Florida Supreme Court: Ambiguities in Insurance Policies Interpreted in Favor of Coverage for Policyholder

Recently, I told you about a case handed down by the Florida Supreme Court regarding ambiguities in insurance policies.  I co-authored an article on InsuranceDay.com expanding on the case, titled “Insurers Lose the Safety Net of Extrinsic Evidence for Ambiguities.”  Here’s the link to the article (which requires a subscription) and the body is reproduced below:

Insurers Lose the Safety Net of Extrinsic Evidence for Ambiguities

Recently, the Florida Supreme Court handed down a notable victory for policyholders regarding the rules for resolving disputes over policy interpretation.  In a nutshell, in Washington Nat. Ins. Corp. v. Ruderman, No. SC12-323, 2013 WL 3333059 (Fla. July 3, 2013), the Court held that when a “policy is ambiguous it must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.”  To simply summarize the ruling, if the policy is deemed ambiguous, the insurer loses—period. The ruling has implications for the industry and means that underwriters and insurers have to exercise extreme diligence when drafting insurance policies in Florida.

In Ruderman, the Court considered whether the “Automatic Benefit Increase Percentage” provision in a home health care coverage policy was ambiguous as it applies to the daily benefit amount or the per occurrence maximum benefit and the lifetime maximum benefit amount.  The Court found that the way the policy was drafted, language that the “Benefits increase by 8% each year” could apply to the daily benefit, but could also be read to apply to the per occurrence maximum benefit and the lifetime maximum benefit amounts.  Needless to say, the Court found that the policy could be reasonably interpreted in two separate ways, each of which affected the outcome of the coverage inquiry.

In the 4-3 decision, the Court made—or “reiterated,” depending on how previous caselaw is interpreted—two fundamental rules regarding the interpretation of insurance policies in Florida.  First, the Court held that, when there is a potential ambiguity in an insurance policy, no extrinsic evidence will be allowed to clarify the potential ambiguity.  Second, in the instance that there is an ambiguity in an insurance policy, the policy must be “strictly construed against the insurer.”  Stated differently, ambiguities will be liberally construed in favor of finding coverage for the insured.  Although the rules arose in the narrow context of home health care coverage for the elderly, it now applies to the construction of all insurance policies under Florida law.

In a well-reasoned dissent, Justice Polston pointed out that precedent disallowing extrinsic evidence applied in situations where an ambiguity had not been declared.  If extrinsic evidence is available to clarify the ambiguity, it serves the parties’ interests that the ambiguity is resolved with all of the available tools of construction, including extrinsic evidence.  Further, he reasoned, the rule regarding construing the language of the policy against the insurer should be used as a last-resort principle, not as a general rule of policy construction as the majority held.   In sum, the dissent proposed that, if a policy is clear, extrinsic evidence should not be allowed, but, in the instance that an ambiguity is present that could be clarified, the rule of construing the policy against the insurer should be the last resort, not a default.  The majority’s holding, he argued, segregates insurance policies from other types of contracts by placing the notion of interpreting an insurance policy against the drafter before basic rules of policy construction.

The majority’s opinion is harsh.  Even when reference to outside evidence is available, the majority suggests courts should turn a blind eye to factors that may easily glean the intent of the parties, including factors as simple as referring to course and custom between the policyholder and the insurer, previous negotiations with an insured, or even some consideration for the level of an insured’s sophistication.

In addition to being a primer on policy interpretation in Florida, Ruderman holds implications for all insurers and underwriters that issue policies in Florida.  Because Florida courts may only view the actual terms of the insurance policy to determine whether there is an ambiguity, insurers must draft policies with a deft eye. It is impossible to anticipate every factual situation that may render a policy subject to more than one reasonable interpretation, but the burden is nonetheless on underwriters to get it right.

The Court did not address policies that include express warranty provisions or policies that include expansive “application” language that essentially incorporates all of the policy negotiating into the four corners of the insurance contract.  If the policy consists of underwriting material, so the argument would go, it cannot be argued that the material is extrinsic but rather it is a part of the policy no different than the insuring agreement, the definitions, or exclusions.

