I’m getting ready to participate in a panel discussion at the New Jersey Institute for Continuing Legal Education with some of my friends from both sides of the bar (policyholder and carrier). I’ll be discussing the rules of construction in insurance policies, particularly as they relate to ambiguity, so I’m re-reading some of the more recent and significant “ambiguity” cases.
One thing’s for certain: as construed by many courts, the term “ambiguity” is itself ambiguous. When determining whether ambiguity exists in insurance policies, many courts seem to follow the late Justice Potter Stewart’s method of determining pornography: “I know it when I see it.”
To advise clients properly, and to do adequate risk assessment when involved in coverage litigation, we need a more workable definition. Travelers’ Liability Coverage Manual from September 1983, for example, contains a succinct definition of “ambiguity”:
“Ambiguity: This means that the words are capable of being understood in two or more reasonably logical ways. Ambiguity should be resolved in favor of the insured.”
In contrast to the 1983 Travelers definition, in Zacarias v. Allstate Ins. Co., 168 N.J. 590, 604 (2001) the New Jersey Supremes ruled that ambiguous policies are those that are “overly complicated, unclear, or written as a trap for the unguarded consumer.” That’s a pretty murky test.
One of the more interesting recent New Jersey cases involving ambiguity is Flomerfelt v. Cardiello, 202 N.J. 423 (2010), the facts of which can be best summarized as: “When the cat’s away, the mice will play.” In Flomerfelt, mom and dad went away for a few days. Their 20-year-old live-in son (Cardiello) decided to throw a party. Instead of playing dominoes or watching old F-Troop episodes on Hulu, though, the party guests broke out the alcohol, marijuana, opiates and cocaine. 21-year-old Wendy Flomerfelt partook of the refreshments, resulting in liver and kidney damage, and permanent hearing loss. All of the previously-mentioned substances were later found in her system at the hospital. Flomerfelt sued Cardiello, on the theory that he negligently delayed in getting medical attention for her because he didn’t want mom and dad to know about the party.
The homeowner’s policy in Flomerfelt excludes coverage for claims “arising out of the use…transfer or possession of controlled dangerous substances.” The question for decision was: What does “arising out of” mean? The policyholder argued that the term “arising out of” was ambiguous, and that the insurance company was required to provide a defense “unless and until it could be proven that alcohol [which is not a “controlled dangerous substance”] was neither the sole nor a contributing cause.”
The carrier, on the other hand, argued that “arising out of” simply means “incident to” or “in connection with.” Under the carrier’s interpretation, if narcotics had anything to do with the injury, no coverage existed.
The New Jersey Supreme Court agreed with the policyholder, writing: “The insurer’s proposed construction…would expand the phrase ‘arising out of’ to mean that the injury is connected in any fashion, however remote or tangential, to the excluded act, rather than one that ‘originates in,’ ‘grows out of,’ or has a ‘substantial nexus’ to the excluded act.”
The Court further wrote: “The insurer’s use of the phrase with no clarification of its intended meaning in circumstances arising from potentially concurrent clauses makes the phrase ambiguous, calling for an interpretation consistent with the reasonable expectations of the insured.”
In Flomerfelt, then, the Supremes seemed to use the 1983 Travelers definition of ambiguity: namely, a term is ambiguous if it’s capable of being understood in two or more reasonably logical ways. Keep in mind that Flomerfelt was a personal lines case, and that, as a practical matter, it can be harder for business policyholders to convince courts that policy terms are ambiguous.