the ambiguity. The court held that there was no contract.193 An alternative holding would be that neither the buyer nor the seller could enforce the contract because neither could carry its burden of proving that the ambiguity should be resolved one way or the other.194

§ 5.4. Special Kinds of Contracts

§ 5.4.1. Insurance Contracts

The courts often say that insurance contracts are to be interpreted in the same way that other kinds of contracts are interpreted.195 Contra proferentem, however, frequently is applied against the insurer.196 More often than with other kinds of contracts, it seems, courts apply this rule as soon as they decide that the relevant contract language is ambiguous, without attempting to resolve the ambiguity by using all of the interpretative elements, as appropriate.197 These courts do not treat the rule as a matter of last resort. But some courts treat it as a last resort here, too.198

There nonetheless are important rules that courts apply only to insurance contracts. First, in some jurisdictions, interpretation of insurance contracts is a matter of law, appropriate for summary judgment and reviewed on appeal de novo.199 Second, exclusions and exceptions from coverage generally are construed against the insurer.200 This exception, unlike contra proferentem, does not depend on a finding that the insurance company drafted the exclusion. It is based, instead, on a substantive decision not to negate a clear coverage provision with an ambiguous exclusion. Third, exceptions to exclusions may be interpreted broadly.201 Fourth, courts are more likely to rely on the ordinary and popular sense

193Id. at 376. See also Oswald v. Allen, 417 F.2d 43 (2d Cir. 1969); RESTATEMENT (SECOND) OF CONTRACTS § 201(3) (1981).

194Frigaliment Importing Co. v. B.N.S. Int’l Sales Corp., 190 F.Supp. 116, 121 (S.D.N.Y. 1960).

195E.g., Bank of the West, 833 P.2d at 551–52.

196Kenneth S. Abraham, A Theory of Insurance Policy Interpretation, 95 MICH. L. REV. 531, 531 (1996).

197E.g., Kaplan v. Northwestern Mut. Life Ins. Co., 65 P.3d 16, 23 (Wash.App. 2003).

198E.g., State Farm Life Ins. Co. v. Beaston, 907 S.W.2d 430, 433 (Tex. 1995).

199National Sun Indus., 596 N.W.2d at 46; Powerine Oil Co., 118 P.3d at 597.

200Auto-Owners-Ins. Co. v. Churchman, 489 N.W.2d 431, 433–34 (Mich. 1992). Contra Harrison v. MFA Mutual Ins. Co., 607 S.W.2d 137, 142 (Mo. 1980).

201E.M.M.I., Inc. v. Zurich American Ins. Co., 9 Cal.Rptr.3d 701, 706 (Cal. 2004).

of insurance contract language than they are in regard to other kinds of contracts.202

The rules for interpreting insurance contracts should be distinguished from the strong version of the doctrine of reasonable expectations. This doctrine allows a court to find that an insured is covered by a policy even though the language of the policy is unambiguously to the contrary.203 For example, in C & J Fertilizer, Inc. v. Allied Mutual. Insurance Co.,204 the insurer promised, in policies entitled “Broad Form Storekeepers Policy” and “Mercantile Burglary and Robbery Policy,”

[t]o pay for loss by burglary or by robbery of a watchman, while the premises are not open for business, of merchandise, furniture, fixtures and equipment within the premises.205

The policies, however, also defined burglary in fine print as

the felonious abstraction of insured property (1) from within the premises by a person making felonious entry therein by actual force and violence, of which force and violence there are visible marks made by tools, explosives, electricity or chemicals upon, or physical damage to, the exterior of the premises at the place of such entry.206

Another provision excluded inside jobs.207 In the event, a theft of chemicals from a storage room inside the insured premises occurred on a Sunday. The trial court found that there were no “visible marks made by tools explosives, electricity or chemicals upon, or physical damage to, the exterior of the premises” at the place of entry.208 There was, however, abundant evidence that the burglary was an outside job, including visible marks on the storage room door indicating that the thief did not have a key. The Supreme Court of Iowa held that the doctrine of reasonable expectations applied to establish coverage.209 The definition of burglary, though not ambiguous, did not stand in the way. A reasonable insured

202Bay Cities Paving & Grading, Inc., v. Lawyers’ Mut. Ins. Co., 855 P.2d 1263, 1270–71 (Cal. 1993).

203Abraham, supra note 196.

204227 N.W.2d 169 (Iowa 1975).

205Id. at 176.

206Id. at 171 (emphasis added).

207Id. at 177.

208Id. at 172.

209Id. at 177.

under a burglary policy would not expect a fine-print definition to limit coverage by defining burglary to require a specific kind of proof.

There is, however, a weak doctrine of reasonable expectations. In California, for example, a court should resolve an ambiguity in policy language according to “the sense in which the promisor believed, at the time of making it, that the promisee understood [the policy].”210 Consequently, as applied to a promise of coverage, this rule does not protect the subjective beliefs of an insurer but, rather, the “objectively reasonable expectations of the insured.”211 This standard is an interpretive one. It is used to give an ordinary meaning to insurance policy coverage provisions, if possible, prior to applying the rule of contra proferentem if it is not possible.212

§ 5.4.2. Others

Several other kinds of contract are subject to special interpretive and default rules. Only a few are mentioned here. Contracts with a government generally are construed against the government, if the ambiguity is not obvious on the contract’s face, because the government usually is the drafter and has greater bargaining power.213 This includes plea agreements in criminal cases.214 Option contracts are construed against the optionee.215 And the scope of an ambiguous agreement to arbitrate disputes is construed in favor of arbitration.216

210Bank of the West, 833 P.2d at 552.

211Id.

212Id.

213United States v. Seckinger, 90 S.Ct. 880, 884–85 (1970); Sunshine Const. & Eng’r., Inc. v. United States, 64 Fed.Cl. 346, 358 (Fed.Cl. 2005).

214E.g., United States v. Ready, 82 F.3d 551, 558–59 (2d Cir. 1996).

215McArthur v. Rosenbaum Co., 180 F.2d 617, 619–20 (3d Cir.1950).

216Mitsubishi Motors Corp. v. Soler Chrysler Plymouth, Inc., 473 U.S. 615, 626 (1985).

This page intentionally left blank