A May 25, 2017 decision by the New Jersey Supreme Court, Oxford Realty Group Cedar, et al. v. Travelers Excess and Surplus Lines Co. (A-85-15) (077617), is noteworthy not just for its reversal of the Appellate Division decision below, but for its impact on two long-standing rules of insurance contract interpretation: the doctrines of “contra proferentem” and “reasonable expectations.” Specifically, the decision in Oxford Realty Group Cedar signals a limit to the scope and application of these two doctrines under New Jersey law.
The coverage issue before the Court was whether a surplus lines policy issued by defendant Travelers capped coverage for all of the policyholder’s losses arising out of SuperStorm Sandy to the policy’s $1,000,000 per occurrence sublimit for flood. The policyholders had submitted a claim that included $1,000,000 in property damage together with $207,961 in debris removal costs. They argued that they were entitled to payment of the debris removal costs in addition to the $1,000,000 available for loss caused by flood under the policy, based on the inclusion of a debris removal coverage provision elsewhere in the policy. Travelers denied coverage for the debris removal costs in excess of the $1,000,000 sublimit, arguing that coverage for all damages caused by the flood, including debris removal costs, was capped by the unambiguous wording of the sublimit.
The policyholders sued, and both parties moved for partial summary judgment on the issue of Travelers’ liability for the debris removal costs. The trial court agreed with Travelers and granted partial summary judgment in its favor, holding that “the general condition that the debris removal is an additional coverage must yield to the specific term…that the [$1,000,000 sublimit] …applies to ‘all loss’ caused by flood.” The Appellate Division, however, reversed and remanded for an entry of judgment in Oxford’s favor. While it agreed with the trial court that the relevant policy provisions were unambiguous, the Appellate Division nevertheless held that the Travelers’ policy required coverage for up to $500,000 in debris removal costs, in addition to the $1,000,000 sublimit for damage caused by flood.
In addressing the coverage issue and reversing the Appellate Division’s decision, the Court noted that the matter involved a surplus lines insurance policy issued to policyholders engaged in high risk enterprises, placed by insurance brokers and parties on both sides of the bargaining table who are sophisticated in insurance matters. In this context, the Court reviewed the standard rules of insurance contract interpretation and observed that there are limitations to the application of the doctrines of contra proferentem and reasonable expectations. The Court noted that “[s]ophisticated commercial insureds…do not receive the benefit of having contractual ambiguities construed against the insurer,” and reasoned that contra proferentem is “a consumer-protective doctrine” only available when the parties have unequal bargaining power and is inappropriately applied where “both parties are equally ‘worldly-wise’ and sophisticated.” The Court reached the same conclusion with respect to the doctrine of reasonable expectations, holding that this doctrine, like contra proferentum, is “less applicable to commercial contracts.”
The Court’s decision in Oxford Realty Group Cedar is thus significant for two reasons. First, it upholds the application of a specific sublimit for all losses caused by a specific peril, i.e., flood, notwithstanding the existence of general coverage provisions in the policy applicable to other forms of loss. Second, the Supreme Court signaled that it will not blindly apply the doctrines of contra proferentem and reasonable expectations to all policyholders and policies. In light of Oxford Realty Group Cedar, lower courts will likely consider the nature of the risk, the policy and the policyholder, together with the involvement of any insurance intermediaries, before applying these doctrines to interpret ambiguous insurance policy wordings. Where sophisticated commercial insureds and intermediaries are involved in the insurance transaction, policyholders may not benefit from broad application of the doctrines of contra proferentum and reasonable expectations.
A copy of the Supreme Court’s decision may be accessed here.