Circuit Court Rejects Application of Doctrine of Contra Proferentem to Coverage Dispute

A severe flood that struck Cedar Rapids, Iowa, in 2008 damaged many of its businesses, including a manufacturing facility owned and operated by Penford Corporation. Penford submitted claims to its insurers, but they asserted that certain policy sublimits capped reimbursement for damages caused by a flood and that those sublimits applied to both property damage and business interruption losses.

Penford contended that the sublimits applied only to property damage, and it sued. After the district court denied Penford’s motion for judgment as a matter of law and granted judgment in favor of the insurers, Penford appealed to the U.S. Court of Appeals for the Eighth Circuit.

Penford argued that the district court should have granted its motion for judgment as a matter of law under the doctrine of contra proferentem. According to Penford, the district court had correctly determined that the policy language was ambiguous but it erred in failing to resolve that ambiguity by applying the doctrine against the insurers, as the drafters of the policy.

The circuit court decided that the doctrine of contra proferentem was inapplicable in this case. First, it pointed out, the evidence most favorable to the insurers was equivocal on the identity of the drafter of the policy form, given the back-and-forth nature of the drafting process and the relatively equal bargaining power of the parties. Second, the circuit court added that the doctrine should not be applied “when the question may be resolved in light of facts developed via extrinsic evidence,” as occurred in this case.

As the circuit court observed, the doctrine does not bar the use of oral testimony to clarify a written contract, but is “a tie-breaker, used to resolve cases in which the written contract remains ambiguous even after oral evidence has been admitted.”

Accordingly, the circuit court concluded that the district court had properly denied Penford’s motion for judgment as a matter of law.

The case is Penford Corp. v. National Union Fire Ins. Co. of Pittsburgh, No. 10-3068 (8th Cir. Nov. 29, 2011).]

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