Most insurance policies use standardized wording drafted by the insurance industry. Coverage disputes frequently center on these standardized wordings. Policyholders only sporadically face significant claims that escalate into disputes with their insurers and result in litigation. Insurers, on the other hand, litigate identical or similar claims on a regular basis.
Some issues lend themselves to insurer inconsistency. For example, an insurer may regularly argue that the law of the state where the policy was issued should control the choice of law. But if that jurisdiction appears unfavorable, an insurer may pivot and argue that the law of the state where the loss occurred should instead control. Likewise, whether an insurer argues a specific type of loss constitutes a single occurrence or multiple occurrences may turn on where its policy sits in the coverage tower in a given case. An insurer may even adopt the policyholder’s position when it is acting as the policyholder in a reinsurance case after paying a loss.
Real World Application
Illustratively, we litigated a case involving the “trigger of coverage” under a London market wording in occurrence-based commercial general liability policies sold to utilities (among others) before 1986. Those policies defined an “occurrence” as “one happening or series of happenings arising out of or caused by one event taking place during the term of this contract.”
For many years, London market insurers argued that operations during the policy period triggered these policies. This position was convenient since the insurers mostly faced claims from utilities arising from contamination at manufactured gas plants, most of which ceased operations by the 1930s—before CGL coverage first became available. In other words, because manufactured gas plants ceased operations before the London market insurers’ policy periods incepted, they argued their policies were not triggered. In several cases, London market insurers prevailed on this argument.
But London market insurers who issued the same policies with the same “occurrence” definition now face a different species of utility claim: claims that coal combustion residuals (or coal ash) stored at power plants are causing groundwater contamination. The problem for London market insurers is that these power plants were operational during the London insurers’ policy periods. Accordingly, the insurers have been forced to reverse course and now argue that operations during the policy period do not trigger these policies.
Faced with such situations—which are by no means limited to the pollution context—policyholders should be aware of arrows in every litigator’s quiver that may enable them to stop an insurer from winning based on taking an inconsistent position.
- Prior Inconsistent Interpretations. An insurer’s prior interpretations of the same policy language in other, similar lawsuits are generally discoverable and can serve as powerful evidence. Courts have permitted discovery into prior claims and litigation involving identical policy provisions in similar circumstances. As the U.S. District Court for the District of Nevada noted in Phillips v. Clark County School District, while quoting earlier authority, this information “may show that identical language has been afforded various interpretations by the insurer” and “could undermine the insurer’s position that the language in question is clear and unambiguous.” Importantly, the doctrine of contra proferentem, available in virtually every jurisdiction, construes ambiguous wording in favor of the policyholder and against the insurer drafter.
- Judicial Estoppel. Judicial estoppel may bar an insurer from taking a position that is inconsistent with a position it previously asserted and won on in another proceeding. “Estoppel” is the legal term for a doctrine preventing a party from making an argument it has waived or that departs from its previous position. It prevents litigants from playing “fast and loose” with the courts.
A useful example comes from an Ohio insurance coverage decision, Brush Wellman, Inc. v. Certain Underwriters at Lloyds, London. There, the policyholder demonstrated that certain insurers had successfully argued in a prior California case that certain pre-1966 policy language was ambiguous. The policyholder pointed out to the Ohio court that the same insurers now were arguing the same language was unambiguous. The court rejected the insurers’ inconsistent position. The court reasoned that because the insurers had prevailed on the ambiguity argument regarding the same wording in an earlier case, judicial estoppel prevented them from taking the opposite position.
Judicial estoppel is a widely accepted principle. Where the record of an insurer’s inconsistency is clear, courts will hold the insurer to its prior position to protect the integrity of the judicial system.
- Res Judicata, Collateral Estoppel and Settled Judicial Construction. More familiar forms of estoppel may also prevent an insurer from relitigating a final judgment (res judicata) or an issue essential to a final judgment (collateral estoppel). Both doctrines bar the relitigation of claims or issues that were fully litigated and resolved in a prior action.
In Simmons v. Mutual Benefit Health & Accident Ass’n, an insurer litigated the meaning of a “one period of confinement” limitation in a medical insurance policy. A court determined the meaning, and a final judgment was entered. When a later dispute arose between the same parties under the same policy wording, the insurer attempted to relitigate the meaning of the “one period of confinement” clause of the policy. The Nebraska Supreme Court held that it could not. Because the contract’s interpretation had already been decided between the same parties, res judicata bound the insurer to that ruling.
Even where the parties are different, an insurer may be estopped from taking an inconsistent position under the doctrine of collateral estoppel. Collateral estoppel generally requires that where an identical issue was previously litigated and decided by a court of competent jurisdiction, was necessary to a final judgment, and that the insurer had a full and fair opportunity to litigate, the prior ruling is binding on the insurer. Some jurisdictions also require mutuality of parties. These requirements are not insurmountable but will turn on the facts.
A recent example comes from Amerisure Mutual Insurance Co. v. Swiss Reinsurance America Corp. There, an insurer sought reimbursement from a reinsurer for defense costs allegedly payable in addition to umbrella policy limits. The insurer had previously litigated the same issue in arbitration with another reinsurer and lost when the arbitration panel held that defense costs were payable only within the policy limits. When the insurer advanced the same interpretation of identical policy language against a different reinsurer in subsequent litigation, the Sixth Circuit held that collateral estoppel barred relitigation because the insurer had already fully litigated and lost on that issue in arbitration.
Closely related to these principles, some courts have recognized that insurers are bound not only by prior judgments but also by settled judicial constructions of the language they continue to use. If courts interpret specific wording and the insurer later issues policies with that same wording unchanged, the insurer is treated as issuing the policy with that established construction incorporated.
- Regulatory Estoppel. Regulatory estoppel also may prevent an insurer from advancing coverage interpretations in court that contradict representations made to state regulators when policy language was submitted for approval. This doctrine has been particularly important in cases involving language that was added to standard-form policies. Courts have rejected insurers’ attempts to expand exclusions where the insurer previously represented to regulators that the change would not significantly reduce coverage.
Bottom Line
When disputes arise over standardized policy wording, an insurer’s prior actions related to that wording can be outcome determinative. Prior interpretations, judicial estoppel, res judicata and collateral estoppel, and regulatory estoppel should all be considered and may provide strong bases to hold insurers to positions they have previously advanced. It pays to retain qualified coverage counsel to recognize these inconsistencies and put the policyholder’s strongest arguments forward to secure coverage.