider extrinsic evidence, although [i]f the extrinsic evidence presents issues of credibility or a choice among reasonable inferences, the decision on the intent of the parties is a job for the trier of fact.”).

Likewise, in Lexington Insurance Co., the Connecticut Supreme Court held that the policy was unambiguous, but even if it were, the court could look to extrinsic evidence to resolve any ambiguity created by the use of terms “aggregated limit” and “aggregate policy limit,” including insurance application materials, e-mails between agents indicating that the policyholder could not afford the coverage initially sought, and binders indicating the difference between the two limits. While the court found the language unambiguous, and thus did not need to examine those materials to come to its decision, had the court automatically applied the doctrine of contra proferentem in case of ambiguity, it would not have been able to come to the same conclusion. If the language was deemed ambiguous, a decision to ignore the binders and e-mails would have resulted in a massively expensive loss to the insurer; a loss that would have been the wrong decision.

Conclusion

Several things should be remembered with respect to policy construction in most jurisdictions: 1) if a policy is unambiguous, review is limited to the four corners of the policy, unless fraud, mistake, or public policy dictate otherwise; 2) if a term in the policy is ambiguous, the court should consider extrinsic evidence; and 3) if a term in the policy is ambiguous, but the meaning of the term is not ascertainable through extrinsic evidence, either because no such evidence exists or because the evidence does not eliminate the ambiguity, and no other exceptions apply, then, and only then, should the rule of contra proferentem allow the court to construe the ambiguous term against the insurer in appropriate circumstances. Certainly, in many cases there will be no such evidence, but in some, it will make all the difference. Thus, contra proferentem should be used as a tool of last resort, not an automatic rule of application.

As a final note, it is important to remember to alert the court that extrinsic evidence actually exists, lest the argument against contra proferentem or in avoidance of “plain meaning” be written off. Extrinsic evidence may rarely tip the scales with respect to a disagreement regarding the “your work” or “your product” exclusions, or garden-variety additional insured issues, but it will often be helpful in determining issues regarding the amount and type of coverage purchased and the inclusion of, or relationship between, endorsements.

Regen O'Malley is Of Counsel at Gordon & Rees LLP, where she focuses on insurance coverage, including counseling regarding complex coverage issues and representation of insurers in defending and prosecuting declaratory judgment actions in coverage disputes. She is also the incoming Chair of the Connecticut Bar Association's Insurance Law Section. Greil I. Roberts is an Associate at the firm, and a member of its insurance practice group.

As anyone involved with insurance coverage litigation knows, ” contra proferentem” is Latin for “ the insurer loses.” Contra proferentem is a rule of contract interpretation that requires an ambiguous contract term to be construed against the drafter of the contract. 20-129 Appleman on Insurance Law & Practice Archive ' 129.2. Because the insurer is the author or “profferor” of the insurance contract, contra proferentem, when applied, almost always results in a loss for the insurer. That the doctrine is also called the “contra insurer” rule speaks to the fact that, when interpreting insurance policies, courts sometimes forget that general rules of contract construction still apply. But there may be a trend in the right direction.

Specifically, a number of commentators have identified a trend away from strict application of contra proferentem and the “plain meaning rule” and toward the admission of extrinsic evidence, in some states even where a contract is ostensibly unambiguous. This is based on a recognition of the inherent tension between these two rules on one hand, and, on the other hand, the principle that ascertaining the parties' intent in the formation of contract is paramount. The view that extrinsic evidence shall not be considered to resolve ambiguities in a contract is clearly at odds with the goal of ascertaining the parties' intent. This is essentially the view in those states applying the contra proferentem rule as a first resort in cases of ambiguity. The preclusion of extrinsic evidence to answer the question of whether an ambiguity exists in the first instance is also at odds with the goal of ascertaining the parties' intent.

While states do not appear ready to eschew the application of contra proferentem except in limited circumstances, there does appear to be an evolutionary shift toward applying the doctrine as the “last resort” it should be where extrinsic evidence exists regarding the parties' intent. Either way, the role of extrinsic evidence in resolving insurance coverage disputes should not be overlooked by practitioners.

