2000 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

2-9-2000

James v. Zurich-American

Precedential or Non-Precedential:

Docket 98-7542

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Recommended Citation

"James v. Zurich-American" (2000). 2000 Decisions. Paper 25.

http://digitalcommons.law.villanova.edu/thirdcircuit_2000/25
Filed February 9, 2000 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 98-7542 and 98-7543 

LESVILLE JAMES, as assignee of the rights of MERIDIAN 

ENGINEERING, INC. and COMPANION, INC., d/b/a 

COMPANION ASSURANCE COMPANY, 

 Appellant in No. 98-7543 

v. 

ZURICH-AMERICAN INSURANCE COMPANY OF ILLINOIS, 

 Appellant in No. 98-7542 

APPEAL FROM THE DISTRICT COURT 

OF THE VIRGIN ISLANDS, 

DIVISION OF ST. CROIX: CHRISTIANSTED 

(D.C. Civil Action No. 95-cv-00117)(RLF) 

District Judge: Honorable Raymond L. Finch 

Argued September 10, 1999 

BEFORE: ROTH and WEIS, Circuit Judges, 

and SHADUR,* District Judge 

Opinion Filed February 9, 2000 

_________________________________________________________________ 

* Honorable Milton I. Shadur, Senior United States District Judge for the 

Northern District of Illinois, sitting by designation. 

 Joel H. Holt, Esquire (ARGUED) 

 Law Offices of Joel H. Holt 

 2132 Company Street, Suite 2 

 Christiansted, St. Croix 

 U.S. Virgin Islands, 00820 

 Attorney for Appellant 

 Lesville James as assignee of the 

 rights of Meridian Engineering, Inc. 

 and Companion, Inc. d/b/a 

 Companion Assurance Company. 

 Ignatius J. Melito, Esquire 

 (ARGUED) 

 S. Dwight Stephens, Esquire 
 Wendy S. Kennedy, Esquire 

 Melito & Adolfsen P.C. 

 233 Broadway 

 New York, New York 10279 

 Douglas L. Capdeville, Esquire 

 Law Offices of Douglas L. Capdeville 

 P.O. Box 4191 

 2107 Company Street, Lot #4 

 Christiansted, St. Croix 

 U.S. Virgin Islands, 00822 

 Attorneys for Appellant 

 Zurich-American Insurance Company 

 of Illinois. 

OPINION OF THE COURT 

SHADUR, Senior District Judge: 

We are asked to interpret what may at worst be labeled 

an ambiguous provision of an insurance policy, to 

determine whether the policy provided coverage for a third 

party, not the insured itself. Upon review we find that 

whatever might be said as to the literal meaning of the 

disputed provision, the practical construction given to its 

terms by the actual parties to the policy--the insurer and 

the insured--resolved any arguable ambiguity and excluded 

 2 

coverage for the third party. We therefore reverse the order 

of the District Court to the contrary. 

Background 

Zurich-American Insurance Company of Illinois ("Zurich") 

appeals an adverse decision in an insurance coverage 

declaratory judgment action instituted against it by Lesville 

James ("James") as assignee of the rights of Meridian 

Engineering Inc. ("Meridian") and Companion Assurance 

Company ("Companion"). This action arose out of a dispute 

between Zurich and Companion as to their respective

responsibilities for damages suffered by James, as 

determined in a personal injury action that he hadfiled 

against Meridian. Although it is uncontested that Meridian 

had procured its own liability insurance policy from 

Companion, what is at issue in the present litigation is 

whether Zurich was a coinsurer. 

Companion had earlier claimed (and now James claims) 

that Meridian was insured under a policy issued by Zurich 

to Hess Oil Virgin Islands Corp. ("Hess Oil" or "HOVIC")1 
covering a construction project ("FCCU Project") at the Hess 

Oil refinery in St. Croix, Virgin Islands. That Zurich policy 

became effective on December 1, 1990 and continued for 

the duration of the project.2 As part of the FCCU Project, 

Hess Oil contracted with Meridian to pave some roads. 

