In Merrick Bank Corp. v. Chartis Specialty Ins. Co., Civ. No. 12-7315 (S.D.N.Y. Mar. 20, 2015), the Court held that the doctrine of contra proferentem – i.e. that the court should construe ambiguities against the insurer as the drafter of the contract – was not applicable under New York law where the “insured is a sophisticated party, represented by a broker, and where the parties actually negotiated the policy.” In denying summary judgment and sending the case to trial, the Court found that a jury should be presented with extrinsic evidence as to the parties’ intent in drafting the policy, including the broker’s intent as the legal representative of the insured.  

The dispute revolved around the interpretation and interplay of several provisions of an uncollectible chargeback insurance policy, designed to cover the risk that Merrick, as a clearing bank for merchants selling goods or services through credit card transactions, would be responsible for customer charge backs of those credit card transactions should the amounts be uncollectible from the merchant, subject to certain terms and conditions.

Although found to be a “sophisticated party,” Merrick, like many companies shopping the insurance market, hired a broker, Royal Group Services, LLC (“RGS”), to negotiate the policy and represent its interests, both in terms of the wording and pricing of the policy. RGS represented Merrick over the course of several years during Merrick’s policy renewals with several different insurers. The Court found that under these circumstances, contra proferentem was inapplicable. The Court alternatively found that “contra proferentemis to be invoked only ‘as a matter of last resort’ after the consideration of extrinsic evidence … and only where ‘the controversy is incapable of resolution by examination of extrinsic evidence” (citation omitted). The Court ruled that since “there is extrinsic evidence from which a jury could draw inferences as to the parties’ intent … contra proferentem is improper on this basis as well.”

The Take Away

Nearly all financial institutions and businesses employ brokers to negotiate their commercial insurance needs. These companies are generally sophisticated, employ in-house counsel and sometimes even have dedicated risk management personnel. Insurers should argue that insureds that have negotiated specific terms, and sometimes even negotiated manuscripted policies or endorsements, should not get the benefit of contra proferentem, especially before a jury has the opportunity to evaluate available extrinsic evidence of the parties’ intent in drafting the policy.