Insurance coverage disputes often turn on the meaning of the specific words used in a policy. Norwegian Hull Club v. North Star Fishing Co., currently pending in the U.S. District Court for the Northern District of Florida, presents a twist—it turns on the meaning of a blank space.
Last month, U.S. District Judge Robert L. Hinkle ruled that neither the policyholder nor the insurer was entitled to summary judgment regarding the interpretation of a critical policy provision, reasoning that an empty field rendered the clause ambiguous. But as the case now proceeds to trial, the most interesting part of the district court’s opinion might be its own blank space: contra proferentem, the argument it doesn’t address.
The Dispute and the Decision
In 2016, North Star Fishing purchased a builder’s risk policy to cover the construction of a large fishing vessel in Panama City, Fla. Nearly three years later, as the vessel was nearing completion but not yet finished, Hurricane Michael devastated the Florida panhandle, including Panama City. North Star’s under-construction vessel suffered substantial damage, purportedly requiring more than $100 million to restore the ship to its pre-hurricane state.
When North Star asked its insurers to indemnify the costs of repairing the vessel, the amount of those damages became a sticking point. North Star’s policy insured the vessel at an agreed value of $77 million. The policy generally incorporated by reference a set of form conditions, the American Institute Builder’s Risks Clauses.
Among those provisions is an escalation clause designed to modify the value of insured property in the event of changes in labor or material costs. However, when the insurers issued the policy, they left a key field in the clause blank:
In the event of any increase or decrease in the cost of labor or materials, or in the event of any change in the specifications or design of the Vessel … the Agreed Value shall be adjusted accordingly, but any increase shall be limited to ___________________ per cent of the Agreed Value as provisionally declared, and the Amount Insured shall be adjusted proportionally[.]
North Star and its insurers interpret that gap very differently. According to the insurers, the empty field renders the escalation clause inoperative under New York law,1 limiting North Star’s potential recovery to the agreed $77 million value with no upward adjustment. According to North Star, however, the blank space simply means that the escalation clause has no ceiling, allowing North Star to invoke the clause and recover its full repair costs.
After paying the initial limits of the policy, the insurers filed suit in a Florida federal court, seeking a declaratory judgment that they were not obligated to pay more. Both the insurers and the policyholder sought summary judgment, each arguing that the escalation clause clearly supported their position.
The court rejected both arguments, instead holding that the escalation clause is ambiguous.2 Rather than resolving the ambiguity, the court set the case for a trial at which both sides will present extrinsic evidence regarding the intended meaning of the escalation clause—including its all-important blank space.
The Missing Issue
Most states apply the rule of contra proferentem to interpret ambiguous language in an insurance policy. Under the majority version of the rule, ambiguous policy language is simply resolved against the insurer and in favor of coverage.
New York is no outlier, as contra proferentem has been a bedrock of New York insurance law been since at least the 1880s.4
In New York, insurance policies are generally governed by standard rules of contract interpretation. And when reviewing other types of contracts, New York courts may consider evidence of the parties’ intent, such as details surrounding the negotiation of the contract, to ascribe a meaning to ambiguous language.
But such canvassing of extrinsic evidence has no place in the interpretation an insurance policy. When insurance is at issue, either the policy is clear and must be enforced as written, or the policy is ambiguous and must be construed in the policyholder’s favor.3
Consistent with these principles, once the Norwegian Hull Club court determined that the escalation clause was ambiguous, one would expect the court to rule in North Star’s favor and construe the blank space against its insurers.
Yet the court’s opinion contains no discussion of the venerable contra proferentem rule. Instead, the court based its central holding—that the proper interpretation of the ambiguous escalation clause could not be resolved on summary judgment—upon New York general contract interpretation precedent stating that the validity of a contract provision containing a blank space turns on what the parties intended the provision to mean, as determined from review of extrinsic evidence.
These cases did not involve insurance policies and, therefore, did not have cause to apply the insurance-specific contra proferentem rule to supersede consideration of outside evidence.
Granted, insurers have previously muddied the New York contra proferentem waters by arguing that courts should use the rule as a last resort, relevant only when ambiguities in insurance policies cannot be resolved by other means, such as review of outside evidence.