While working under Meridian's supervision on August 31, 

1993, James suffered an injury that he asserted resulted in 

a below-the-knee amputation of his right leg. On June 24, 

_________________________________________________________________ 

1. Amerada Hess Corporation ("Amerada Hess") is Hess Oil's parent 

company. Because Hess Oil did not have its own insurance department, 

Amerada Hess was involved in procuring the Zurich policy on Hess Oil's 

behalf. To that end Amerada Hess utilized the assistance of the Marsh 

& McClennan ("Marsh") brokerage firm. 

2. Although the policy states that the estimated time for the project's 

completion was 44 months, Zurich Br. 43 states that"the parties to the 

contract have been consistently administering the claims under the 

Zurich policy for nine years. . . ." 

 3 

1994 James filed his personal injury action against

Meridian.3 

Upon learning of James' lawsuit, "Meridian looked for 

insurance policies that might cover its liability for James' 

claim. Meridian identified Companion and Zurich as 

potential co-insurers. . . ." (James v. Zurich-American Ins. 

Co. of Ill., No. 95-117F, slip op. at 4 (D.V.I. Sept. 9, 1998)).4 

Defense of the case was tendered to Zurich as well as 

Companion, but Zurich denied coverage on the predicate 

that Meridian was not insured under its policy. Companion 

proceeded to defend the action, but it also tendered defense 

of the claim to Zurich after initial discovery. Zurich again 

denied coverage, and Companion then brought this 

declaratory judgment action. 

James, Companion and Meridian later began settlement 

discussions. Zurich was afforded the opportunity to

participate in those talks, but it declined. Those 

discussions led to an agreement under which Meridian 

stipulated to a $1 million judgment and assigned whatever 

rights it had against Zurich and Companion to James in 

exchange for James' promise not to execute the judgment 

against Meridian. For its part, Companion agreed to pay 

James $125,000 as a discharge payment for its share of the 

stipulated judgment, and it too assigned its rights against 

Zurich to James. Because Companion's policy limit was $1 

million and Zurich's was $2 million, James stipulated that 

Zurich's maximum liability would be two-thirds of the $1 

million stipulated judgment.5 James was then substituted 
as the sole plaintiff in the federal action. Hence the nature 

_________________________________________________________________ 

3. Hess Oil and United Dominion Constructors, Inc. ("United Dominion") 

were originally named as codefendants, but they were later voluntarily 

dismissed from the case. 

4. Both James and Zurich seem to dispute the District Court's justquoted statement, instead identifying Companion as having discovered 

that Meridian might be covered under the Zurich policy. 

5. Each of the Zurich and Companion policies contains a coinsurance 

provision stating that if another policy covers the same claim, the two 

policies are to be treated as coinsurance policies, with each insurer 

responsible for a pro-rata share of coverage based upon the respective 

policy limits. 

 4 

of the relief sought in the declaratory judgment action 

before the District Court was a declaration that Zurich was 

a coinsurer, so that James could collect $666,666 from it 

under the settlement agreement. 

On the litigants' cross-motions for summary judgment, 

the District Court determined (in its June 23, 1998 slip 

opinion, the "Summary Judgment Opinion"6) that the 

contract provision identifying the entities covered under the 

policy ("the Named Insured provision") was ambiguous, so 

that the need for extrinsic evidence precluded a decision as 

a matter of law. Here is the Named Insured provision 

(emphasis added): 

 Hess Oil Virgin Islands Corps. (HOVIC), Amerada Hess 

 Corporation and its directly and indirectly owned 

 subsidiary companies and/or interests in associated 

 and/or affiliated companies and/or organizations and 

 any other companies or entities over which Amerada 

 Hess Corporation is responsible to insure and/or 

 required to insure under contract or otherwise in respect 

 of their involvement in the HOVIC FCCU Project, and 

 Litwin Engineers and Contractors, Inc. and/or 

 Contractors, Subcontractors and Employees and/or 

 Consulting Engineers; and suppliers as required. 