Intent of the Contracting Parties Versus the Plain Meaning Rule

It is axiomatic that the paramount role of the court in construing contracts is to ascertain and effectuate the intent of the contracting parties. See 11 Williston on Contracts ' 32.2, at 396 (4th ed. 1999); 5-24 Corbin on Contracts ' 24.7. Indeed, the first line of Ostrager and Newman's Handbook on Insurance Coverage Disputes sets forth the “well-settled” rule that “insurance contracts must be interpreted to effectuate the intent of the parties at the time the contract was formed.” Ostrager & Newman, 1 Handbook on Insurance Coverage Disputes ' 1.01 at 3. See 14-105 Appleman on Insurance ' 105.3[A.]. Yet, as a practical matter, the goal of ascertaining intent arguably plays second fiddle, or no fiddle at all, when the plain meaning rule is applied.

Under the plain meaning rule, where “policy language is unambiguous, the terms are to be accorded their natural and ordinary meaning.” 2-6 Appleman on Insurance Law & Practice Archive ' 6.1 (2013). See 1-3 Construction Insurance: Coverages and Disputes ' 3-5 (discussing the Virginia decision, TravCo Ins. Co. v. Ward , 284 Va. 547, 736 S.E.2d 321 (2012), holding that policy language excluding “latent defect” clearly and unambiguously excluded damage caused by Chinese drywall according to plain meaning of that term). Moreover, the plain meaning rule holds that, absent ambiguity, a court shall not “look to extrinsic evidence or the circumstances surrounding the formation of the contract,” unless fraud, mutual mistake or public policy reasons exist. See 14-105 Appleman on Insurance ' 105.3 (2014).

The conflict between the plain meaning rule and the fundamental goal of ascertaining the contracting parties' intent has been observed and discussed by several commentators. See 5-24 Corbin on Contracts ' 24.7; Ed E. Duncan, The Demise of Contra Proferentem As the Primary Rule of Insurance Contract Interpretation in Ohio and Elsewhere, 41 Tort & Ins. L.J. 1121 (Summer 2006) (“Duncan Article”); see also Margaret N. Kniffin, Conflating and Confusing Contract Interpretation and the Parol Evidence Rule: Is the Emperor Wearing Someone Else's Clothes?, 62 Rutgers L. Rev. 75, 97 (Fall 2009) (“Corbin and others have pointed out that examination of extrinsic evidence, including all surrounding circumstances, can reveal ambiguity that the court would not otherwise have detected.”); Harry G. Prince, Contract Interpretation in California: Plain Meaning, Parol Evidence and Use of the “Just Result” Principle, 31 Loy. L.A. L. Rev ' 557 (Jan.1998) (“Prince Article”) (criticizing the plain meaning rule as holding little value as illustrated by California decisions such as Pacific Gas & Electric v. G.W. Thomas Drayage & Rigging Co. , 69 Cal. 2d 33, 442 P.2d 641, 69 Cal. Rptr. 561 (1968) and others). As Corbin on Contracts states:

There is universal agreement that the first duty of the court is to put itself in the position of the parties at the time the contract was made. It is wholly illogical for the court to do this without being informed by extrinsic evidence of the circumstances surrounding the making of the contract.

5-24 Corbin on Contracts ' 24.7.

This rule is followed by a majority of states. 5-24 Corbin on Contracts ' 24.7. In a number of states, however, courts will enforce an unambiguous insurance contract as written, but in doing so purport to look to the perspective of a reasonable layperson in the insured's or purchaser's position. See 1-3 Construction Insurance: Coverages and Disputes ' 3-5, n.51 (listing cases from Wisconsin, Georgia, Nebraska, New Hampshire, New York, Kansas and New Jersey); see also, e.g., Community Action for Greater Middlesex County, Inc. v. Am. Alliance Ins. Co. , 254 Conn. 387, 399-400, 757 A.2d 1074, 1081, (2000). Yet, how is this “context” provided when no evidence of context is permitted?

In addition to this paradox, another fallacy of the plain meaning rule is the belief that “words ha[ve] absolute and constant referents.” Pacific Gas & Electric, 442 P.2d at 644. Indeed, the nature of the English language makes it relatively easy to insist that a word or a common phrase can have more than one reasonable interpretation. As stated by Justice Oliver Wendell Holmes: “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the times in which it is used.” Towne v. Eisner , 245 U.S. 418, 425 (1918); 5-24 Corbin on Contracts ' 24.7, n.79.

