Insurance company claims personnel tend to view the concept of “ambiguity” as the last refuge of a scoundrel.  That’s because unhappy policyholders often reflexively argue that a particular term in dispute is “ambiguous.” On the other hand, miserly insurance companies often argue that the term is perfectly clear. Neither side usually understands what the term “ambiguity” actually means.

“Ambiguous” does not mean “vague.”  (“Vagueness” can in itself be a vague concept, which calls to mind Justice Potter Stewart’s famous definition of “pornography”: “I know it when I see it.”) Nor does “ambiguity” mean that the definition of a term is in dispute. Instead, “ambiguity” has a very specific meaning, as a Federal Court recently held in an interesting case involving a “newly acquired premises” provision:

“Under an objective test, a policy is ambiguous if the language is susceptible to two reasonable interpretations. We read the policy as a whole when determining whether the contract has two equally plausible interpretations, not seriatim by clauses. If the policy is ambiguous, we adopt the construction most favorable to the insured. An insurance policy is not ambiguous, however, just because the parties disagree as to the meaning of its terms.”  (Citations omitted.)

This raises an interesting question. If two different Courts view the same insurance terminology in entirely different ways (as we saw for many years with the pollution exclusion), isn’t the term by definition “ambiguous”?  No judge could actually be “unreasonable,” right?  Personally, I think that’s a great argument…but I’ve never actually gotten it to work.

In any event, the recent case that gave rise to the Federal Court’s discussion of “ambiguity” involved Amera-Seiki, a company that imports computerized industrial equipment for customers in the United States. Amera-Seiki bought a vertical lathe from a manufacturer in Taiwan for delivery to a customer in Illinois. The equipment was transported to Los Angeles, where it was to be stored temporarily until a flatbed truck could take it to the customer. Unfortunately, while the lathe was being held in Los Angeles, a longshoreman at the terminal was moving it by tractor, when it fell and was destroyed.

Cincinnati Insurance Company had sold a commercial property policy to Amera-Seiki, and paid $10,000 in transportation coverage on the claim. Amera-Seiki, however, argued that there was additional coverage under an extension for “newly acquired property”. The “newly acquired property” extension provided coverage for loss to “business personal property, including such property that you newly acquire, at any location you acquire other than at fairs, trade shows or exhibitions.”  (Emphasis added.)

Because Amera-Seiki had paid $1950 to store the lathe at the terminal, Amera-Seiki contended that it had temporarily acquired a “location” at the terminal, meaning that the claim fell within the “newly acquired property” extension.  Amera-Seiki also argued that Cincinnati had specifically excluded the temporary acquisition of a location at “fairs, trade shows, or exhibitions,” showing that other temporary locations were in fact covered. (Otherwise, “fairs, trade shows or exhibitions” wouldn’t have to be excluded). Finally, Amera-Seiki argued that, if Cincinnati had intended to require greater permanency at a location, Cincinnati should have so defined the term “acquire” in the policy, or expressly limited the “newly acquired property” extension, in the same way Cincinnati limited other policy provisions.

Cincinnati of course disagreed, arguing that temporary storage arrangements were too passive and too transient to qualify the terminal as a location the policyholder had “acquired,” under any reasonable interpretation of the “newly acquired property” extension.

In the end, the Court found that both interpretations suffered their “own flaws and both fray at the edges, but given the breadth of the policy language, neither is unreasonable.” The Court therefore held that a “genuine uncertainty” existed as to which of the meanings was the proper one; so, because the policy was “ambiguous” as that term is properly defined (two contrary but reasonable interpretations), the Court held that coverage existed.

This case nicely showcases the (sometimes frustrating) chess game that takes place when interpreting insurance policies. But, even though Amera-Seiki won this one, the case also demonstrates something else from the policyholder perspective: It’s important to have an experienced insurance broker or consultant review the nature of all of your business operations in advance, and determine whether your specific insurance coverage applies to all apparent risks. Amera-Seiki was in the business of importing expensive equipment. It would have been nice to know beforehand that coverage existed for equipment stored at a temporary location, instead of having to litigate the issue. Given the complexity of commercial insurance, it’s sometimes difficult to determine whether coverage for every aspect of your operations exists; but you can certainly increase your chances.

You can read the full decision in Amera-Seiki v. Cincinnati Insurance Company by clicking here.