At the ensuing bench trial Zurich stressed that the"as 

required" language at the end of the provision refers back 

to the entities that Hess Oil is "responsible to insure" or is 

"required to insure under contract." In contrast, James 

argued that the provision provided coverage for all

contractors and subcontractors performing work on the 

FCCU Project because the "as required" phrase relates only 

to "suppliers." 
Both sides produced extrinsic evidence to support their 

respective interpretations of the provision. Zurich and Hess 

Oil representatives testified7 that the intent of the Named 

_________________________________________________________________ 

6. To distinguish between that opinion and the District Court's opinion 

rendered later at the trial, the latter slip opinion (which has earlier 

been 

quoted from in the text at n.4) will be referred to as "Trial Op." 

7. All of the testimonial evidence for the bench trial was proffered 

through submissions of the witnesses' depositions and affidavits, not 

through live testimony. 

 5 

Insured provision was to provide coverage only for"FCCU 

contractors," a term referring to contractors and 

subcontractors that Hess Oil had contractually promised to 

insure. As Hess Oil's Property and Casualty Claims 

Administrator John Talarico ("Talarico") explained, an 

"FCCU contractor is a term of art we use to describe those 

whom HOVIC had agreed to provide insurance coverage as 

embodied by the Zurich Wrap Up policy." 

Witnesses from Zurich, Hess Oil and Amerada Hess 

uniformly stated that the Named Insured provision was 

intended to provide coverage solely for FCCU contractors. 

As Talarico explained in a letter to Zurich: 

 We purchased the Wrap Up liability insurance first, 

 then the contract provisions were drafted to reflect the 

 coverage terms and limits. The intent is to provide 

 [general liability] and auto coverage for all FCCU 

 contractors in all instances. 

Among those bolstering that view were Andrew Wade 

("Wade"), the Zurich underwriter who negotiated the policy, 

James Foley and Ed Weinman, the present and former 

Hess Oil controllers who dealt extensively with Hess Oil's 

various contractors, and Kevin Beebe, Amerada Hess'

Manager of Corporate Insurance.8 

Zurich and Hess Oil employees also testified that the 

policy was administered in accordance with the 

understanding that the provision covered only FCCU 

contractors. Talarico stated that in administering claims 

under the policy Zurich and Hess Oil acted consistently 

with that understanding. Jackie Ward ("Ward"), a former 

litigation claims specialist with Zurich, assumed 

responsibility for handling claims under the policy in 1993 

--well after the policy had become effective but before 
James was injured. Ward said that she was told at that 

time "[t]hat HOVIC or [Amerada] Hess would designate 

those contractors they wanted to insure, and that I was 

_________________________________________________________________ 

8. For example, Wade testified that the policy covered only FCCU 

contractors and that "FCCU contractors are those that . . . HOVIC is 

obligated to insure because . . . HOVIC offered them insurance as part 

of their contract . . . for the project." 

 6 

then to insure them under the policy with all of the terms 

of it." She further answered "no" to the question whether 

"the word `FCCU contractor' is a word of art used in the 

policy,"9 but she then went on to confirm that "[i]t's a term 

that John Talarico and I used to simplify our dealings with 

each other." Finally, it is undisputed that when James filed 

suit Zurich did undertake the defense of another company 

--a codefendant in James' action--that was an"FCCU 

contractor" that Zurich was contractually obligated to 

insure. 

On the other side of the dispute as to original intent, 

some written extrinsic evidence submitted by James 

appeared to indicate that the Zurich policy as written 

provided coverage for all contractors and subcontractors 

who worked on the FCCU project. First, during negotiations 

for the policy Amerada Hess sent Zurich's proposal to 

Marsh and attached Exhibit II(a) as a summarization of the 

policy's terms. Exhibit II(a) listed substantially the same 

language that ultimately appeared in the Named Insured 

provision and went on with this skeletal description of that 

provision: 

 Policy names as requested Amerada Hess, HOVIC, 

 Litwin and any other contractor or subcontractor. 

