Loyal readers of this blog may recall our recent analysis of Norwegian Hull Club v. North Star Fishing Co., an insurance coverage dispute that appeared likely to turn on the meaning of a blank space in a very large builder’s risk policy. After bench trial, U.S. District Judge Robert L. Hinkle has filled that gap—giving the policyholders most, but not all, of the coverage that they sought. Under the judge’s decision, based upon industry custom and practice, that blank space provided the policyholder with nearly $20 million in extra coverage.
To briefly recap: after Hurricane Michael caused substantial damage to an under-construction fishing vessel, the ship’s owner and builder sought coverage under their builder’s risk insurance policy. (For convenience, we’ll refer to both owner and builder as “North Star.”) The policy’s underwriters agreed that they were obligated to pay North Star’s repair costs up to the policy’s limit, which they viewed as the policy’s “Agreed Value” of $77 million. Facing actual repair costs of more than $100 million, North Star argued that the policy’s Escalation Clause—a provision designed to modify the value of insured property in the event of changes in labor or material costs—increased the insurers’ liability under the policy. But the insurers countered that an empty field in the Escalation Clause, capping any increase under the provision to “____ per cent” of the Agreed Value, negated the entire clause.
The insurers turned to a federal court in Florida, seeking a declaration that they were not required to pay more than the original $77 million policy limit. Both sides filed motions for summary judgment, where the insurers argued that the blank space negated the Escalation Clause, while North Star argued that the blank space established unlimited limits under the Escalation Clause. The court rejected both arguments, concluded instead that the clause was ambiguous, and ordered a trial to determine the clause’s meaning.
In his summary judgment opinion, Judge Hinkle forecasted several potential outcomes for the trial —one of them being resolution “in between” the parties’ positions, in which the escalation clause was assigned a value “more in line with the 15% to 25% often inserted into this blank in this builder’s risk form.” It is therefore unsurprising, perhaps, that the court ultimately adopted a version of its “in between” prediction. Relying heavily upon its determinations of the “standard practice in the industry,” the court decided that (1) builder’s risk policies of the relevant kind typically included an escalation clause subject to a cap; (2) it was therefore “more likely than not” that the parties understood the policy to contain an effective escalation clause; and (3) based on the communications that “did and did not occur between the parties,” the reasonable conclusion was that the parties intended the clause to be capped at a 25% increase—what the court described as an “industry norm.”
For North Star, the ruling is a substantial victory. Applying the escalation clause, subject to the court’s 25% cap, increased the coverage available under the builder’s risk policy to a total of $96.25 million. Although not enough to fully offset the costs of repairing the damage caused by Hurricane Michael, the court’s judgment awarded North Star more than $19 million in damages and several years’ of pre-judgment interest—no small sum.
But for outside observers, the question remains whether trial was warranted at all, given the court’s express determination at summary judgment that the policy’s escalation clause was ambiguous. As we previously explained, the bedrock doctrine of contra proferentem mandates that ambiguities in an insurance policy should be resolved against the insurer and in favor of coverage as a matter of law, eliminating any need to consider extrinsic evidence of the parties’ intent at trial. Such bright-line rules provide policyholders with predictability and certainty when grappling with unclear policy language, motivate insurers to draft policies with precision, and spare both parties and the judicial system the time and expense of unnecessary trials.
Here, North Star was able to prevail even without the benefit of contra proferentem—albeit not as much as if the court had applied the doctrine to conclude that the Escalation Clause applied without any cap. Future claimants, on the other hand, may not be so fortunate. Whether purchasing new policies or seeking coverage under existing ones, policyholders should engage experienced insurance counsel to advise how to best protect their interests against the risks created by unclear policy language.