A prime example of this is Pacific Gas & Electric, wherein the trial and appellate courts issued conflicting decisions regarding the “plain meaning” of the term at issue, both of which were rebuked by the California Supreme Court. 442 P.2d at 646; Prince Article at 577-78 & n.111. The courts sought to construe a repair contract that called for the defendant to “indemnify” Pacific Gas & Electric “against all loss, damage, expense and liability resulting from ' injury to property, arising out of or in any way connected with the performance of this contract.” Remanding the case for a retrial, the California Supreme Court held that the trial court must preliminarily consider extrinsic evidence surrounding the contract's formation to determine the intent of the parties in order to resolve the facial ambiguity caused by the inclusion of a term (“indemnify”) applied either to contracting parties or third parties. 442 P.2d at 644-46. The court held such evidence is to be admitted if the trial court makes a preliminary determination that such evidence supports “a meaning to which the language of the instrument is reasonably susceptible.” Id.; Prince Article at 579, n.123. In so holding, the Pacific Gas & Electric court is credited with abolishing the plain meaning rule in California. 5-24 Corbin on Contracts ' 24.7

Notably, this approach is consistent with the Restatement, Section 214, which demands “inquiry into the meaning attached to the words by each party and into what each knew or had reason to know” due to the potential for latent ambiguity absent evidence of context. Restatement (Second) of Contracts 214, Comment b. (1981); Prince Article at 580, n.124. Restatement Section 212(1), also provides, “[t]he interpretation of an integrated agreement is directed to the meaning of the terms of the writing or writings in the light of the circumstances. ' ” Restatement (Second) of Contracts 212(1) (1981). Thus, questions of fact exist if interpretation of a disputed term “ depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence. Otherwise a question of interpretation of an integrated agreement is to be determined as a question of law.” Restatement (Second) of Contracts 212(2).

Among those states apparently following the Restatement's unrestricted consideration of extrinsic evidence are: Arizona, Smith v. Melson, Inc. , 659 P.2d 1264, 1266 (Ariz. 1983) (“When interpreting an agreement, the court may always consider the surrounding circumstances.”); Potter v. U.S. Specialty Ins. Co. , 209 Ariz. 122, 98 P.3d 557 (Ariz. Ct. App. 2004) (looking to the “language of the contract in view of the surrounding circumstances,” including the common-sense meaning, the purpose of the provision, and the specialized meaning of an undefined term in the relevant industry); New Hampshire, R. Zoppo Co. v. City of Dover , 475 A.2d 12, 15 (N.H. 1984) (“In interpreting a contract, our inquiry focuses on the intent of the contracting parties at the time of the agreement” and “[t]he language of a written contract will be given the interpretation that best reflects the parties' intentions.”); New Mexico, C.R. Anthony Co. v. Loretto Mall Partners , 112 N.M. 504, 510, 817 P.2d 238, 244 (N.M. 1991) (holding that “extrinsic evidence may be offered to aid the court in the threshold determination involving the interpretation of contract terms,” and remanding case for full evidentiary hearing on the question of mutual mistake); and Washington, Berg v. Hudesman , 801 P.2d 222, 229-30 (Wash. 1990) (abandoning the plain meaning rule in announcing new rule that “extrinsic evidence is admissible as to the entire circumstances under which the contract was made, as an aid in ascertaining the parties' intent,” even where a contract appears facially unambiguous).

The abolishment of the plain meaning rule can, however, have unwelcome consequences for insurers when combined with a more subjective “reasonable expectations” standard or an inclination by the court to apply contra proferentem despite the existence of extrinsic evidence. In New Mexico, for example, the court considered a facially unambiguous policy provision barring the insureds' married, nonresident daughter from stacking uninsured motorist benefits, but credited extrinsic evidence to support a finding that the insureds still had a “reasonable expectation” of coverage. Ponder v. State Farm Mut. Auto. Ins. Co. , 12 P.3d 960 (N.M. 2000); see also United Nuclear Corp. v. Allstate Ins. Co. , 285 P.3d 644 (N.M. 2012) (holding that the court need not bind itself to “prior judicial exploration of the origins of the language employed in the exclusion” and construing term “sudden” in exception to pollution exclusion to mean “unexpected,” rather than assigning any temporal meaning because any ambiguity must be construed in favor of the insured). These cases show that unfettered consideration of extrinsic evidence is not always good for insurers.