Another abbreviated summary of the Zurich policy prepared 

by Wade stated that coverage extended to "Hess Oil Virgin 

Islands Corporation (HOVIC) and all Contractors and SubContractors for FCCU Project." Finally, though this added 

factor is at best a slim reed, the policy premium was 

calculated on the total cost of the FCCU Project (which thus 

included the amounts payable on all of the subcontracts, 

including Meridian's). 

Because it found that extrinsic evidence in support of 

Meridian's contention more credible and relevant to the 

original contractual intent, the District Court held"that the 

intent of the parties in negotiating the contract was to 

provide coverage for all contractors and subcontractors who 

_________________________________________________________________ 
9. That question is inherently misleading. When the term "FCCU 

contractor" as such does not appear in the policy at all, what sensible 

meaning can be given to the question whether it is a"word of art" there? 

 7 

worked on the FCCU Project" (Trial Op. 13). Alternatively, 

despite its earlier summary judgment ruling, the court 

reached the same conclusion as a matter of law because it 

determined that the ambiguous Named Insured provision 

should automatically be construed against the insurer (id. 

12-13). 

Hence, after having determined that Zurich was bound 

by the James-Meridian-Companion settlement agreement,10 

the District Court held that Zurich was a coinsurer of 

Meridian and ordered it to pay James $666,666 plus 

interest. This appeal then ensued. James also crossappeals, arguing that the District Court erred infinding 

that the policy language was ambiguous. 

_________________________________________________________________ 

10. Although we have on several occasions upheld (as a matter of 

applicable state law) the validity of two-tiered settlements where they 

are 

reasonable and entered into in good faith (see, e.g., Trustees of the 

Univ. 

of Pa. v. Lexington Ins. Co., 815 F.2d 890 (3d Cir. 1987) and Greater N.Y. 

Mut. Ins. Co. v. North River Ins. Co., 85 F.3d 1088 (3d Cir. 1996)), from 

the very outset we have been "not unmindful of the dangers presented 

by two-tiered settlements" (Lexington, 815 F.2d at 902), particularly 

"that 

two-tiered settlements are fraught with the danger of self-dealing and 

should be scrutinized with extra care" (id .). In this instance James' 

covenant not to execute the $1 million consent judgment against 

Meridian left the latter totally indifferent to whether the price tag 

attached to that judgment was really $1 million or (say) twice or three 

times that amount. During the pendency of this declaratory judgment 

action, Companion wrote Zurich that James' action could be settled in 

the range of $300,000, a demand that was apparently then lowered to 

$250,000. Even on the predicate that Companion (which indisputably 

was obligated to cover Meridian, and hence the James claim, under its 

own $1 million policy) would come up with just $125,000 in cash as its 

contribution, that $250,000 figure would have capped out Zurich's 

liability at $125,000 if it had caved in to the demand that it join in a 

global settlement. Instead the $1 million figure that was nominally 

attached to the consent judgment ("nominally" because it meant nothing 

to either Meridian or Companion) placed Zurich at risk for $666,666 as 

the price for having taken this case to trial and now to appeal. This 
scenario appears to provide a classic instance of the concerns that we 

voiced in Lexington. But our disposition of this appeal on other grounds 

makes it unnecessary for us to issue a definitive ruling, rather than 

merely this caveat, on that score. 

 8 

Jurisdiction and Standard of Review 

Jurisdiction in the District Court was invoked on 

diversity-of-citizenship grounds under 28 U.S.C.S1332. 

Appellate jurisdiction over the District Court'sfinal 

judgment exists under 28 U.S.C. S1291. 

