The U.S. Fifth Circuit Court of Appeals recently upheld a district court’s decision to decline to apply a “sophisticated insured” exception to the doctrine of contra proferentem under Texas law. Certain Underwriters at Lloyds London v. Perraud, 2015 WL 4747318 (5th Cir. Aug. 12, 2015).
Two employees sought reimbursement for attorney’s fees and costs under their employer’s directors’ and officers’ liability policy after a successful defense of federal criminal charges. The insurers refused to pay and filed a declaratory judgment on the basis of a policy exclusion. The district court found the exclusion ambiguous and interpreted it in favor of coverage pursuant to the doctrine of contra proferentem. The district court then declined to apply a sophisticated-insured exception to that doctrine on the basis that, even if Texas were to recognize the exception, the insurers had presented no evidence that the company had negotiated or drafted the exclusion. The insurers appealed.
The Fifth Circuit limited its analysis to narrow and middle-ground versions of the “sophisticated insured” exception and found that the evidence was insufficient to create a genuine dispute of material fact under the middle-ground approach. The Fifth Circuit reasoned that absent any information on the content of negotiations, how the contracts were prepared or other indicators of relative bargaining power, the insurers did not present evidence that the insured employer influenced the terms of the exclusion.