This view is not without judicial support, particularly from federal court decisions purporting to apply New York law.
But the New York Court of Appeals, the final arbiter of New York law, generally has not cabined contra proferentem to such narrow circumstances.4 And rulings by the New York Court of Appeals as to New York law on an issue trump Erie guesses by federal courts sitting in diversity as to what New York law might be. Notably, in its briefing in Norwegian Hull Club, the insurer does not appear to have argued otherwise.
And even if New York’s application of contra proferentem were more limited than the majority approach, it’s not clear that New York law even applies in Norwegian Hull Club.
Echoing the 2021 North American Elite Insurance Co. v. Space Needle LLC saga in a New York state appeals court,5 North Star argued that the policy’s choice-of-law clause is unenforceable under a Washington statute that invalidates such provisions. The court deferred this issue until trial, under the theory that “summary judgment would be denied under any potentially applicable choice of law.”
But whatever confusion may exist regarding the supremacy of contra proferentem under New York law does not extend to Washington, North Star’s home, or Florida, where the loss occurred, both of which resolve ambiguities in the policyholder’s favor without considering extrinsic evidence.6
As a result, if the Norwegian Hull Club decision hinged on a New York-specific application of contra proferentem, then the court should have considered whether it was applying the correct body of law before denying North Star’s summary judgment motion and sending the case to trial.
In short, the Norwegian Hall Club decision should not be regarded as a road map for evaluating blank space ambiguities in insurance policies.
Filling in the Blank
Any ambiguous provision in an insurance policy is like a blank space—a gap that could reasonably be filled with competing interpretations. Among its other virtues, the doctrine of contra proferentem cuts through the Gordian knot that these gaps would otherwise create, eliminating potentially lengthy and expensive reviews of extrinsic evidence through a clean, simple rule that ambiguities will be resolved to the policyholder’s benefit.
By failing to apply contra proferentem, the Norwegian Hull Club court sent itself and the parties down an unnecessary rabbit hole, when it could have simply construed the ambiguous escalation clause in North Star’s favor and found coverage.
The gap in the Norwegian Hull Club decision highlights the importance of the contra proferentem rule.
Policyholders should be able to trust that when ambiguous language slips through the cracks—or is forced upon them by their insurers—courts will resolve any resulting confusion in favor of coverage. And insurers should not be allowed to benefit from the omissions or mistakes. Policyholders must carefully navigate these issues, both when purchasing new policies and when seeking coverage under existing ones.
(This article originally appeared in Law360.)
1 Although the Norwegian Hull Club policy was purchased by a Washington company to insure a Florida construction project, the policy contains a choice-of-law provision that points to New York law.
2 Norwegian Hull Club et al. v. North Star Fishing Co. LLC et al., N.D. Fla. No. 5:21-cv-00181, Dkt. No. 74 (Feb. 8, 2023).
3 See, e.g., J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 37 N.Y.3d 552, 561-62 (2021); In re Viking Pump, 27 N.Y.3d 244, 257-58 (2016).
4 See note 5, supra; see also Seaboard Sur. Co. v. Gillette Co., 64 N.Y.2d 304 (1984).
5 See North Am. Elite Ins. Co. v. Space Needle, LLC, 200 A.D.3d 425 (N.Y. App. Div. 2021); see also Jeffrey Mikoni, “How Forum-Selection and Choice-of-Law Provisions in Insurance Policies Can Affect Coverage.”
6 See Queen Anne Park Homeowners Ass’n v. State Fire Fire & Cas. Co., 183 Wn.2d 482, 491 (2015), quoting Dairyland Ins. Co. v. Ward, 83 Wn.2d 353, 358 (1974) (“It is Hornbook law that where a clause in an insurance policy is ambiguous, the meaning and construction most favorable to the insured must be applied, even though the insurers may have intended another meaning.”); Wash. Nat’l Ins. Corp. v. Ruderman, 117 So. 3d 943, 952 (Fla. 2013) (“Under Florida law, because the policy is ambiguous it must be construed against the insurer and in favor of coverage without resort to consideration of extrinsic evidence.”).