We exercise plenary review as to the correct construction 

and legal operation of an insurance policy (see New Castle 

County v. Hartford Accident & Indem. Co., 970 F.2d 1267, 

1270 (3d Cir. 1994); Pittston Co. Ultramar Am. Ltd. v. 

Allianz Ins. Co., 124 F.3d 508, 515 (3d Cir. 1997)). Finally, 

the District Court found (Trial Op. 10-11), and neither 

party disputes, that Virgin Islands contract law applies to 

this case. As such, we both (1) apply Virgin Islands contract 

law and (2) exercise de novo review over the District Court's 

interpretation of that law (see Chemical Leaman Tank Lines, 

Inc. v. Aetna Cas. & Sur. Co., 89 F.3d 976, 983 (3d Cir. 

1996)). In doing so we credit the District Court's factual 

findings. 

Whom Does Zurich's Policy Cover? 

As stated earlier, Zurich insists that the Named Insured 

provision covers only "FCCU Contractors," a term that does 

not encompass Meridian. Even more importantly, that

reading is supported by the uncontradicted testimony of 

persons on both sides of the contract itself, as well as the 

consistent post-contracting course of dealings between 

Zurich and Hess Oil. But relying on the ambiguities of 

language and some extrinsic evidence, James asserts that 

Meridian is included as a named insured under the policy. 

Thus the situation is that both parties to the contract say 

that the provision means "X," while a stranger to the 

contract--Meridian--says it means "Y." 

We agree with the District Court that the Named Insured 

provision is ambiguous.11 But any extended (or even brief) 

_________________________________________________________________ 

11. As we have stated, James disputes that in its cross-appeal. But the 

issue turns out to be irrelevant to the outcome. As the ensuing 

discussion reveals, even if the provision were not ambiguous the parties 

to the contract were free to modify its terms, either by express 

amendment or by their conduct. 
 9 

colloquy on how the extrinsic evidence should be weighed 

is entirely unnecessary, because the consistent practical 

construction given to that provision by the parties to the 

contract controls its terms. As the second of its alternative 

rulings, the District Court held that Meridian was covered 

under the policy because extrinsic evidence indicated "that 

the intent of the parties in negotiating the contract was to 

provide coverage for all contractors and subcontractors who 

worked on the FCCU project" (Trial Op. 13, emphasis

added). So the District Court cast its searchlight of analysis 

solely on the presumed intention of the parties at the time 

of contract formation, not at all on how the contracting 

parties then proceeded to construe the policy in operation.12 

But as Capitol Bus Co. v. Blue Bird Coach Lines, Inc., 478 

F.2d 556, 560 (3d Cir. 1973) exemplifies, a basic rule of 

contract construction is that "[a] contract must be

interpreted in light of the meaning which the parties have 

accorded to it as evidenced by their conduct in its

performance."13 All of the ALI Restatements of the Law (thus 

including the Restatement (Second) of Contracts 

("Restatement")) have been adopted as definitive sources of 

rules of decision by the Virgin Islands Legislature. 14 And 

Restatement S201(1) echoes the teachings of Capitol Bus: 

_________________________________________________________________ 

12. For example, the District Court did not credit the testimony of Hess 

Oil's current and former controllers because "none of these individuals 

had been involved in the negotiation of the policy, and most if not all of 

them had not even seen the policy" (Trial Op. 8). Similarly, Talarico's 

testimony was discredited in part because "Talarico did not even work 

for Hess at the time the policy was negotiated" (id.) In stark contrast, 

the 

extrinsic evidence produced by James was given greater weight because 

it was generated during the policy's negotiation (id. 6-8). 

13. See also such cases as Insurance Corp. of Am. v. Dillon, Hardamon & 

Cohen, 725 F.Supp. 1461, 1464 (N.D. Ind. 1988), adopting the view that 

"where, as here, the insurer and the insureds agree on the interpretation 

of a particular provision . . ., their agreement ends the inquiry," and 

Pioneer Life Ins. Co. v. Alliance Ins. Co., 374 Ill. 576, 590, 30 N.E.2d 

66, 

73 (1940) ("Where the terms of an agreement are in any respect 

ambiguous and the parties have by their own acts placed a reasonable 

construction upon them, their interpretation will be adopted by the 

court"). 