Intent of the Parties Versus the Doctrine of Contra Proferentem

In whatever manner a court determines the existence of an ambiguity in a contract, whether through an initial examination of contextual evidence or a rigid “four corners” review, the existence of ambiguity is a crucial determination. Where an insurance contract is held to be ambiguous (a legal question), the doctrine of contra proferentem will likely be considered.

Thus, an important question is whether contra proferentem should be applied as a first resort or as a last resort and “tie breaker” where two equally plausible interpretations of a term are proffered or at least where the insured has offered a “reasonably plausible” construction. The latter has been described as the “better reasoned modern view of contract law.” Ostrager & Newman at 1.01[c], p.17; Jeffrey Stempel, Reassessing the “Sophisticated” Policyholder Defense in Insurance Coverage Litigation, 42 Drake L. Rev . 807, 821 (1993); see also, e.g., Pitcher v. Principal Mut. Life Ins. Co. , 870 F. Supp. 903, 915 (S.D. Ind. 1994), aff'd, 93 F.3d 407 (7th Cir.1996) (describing the rule as “a tie breaker when there is no other sound basis for choosing one contract interpretation over another.”).

Like the shift away from the plain meaning rule, there also appears to be a recent shift away from applying contra proferentem as a first resort, and toward application of contra proferentem as a last resort after considering extrinsic evidence. See Susan Randall, Freedom of Contract in Insurance, 14 Conn. Ins. L.J . 107, 120-122 & n.43 (2007) (recognizing recent advocacy “for adherence to usual contract rules” and listing cases supporting increasing application of those rules by courts), (citing, inter alia, Klapp v. United Ins. Group Agency, Inc. , 663 N.W.2d 447, 456 (Mich. 2003) (ruling, over heady dissent, that contra proferentem applies only if the parties' intent cannot be discerned through use of conventional rules of interpretation, including examination of relevant extrinsic evidence)); see Duncan Article at n.88 (observing that the “majority rule” or at least the “modern view” has been stated as embracing contra proferentem as a last resort). But see, e.g., Washington Nat'l Ins. Corp. v. Ruderman , 117 So. 3d 943 (Fla. 2013) (demonstrating reflexive application of the doctrine of contra proferentem in Florida upon a superficial finding of ambiguity in an insurance policy, without resort to extrinsic evidence).

With respect to the doctrine generally, Appleman observes: “courts unanimously hold that insurance contracts must be interpreted in favor of a policy holder or beneficiary, wherever possible, and strictly construed against the insurer in order to afford the protection which the insured was endeavoring to secure when applying for insurance.” 14-105 Appleman on Insurance ' 105.3 at n.370. See Conn. Ins. Guaranty Ass'n v. Fontaine , 900 A.2d 18, 24, n.7 (Conn. 2006) ( contra proferentem rule is applied “more rigorously ' in the context of insurance contracts than in other contracts”).

The rationales supplied for the application of contra proferentem are varied. The most common is that ambiguities should be construed against the insurer “[s]ince the insurer is the author ('profferor') of the insurance contract[.]” 14-105 Appleman on Insurance ' 105.3 at n.370. Restatement (Second) of Contracts 206. Explained more fully:

The party who actually does the writing of an instrument will presumably be guided by his own interests and goals in the transaction. He may choose shadings of expression, words more specific or more imprecise, according to the dictates of these interests. ' A further, related rationale for the rule is that [s]ince one who speaks or writes, can by exactness of expression more easily prevent mistakes in meaning, than one with whom he is dealing, doubts arising from ambiguity are resolved in favor of the latter.

