Commercial Justices Apply Rules of Contract Interpretation in Insurance Cases

July 01, 2004

In two recent decisions, the Justices of the Commercial Division of the Supreme Court, Nassau County, applied well-established principles of contract interpretation in two different contexts, both insurance-related. In Erlichman v. Encompass Insurance Company,1 Justice Austin analyzed the provisions of a contract of insurance to determine the timeliness of the action, ultimately concluding the ambiguities in the policy provisions warranted the denial of the defendant’s motion for summary judgment. Two months earlier, in Matter of Coordinated Title Insurance Cases,2 Justice Warshawsky denied, in large part, a motion to quash a non-party subpoena, holding the extrinsic evidence in the possession of the non-party was discoverable in connection with claimed ambiguities in policy provisions.

The Erlichman Case

The plaintiffs in Erlichman were the victims of home burglary in July 1999, during which a Renoir drawing was stolen. They promptly submitted a claim to their homeowners insurance company. Following submission of the claim, the plaintiffs had extensive discussions with the insurance company and the art expert retained by the company, receiving repeated assurances that the claim was being processed and would be satisfactorily resolved. However, in the summer of 2002, with no resolution of the claim, the plaintiffs commenced a first- party action against the insurance company to recover the value of the stolen drawing.

The insurance company moved for summary judgment on the ground that the action was barred by the contractual limitations provisions in the insurance policy, which provided that no action could be brought unless commenced “within two years after the date of loss” but “not until thirty days after the proof of loss has been filed and the amount of the loss has been determined.” The policy also provided that the “two year period is extended by the number of days between the date the proof of loss is submitted and the date the claim is submitted in whole or in part.”

The Court observed that the relationship between an insurance company and a policy holder is contractual, and that parties to a contract may agree to shorten the limitations period applicable to particular claims. Plaintiff urged that the company, by assuring plaintiffs that it was processing the claim and that the claim would be satisfactorily resolved, had waived, or was equitably estopped from raising, the statue of limitations defense. The court determined that the plaintiffs failed to allege sufficient facts to establish either a waiver or an estoppel. This was due, in large part, to a significant period of inactivity on the part of the plaintiffs following the submissions of the claim to the company.

Turning to the language of the insurance contract, the court found that the limitations provisions were ambiguous as they were subject to at least two reasonable interpretations. Although the insurance company argued that the action was time-barred because the policy required that all claims be commenced within two years of the date of loss, the Court determined that reading that policy provision in a vacuum would negate the second limitations provision, which tolled the limitations period “until thirty days after the proof of loss has been filed and the amount of the loss has been determined.” The court noted that there had been no determination of the amount of the loss and, thus, it appeared that the plaintiffs’ time to commence the action had not begun to run.

In addition, the Court held that the final policy provision at issue, extending the limitations period “by the number of days between the date of proof of loss is submitted and the date the claim is submitted in whole or in part,” was ambiguous because the policy did not define the phrase “the claim is submitted in whole or in part.” Accordingly, the Court found that the average lay policy holder could read the provision to mean that the time to commence an action is extended until the adjuster or appraiser submits a report to the carrier, and noted that there was no evidence in the record that such a report had been submitted.

In the presence of these ambiguities, the court denied the defendant’s motion for summary judgment, concluding that extrinsic evidence of the meaning of the subject provisions was appropriate.

Coordinated Title Insurance Cases

In Matter of Coordinated Title Insurance Cases, a certified class action brought against eight title insurance companies, Justice Warshawsky denied, in large part, a motion by non-party Title Insurance Rate Association Inc. (TIRSA) to quash a subpoena served by the plaintiffs. The plaintiffs alleged that the defendants failed to adhere to notice and rate charging provisions of a TIRSA rate manual, which purportedly required the defendants to charge a reduced premium in instances involving either a refinance or a reassurance of a title insurance policy.

The Court began its analysis by noting that the TIRSA is licensed by the State of New York as a rating bureau, or rate service organization, with a mandate to gather statistical information, recommended premiums, and propose policy and endorsement forms to the Superintendent of Insurance.

The defendants argued that certain key terms of the TIRSA manual were ambiguous . The Court acknowledged the defendants’ argument that the manual lacked a definition of the person or entity entitled to receive the discounted rate; failed to define “an improved or unchanged property;” lacked guidelines to interpret and apply the confusing terms regarding the method by which the borrower or lender was to receive notice; did not define, and there were no industry standards or practices for sending out, “applicant confirmations;” and failed to define “identical premises” or “unchanged ownership.” In essence, the defendants argued that “it is hard to know, and therefore practice, what the packet manual means.”

The Court stated it was not determining whether the TIRSA manual was ambiguous, vague, and difficult to interpret and apply, but rather whether the non-party discovery sought by the plaintiffs was relevant. It noted that when a law, statute, government enactment, or regulation is susceptible of different meanings, it is appropriate to determine meaning by reviewing things such as the legislative history, the Governor’s message to the Legislature, the deliberations in committee, the drafts of the original bill, and the publication offered for public comment. Because TIRSA prepared the manual at issue, and offered it to the Superintendent of Insurance for approval, the Court held that anything involved in the preparation of the manual would be relevant to resolving the issues in the action. Thus, the Court directed TIRSA to respond to several items in the non-party subpoena.

Conclusion

These two cases demonstrate that “black-letter” rules of contract interpretation – including permitting the discovery and use of extrinsic evidence to aid in the interpretation of ambiguous written documents – provide the basis for decisions in numerous types of commercial disputes. In no area of law are these rules more important than in context of interpreting insurance policy language, where it is frequently asserted that a policy provision is ambiguous. In these types of cases, counsel would be well-advised to return to first principles, the “rudder of the law” in the words of one jurist,3 analyzing the facts of a given case within a familiar and established framework.

Eric W. Penzer is associated with the firm of Farrell Fritz P.C., and is a member of the Nassau County Bar Association’s Commercial Litigation Committee.

1. 2004 N.Y. Slip Op 50599(U) (June 18, 2004).
2. 2004 N.Y. Slip Op 50338(U) (April 15, 2004).
3. In re Leland’s Will, 96 Misc 419, 422 (Sur Ct, NY County), rev’d, 175 AD 62 (1st Dept 1916).

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