14. V.I. Code Ann. tit. 1, S4 (1999) states: 

 10 
 Where the parties have attached the same meaning to 

 a promise or agreement or a term thereof, it is 

 interpreted in accordance with that meaning.

That same message is conveyed throughout the 

Restatement, as in Restatement S202(5)(emphasis added): 

 Wherever reasonable, the manifestations of intention of 

 the parties to a promise or agreement are interpreted 

 as consistent with each other and with any relevant 

 course of performance, course of dealing, or usage or 

 trade. 

Restatement S202, comm. g adds: 

 The parties to an agreement know best what they 

 meant, and their action under it is often the strongest 

 evidence of their meaning. But such "practical 

 construction" is not conclusive of meaning. Conduct 

 must be weighed in the light of the terms of the 

 agreement and their possible meanings. Where it is 

 unreasonable to interpret the contract in accordance 

 with the course of performance, the conduct of the 

 parties may be evidence of an agreed modification or of 

 a waiver by one party. 

Zurich's and Hess Oil's post-contracting conduct, as 

manifested by their consistent administration of the Zurich 

policy, was eminently reasonable in practical terms, 

whether adopted as a sensible way to resolve the ambiguity 

of the Named Insured provision's opaque language (framed 

as it was in a way that would fail English Grammar and 

Syntax 101), or even if adopted as a sensible course of 

dealing instead of what might have been perceived as an 

awkward literal meaning of the provision. Either way, the 

contracting parties' uniform course of dealing made it clear 

that they viewed the policy as covering only contractors and 

_________________________________________________________________ 

 The rules of the common law, as expressed in the restatements of 

 the law approved by the American Law Institute, and to the extent 

 not so expressed, as generally understood and applied in the United 

 States, shall be the rules of decision in the courts of the Virgin 

 Islands in cases to which they apply, in the absence of local laws 

to 

 the contrary. 

 11 

subcontractors that Hess Oil had a contractual obligation 

to insure. 
Indeed, as the District Court itself noted in its ruling on 

the parties' cross-motions for summary judgment 

(Summary Judgment Op. 8): 

 The affidavits, depositions and other documentation 

 submitted by Zurich show that the individuals that 

 have administered the insurance policy [at Zurich, 

 Amerada Hess and Hess Oil] all agree that Meridian 

 would not be covered according to the way that the 

 Zurich policy has been administered. 

That acknowledgment should really have spelled the end of 

the matter. After all, the parties to a contract are free to 

define and clarify--or even to change--the contract's terms, 

and Zurich and Hess Oil did precisely that by pursuing a 

course of conduct consistent with their mutual 

understanding of the Named Insured provision.15 

Most importantly for the present appeal, suppose that the 

District Court were right in its parsing of the original paper 

record as indicating that Zurich and Hess Oil had originally 

intended to provide coverage for all subcontractors, thus 

including Meridian. Even so, their later practical 

application of the Named Insured provision in a totally 

different fashion must prevail, because Meridian never had 

any vested rights in the terms of the policy as originally 

written. It is really irrelevant what the extrinsic evidence of 

the original contract negotiations may have shown, because 

Zurich and Hess Oil remained free to modify the contract's 

terms. Restatement S311(2) explains that in the absence of 

_________________________________________________________________ 

15. Citing an opinion from the same District Court in Coakley Bay 

Condominium Ass'n v. Continental Ins. Co., 770 F.Supp. 1046, 1050 

(D.V.I. 1991), the district judge said "[t]he interpretation of a contract 

is 

dependant upon the meaning of the language used by the parties to the 

contract, and the Court must assume that the parties embodied their 

whole intentions in the contract" (Trial Op. 11). That statement ignores 

the dictates of the Restatement, approved and adopted as it has been by 

the Virgin Islands legislature. As such, the District Court's singleminded 

focus on the perceived intentions of the parties as assertedly embodied 

in the language of the contract closed off all inquiry into the 

controlling 

relevance of the policy's post-contractual administration. 