Fontaine, 278 Conn. at 789, n.7 (citation and internal quotation marks omitted). See also Restatement (Second) of Contracts 206, cmt. a (echoing this rationale). A second rationale is that insurance policies are take-it-or-leave-it “contracts of adhesion,” which is “a variation on the first rationale (drafter is responsible) that focuses more on the insureds' side and their inability to vary the terms of the agreement.” 1-5 New Appleman on Insurance Law Library Edition ' 5.02 at n.51 (2014) (identifying additional rationales including that insurers are more capable of absorbing the risk and that searching for the intent of the insured would be strained and artificial when it comes to interpreting policy forms).

But as Appleman points out, insurance policies are often based on forms, drafted by the ISO rather than a single insurance company, and are not completely contracts of adhesion either, since “most policies have optional endorsements that can alter certain provisions of the policy.” 1-5 New Appleman on Insurance Law Library Edition ' 5.02 at nn.52-54.

Further, as sophisticated insureds often negotiate their policies and are sometimes even involved in drafting policy provisions, some courts have recognized exceptions to contra proferentem in these circumstances. See Newport Assocs. Dev. Co. v. Travelers Indem. Co. , 162 F.3d 789, 794 (3d Cir. N.J. 1998) (“When a contract is drafted by the insured or jointly negotiated, the doctrine [of contra proferentem ] does not apply.”) (citation omitted); Vought Aircraft Indus. v. Falvey Cargo Underwriting, Ltd. , 729 F. Supp. 2d 814, 824 (N.D. Tex. 2010) (reaching a similar holding); Hazel Glenn Beh, Reassessing the Sophisticated Insured Exception, 39 Tort & Ins. L.J . 85 at n.44 (Fall, 2003) (listing cases and observing that “the primary factor that leads to rejecting contra-insurer construction rules [in recent cases] is the drafting history of the contract language”). See also Stempel Article at 848-55 (listing factors courts should consider concerning the policyholder's status and involvement in negotiation and drafting to assist courts in determining a contract's meaning).

Likewise, courts typically will not apply the doctrine in cases where insurance policy language is statutorily mandated. See Restatement (Second) of Contracts 206, cmt. b. (noting “no direct application” of rule “to cases where the language is prescribed by law,” as sometimes applies to insurance policies, bills of lading, and other standardized documents.); Terra Indus. v. Commonwealth Ins. Co. of Am ., 981 F. Supp. 581, 589 (N.D. Iowa 1997) (holding that the application of contra proferentem to terms of insurance policies dictated by statute is “clearly at odds with the greater weight ' and what this court finds to be the better reasoned ' of authority in other jurisdictions.”).

To the extent that no exception to the rule applies, whether contra proferentem is applied strictly as a first resort or, alternatively, as a last resort after consideration of extrinsic evidence remains a key question. The Ohio Supreme Court's attempts to answer this question are illustrative of the legal discourse nationwide. Discussing the evolution of Ohio law, one commentator cites the supreme court's decision in Westfield Insurance Co. v. Gelatis , 797 N.E.2d 1256 (Ohio 2003), opining that although ” Gelatis does not hold outright ' that intent of the parties prevails over contra proferentem , the opinion does lay the groundwork for such a conclusion.” Duncan Article at n.77.

Notably, the Ohio supreme court's Gelatis decision was, in part, a reaction to its 1999 decision, Scott-Pontzer v. Liberty Mutual Fire Insurance Co. , 710 N.E.2d 1116 (Ohio 1999), where the “prevalence of contra proferentem over the intention of the parties perhaps reached its zenith ' and the importance of the intention of the parties its nadir.” Duncan Article at n.28. Gelatis overruled Scott-Ponzer's holding that ambiguous language in a business auto policy provided uninsured/underinsured motorist coverage to the insured's employees even where an accident occurred outside of the course and scope of employment. Gelatis , 797 N.E.2d at 1265-66. The Gelatis court lambasted Scott-Pontzer as a “preposterous” and “beguiling” decision that “ignored the intent of the parties” and ultimately led to “chaos in the courts.” Gelatis, 797 N.E.2d at 1263, 1269.