The Court certainly had pointed drafting tips for insurers, including:

[W]here an insurance policy is drawn in such a manner that it requires the proverbial Philadelphia lawyer to comprehend the terms embodied in it, the courts should and will construe them liberally in favor of the insured and strictly against the insurer to protect the buying public who rely upon the companies and agencies in such transactions. We recognize that unless restricted by statute or public policy, insurance companies have the same right as individuals to limit their liability and impose conditions upon their obligations.

Id. at *6. (internal quotations and citations omitted).

Although the Court’s quip that interpreting an insurance policy should not require the intellect of the “proverbial Philadelphia lawyer” was a playful reference to the complicated language of some policies, there is some truth in its jest.  Interpreting an insurance policy can often be a daunting task, which explains the recent trend in policy drafting towards plain language.  In essence, when it comes to insurance policies, the Florida Supreme Court wants insurers to keep it simple.

What insurers and policyholders can take from Ruderman is essentially one firm rule and one rule that is not quite settled.  The firm rule is that the use of extrinsic evidence is prohibited when it comes to interpreting an insurance policy.  To that, there is no debate. The unsettled rule is whether policies are to be interpreted against the drafter in general or only in instances of ambiguity.  The dissent suggests that the rule is now the former.  Yet, the majority implies both throughout its opinion.  What we do know is that underwriters are now more vulnerable and, when it comes to interpreting policy language, they will not get the benefit of the doubt.

Florida Supreme Court: When an Insurance Policy is Ambiguous, It Is Interpreted in Favor of Coverage; No Extrinsic Evidence Allowed

Just last week, in Washington Nat. Ins. Corp. v. Ruderman, SC12-323, 2013 WL 3333059 (Fla. July 3, 2013), the Florida Supreme Court held that an insurance policy was ambiguous where it provided for annual increasing benefits, but did not specify which benefits increased.   The specifics of the ambiguity in this case are not  important, what is important is the rule.  The Court held that where there are ambiguities in policies, the policy should be interpreted liberally against the drafter and in favor of coverage, and extrinsic evidence should not be used to clarify the ambiguity.  The Eleventh Circuit was uncertain in regard to Florida law based on Excelsior Insurance Co. v. Pomona Park Bar & Package Store, 369 So. 2d 938 (Fla. 1979), which indicated that extrinsic evidence may be allowed.  The Court held:

The Eleventh Circuit in the instant case did not rely on its reasoning in the Gradinger decision and, further, now expresses doubt that Florida law is settled on whether an ambiguous insurance policy should be strictly construed against the insurer or whether extrinsic evidence must first be allowed in an attempt to clarify any potential ambiguity…. We now make clear that nothing in Excelsior expressly holds that extrinsic evidence must be considered in determining if an ambiguity exists. Further, nothing in Excelsior constitutes an implicit declaration that resort must be made to consideration of extrinsic evidence before an insurance policy is found to be ambiguous and construed against the insurer.

The take away here is that when an insurance policy can be interpreted multiple ways, it should be interpreted liberally and in favor of the party that did not draft it. See also Gradinger v. Washington National Insurance Co., 250 F. App’x 271 (11th Cir. 2007).  Here is a good sound bite from the case that I found entertaining:

As we noted in Hartnett v. Southern Insurance Co., 181 So. 2d 524, 528 (Fla. 1965), where an insurance policy is “drawn in such a manner that it requires the proverbial Philadelphia lawyer to comprehend the terms embodied in it, the courts should and will construe them liberally in favor of the insured and strictly against the insurer to protect the buying public who rely upon the companies and agencies in such transactions.” We recognize that “[u]nless restricted by statute or public policy, insurance companies have the same right as individuals to limit their liability and impose conditions upon their obligations.” Canal Ins. Co. v. Giesenschlag, 454 So. 2d 88, 89 (Fla. 2d DCA 1984). However, the insurance company has a duty to do so clearly and unambiguously.

Read the entire decision here.