 12 

an explicit provision to the contrary, "the promisor and 

promisee retain power to discharge or modify the duty [to 
an intended beneficiary] by subsequent agreement." Here 

there was certainly no explicit provision in the Zurich policy 

to negate that retained power. 

At most Meridian (and hence James as its assignee) 

could lay claim to benefits under the policy as an intended 

third-party beneficiary. And on that score, Restatement 

S311(3) lists three vesting events that signal when a 

contract may no longer be modified without the consent of 

an intended beneficiary: 

 Such a power [the one referred to in the preceding 

 paragraph's quotation from Restatement S311(2)] 

 terminates when the beneficiary, before he receives 

 notification of the discharge or modification, materially 

 changes his position in justifiable reliance on the 

 promise or brings suit on it or manifests assent to it at 

 the request of the promisor or promisee. 

Without question, no potential third-party rights that 

Meridian may assertedly have claimed under the contract 

ever vested under any of those alternatives. 

First, the record establishes without contradiction that 

Meridian never materially changed its position in reliance 

on the Zurich policy. It will be remembered that Meridian 

purchased its own liability insurance from Companion-- 

indeed, it was not even aware of any possible coverage 

under the Zurich policy until after James had already filed 

suit against Meridian.16 

Second, Meridian was confronted with Zurich's totally 

different (and adverse) view of the policy's coverage before 

James (standing in Meridian's shoes via assignment)filed 

the present declaratory judgment action. James' initial 

action against Meridian cannot of course be considered a 

suit on the contract under Restatement S311(3): It was a 

_________________________________________________________________ 

16. At best, as the District Court found (Trial Op. 4), it was only after 

James' suit was filed that "Meridian looked for insurance policies that 

might cover its liability." At worst, as discussed in n. 4, Meridian never 

even knew about any possible coverage under the Zurich policy until 

Companion had taken over the James personal injury case. 

 13 

personal injury action, not a suit on the contract, and 

neither Companion nor Zurich was named as a party in 

that case. Finally, it is also beyond dispute that neither 

Zurich nor Hess Oil ever requested Meridian's assent to any 

promise that it would be covered under the policy (a 

promise that was never conveyed to Meridian at all). 
In sum, it is clear that the earliest time at which

Meridian could even arguably have claimed any type of 

"interest" was the date on which James was injured and 

Meridian's liability for that injury arose. Before that date 

Zurich and Hess Oil were free to modify the policy's terms 

if and to the extent that they desired. And the 

uncontroverted record evidence is that even if there had 

been any intent, as read into the original policy terms, to 

cover subcontractors such as Meridian, that presumed 

intent was supplanted by the mutual understanding--

arrived at well before James' injury--that the policy covered 

only "FCCU contractors." And the identical result follows if 

the contracting parties' course of conduct were to be viewed 

as a clarification of ambiguous language. As Federal Ins. 

Co. v. Americas Ins. Co., 691 N.Y.S.2d 508, 513 (N.Y. App. 

Div. 1999) has put it: 

 Moreover, where, as here, the parties themselves 

 agreed to clarify the policy 

 . . . their agreement will be enforced even if the rights 

 of a third party are affected, unless the third party can 

 show that it changed its position in reliance upon the 

 agreement as originally written. 

Any way you slice it, then, the undisputed conduct of the 

parties controls the terms of the contract between them, 

thus excluding coverage for Meridian. 

Zurich and Hess Oil's in-practice application of the policy 

likewise torpedoes the District Court's alternative ruling. 