Yet, the Gelatis decision is somewhat schizophrenic because, while the court made clear that “the intent of the parties is paramount,” id. at 1270, it held fast to the rule that “when a written contract is standardized between parties of unequal bargaining power, an ambiguity will be construed in favor of the nondrafting party.” See Gelatis , 797 N.E.2d at 1262; Safeco Ins. Co. of Am. v. White , 913 N.E.2d 426, 433 (Ohio 2009). The specific limitations on the rule revived in Gelatis were: 1) that it shall not be applied “so as to provide an unreasonable interpretation of the words of the policy”; and 2) that a plaintiff not a party to the allegedly ambiguous contract “is not in a position to urge” that it “be construed strictly against the other party.” Gelatis , 797 N.E.2d at 1262 (citing Morfoot v. Stake , 190 N.E.2d 573 (Ohio 1963) and Cook v. Kozell , 199 N.E.2d 566 (Ohio 1964)).

The recent evolution of the rule of contra proferentem is also apparent in the recent Connecticut decisions of Fiallo v. Allstate Ins. Co. , 51 A.3d 1193 (Conn. App. 2012) and Lexington Insurance Co. v. Lexington Healthcare Group, Inc. , 84 A.3d 1167 (Conn. 2014) (en banc). The Fiallo court was faced with two potential methods of payment for uninsured/underinsured motorist insurance coverage. The method was intended to be determined by a code printed on the declarations page ' if one code was specified, the coverage would be limited at a certain amount; if the other code was specified, the entirety of the judgment would be covered. The declarations page did not specify one code or the other. Facing this ambiguity, the court noted that “the canon of contra proferentem need not be applied automatically.” Fiallo, 138 Conn. App. at 340, 51 A.3d at 1202 (citation omitted). The court thus remanded the case for the trial court to ascertain the parties' intent by way of extrinsic evidence. Id . at 1207. See also Fontaine, 278 Conn. at 788, 900 A.2d at 24 (“Thus, having concluded that the relevant policy language is ambiguous, we ordinarily would be free to consider extrinsic evidence, although [i]f the extrinsic evidence presents issues of credibility or a choice among reasonable inferences, the decision on the intent of the parties is a job for the trier of fact.”).

Likewise, in Lexington Insurance Co., the Connecticut Supreme Court held that the policy was unambiguous, but even if it were, the court could look to extrinsic evidence to resolve any ambiguity created by the use of terms “aggregated limit” and “aggregate policy limit,” including insurance application materials, e-mails between agents indicating that the policyholder could not afford the coverage initially sought, and binders indicating the difference between the two limits. While the court found the language unambiguous, and thus did not need to examine those materials to come to its decision, had the court automatically applied the doctrine of contra proferentem in case of ambiguity, it would not have been able to come to the same conclusion. If the language was deemed ambiguous, a decision to ignore the binders and e-mails would have resulted in a massively expensive loss to the insurer; a loss that would have been the wrong decision.

Conclusion

Several things should be remembered with respect to policy construction in most jurisdictions: 1) if a policy is unambiguous, review is limited to the four corners of the policy, unless fraud, mistake, or public policy dictate otherwise; 2) if a term in the policy is ambiguous, the court should consider extrinsic evidence; and 3) if a term in the policy is ambiguous, but the meaning of the term is not ascertainable through extrinsic evidence, either because no such evidence exists or because the evidence does not eliminate the ambiguity, and no other exceptions apply, then, and only then, should the rule of contra proferentem allow the court to construe the ambiguous term against the insurer in appropriate circumstances. Certainly, in many cases there will be no such evidence, but in some, it will make all the difference. Thus, contra proferentem should be used as a tool of last resort, not an automatic rule of application.

As a final note, it is important to remember to alert the court that extrinsic evidence actually exists, lest the argument against contra proferentem or in avoidance of “plain meaning” be written off. Extrinsic evidence may rarely tip the scales with respect to a disagreement regarding the “your work” or “your product” exclusions, or garden-variety additional insured issues, but it will often be helpful in determining issues regarding the amount and type of coverage purchased and the inclusion of, or relationship between, endorsements.

Regen O'Malley is Of Counsel at Gordon & Rees LLP, where she focuses on insurance coverage, including counseling regarding complex coverage issues and representation of insurers in defending and prosecuting declaratory judgment actions in coverage disputes. She is also the incoming Chair of the Connecticut Bar Association's Insurance Law Section. Greil I. Roberts is an Associate at the firm, and a member of its insurance practice group.