Having found that the policy was ambiguous, the District 

Court said that extrinsic evidence need not be consulted 

because Virgin Islands law mandates that "the 

interpretation more favorable to coverage must prevail" 

(Trial Op. 12). On that premise, the District Court

summarily ruled that the policy should be construed to 

include coverage for Meridian, and hence in James' favor. 

 14 

But such generalized doctrines of contract interpretation 

must not be applied in a vacuum. Contra proferentem

construction of an ambiguous insurance policy against an 

insurer may well come into play where the contract dispute 

is between the insurer and its insured, each contending for 

a different reading of the insured's coverage under a policy. 

But here we are called on to decide a very different 

question: whether a third-party entity is entitled to policy 

coverage where the contracting parties have agreed on a 

negative answer but that third party objects. 
Such cases in our Circuit as Rich Maid Kitchens, Inc. v. 

Pennsylvania Lumbermens Mut. Ins. Co., 641 F.Supp. 297, 

307-08 (E.D. Pa. 1986), aff 'd without published op. 833 

F.2d 307 (3d Cir. 1987), and Hodgins v. American Mut. 

Liability Ins. Co., 261 F.Supp. 129, 130-31 (E.D.Pa. 1966) 

have properly made that very distinction, rejecting the 

application of contra proferentem principles in such a 

context. Here too there is no "doubt as to what the parties 

themselves intended" (the language in Hodgins , id. at 130).17 

Hence the District Court was clearly mistaken in applying 

the doctrine to Zurich's disadvantage in the matrix of this 

case. 

It is thus unnecessary to decide the mooted question 

whether Virgin Islands law will construe ambiguous policy 

language against the insurer when the parties to the policy 

have equal bargaining power. But it is worth observing that 

the very existence of that exception in many jurisdictions 

emphasizes that the doctrine itself is to be employed only in 

disputes between parties to an insurance policy, for it is 

fundamental that the purpose of judicial interpretation of a 

contract is to ascertain the intent of the parties. Where 

both parties have equal bargaining power, any judicial 

concerns about "take it or leave it" contracts of adhesion 

are lessened, and mutual agreement is more readily 

assumed. Here the parties to the contract have agreed on 

_________________________________________________________________ 

17. Indeed, James Br. 30 concedes that a policy provision is strictly 

construed against the insurer only when it is capable of two reasonable 

interpretations--again a proposition based on the differences in 

interpretation between an insurer and its insured. Here both parties to 

the policy agree on its interpretation, so the principle is inapplicable. 

 15 

its terms, and it would subvert freedom of contract

principles to benefit a third party by employing a legal 

doctrine--useful merely as an aid to interpretation--that 

yields a contrary result. 

Conclusion 

We apply the Named Insured provision, just as the 

contracting parties have in their own practical construction 

of that provision, in Zurich's favor regarding the exclusion 

of coverage for Meridian. Even if the policy as originally 

drafted were to be construed in Meridian's (and hence 

James') favor, Meridian's (and hence James') rights as a 

third-party beneficiary would not have vested before Zurich 

and Hess Oil had established a consistent course of

conduct in administering the policy that excluded coverage 

for any subcontractor such as Meridian. Because it is 
undisputed that Meridian was not a "FCCU contractor," we 

hold that the Zurich policy did not provide coverage for 

Meridian as the time of the incident that resulted in James' 

injuries.18 We AFFIRM as to the District Court's 

determination that the policy provision at issue is

ambiguous (though, as stated earlier, that makes no

difference in the result), and we REVERSE and order the 

entry of final judgment in favor of Zurich and against 

James. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

_________________________________________________________________ 

18. Counsel for James submitted a post-argument letter, obviously 

stimulated by questions from our panel during oral argument, raising 

the objection that Zurich had not advanced the precise legal position 

that we have articulated here. But both before the District Court and on 

appeal Zurich has urged that the case should be controlled by the 

undisputed evidence demonstrating the uniform post-contract 

understanding of the parties to the policy. We see no principled 

jurisprudential reason for ignoring the first-year law school contracts 

teaching that confirms the correctness of that position. 

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