2009 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

4-16-2009

Royal Ins Co of Amer v. KSI Trading Corp

Precedential or Non-Precedential: Precedential

Docket No. 06-3447

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"Royal Ins Co of Amer v. KSI Trading Corp" (2009). 2009 Decisions. Paper 1442.

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

 

Nos. 06-3447 and 07-3824

 

ROYAL INSURANCE COMPANY OF AMERICA

 v.

KSI TRADING CORPORATION;

ASTRO AUTOMOTIVE, INC.

JAMES BARRETT; JEFFREY JOINER;

THE LIG INSURANCE AGENCIES,

 Third-Party Defendants

 KSI Trading Corporation; Astro Automotive, Inc.,

 James Barrett, Jeffrey Joiner,

 The LIG Insurance Agencies,

 Appellants, No. 06-3447

 KSI Trading Corporation; Astro Automotive, Inc.,

 The LIG Insurance Agencies,

 Appellants, No. 07-3824
*

Honorable John R. Padova, Senior United States District

Judge for the Eastern District of Pennsylvania, sitting by

designation.

2

 

On Appeal from the United States District Court

for the District of New Jersey

(D.C. No. 04-cv-00867)

District Judge: Honorable Dennis M. Cavanaugh

 

Argued January 6, 2009

Before: FUENTES and FISHER, Circuit Judges,

and PADOVA,* District Judge

(Filed: April 16, 2009)

Kenneth R. Rothschild (Argued)

Golden, Rothschild, Spagnola,

 Lundell, Levitt & Boylan

1011 Route 22 West, Suite 300

P.O. Box 6881

Bridgewater, NJ 08807

Attorney for Appellants

James F. Campise

David Y. Loh (Argued)

Cozen & O'Connor

45 Broadway Atrium, Suite 1600

New York, NY 10006

Attorneys for Appellee
3

 

OPINION OF THE COURT

 

FISHER, Circuit Judge.

This appeal calls for the interpretation of a Marine Open

Cargo insurance policy (the Policy) entered into by KSI Trading

Corporation (KSI) and Royal Insurance Company of America

(Royal). A fire occurred at one of KSI’s warehouses, and KSI

filed a reimbursement claim with Royal for the full extent of its

loss pursuant to a Warehouse Storage Insurance section of the

Policy. Royal disclaimed coverage for a significant portion of

the loss, asserting that the Warehouse Storage Insurance section

did not cover KSI’s domestically acquired merchandise.

Thereafter, Royal sought a declaratory judgment in the District

Court that it was not obligated to indemnify KSI for all of its

loss. The District Court determined that the Warehouse Storage

Insurance section of the Policy only provided coverage for

KSI’s internationally acquired merchandise and granted

summary judgment in favor of Royal. We conclude that the

Policy is ambiguous with respect to the property that was

insured while stored in KSI’s warehouse, and because New

Jersey law, which governs the interpretation of the Policy,

requires ambiguities to be resolved in favor of the insured, we

will reverse the District Court and enter judgment in favor of

KSI.
4

I.

KSI, a New Jersey corporation, is a wholesale distributor

of after-market auto body parts that purchases inventory from

both domestic and international suppliers, and stores its

inventory in warehouses located throughout the United States.

Royal, an Illinois corporation, is a marine cargo underwriter

which provides insurance for the hazards encountered in

maritime transportation. On May 19, 1999, Royal provided

quotations for insurance coverage to KSI’s broker, Jeffrey Joiner

of the LIG Insurance Agencies (LIG), and on July 1, 1999,

Royal and KSI entered into an insurance contract, with coverage

commencing at this time. Certain subsidiaries of KSI, including

Astro Automotive, Inc. (Astro), were also covered by the Policy.

Sometime after July 1, 1999, KSI received the actual Marine

Open Cargo Policy No. POC102991.

The Policy contained three sections, which are titled as

follows: (I) Ocean Cargo; (II) Domestic Transportation

Insurance; and (III) Warehouse Storage Insurance. The Ocean

Cargo section of the Policy is comprised of fifty-one paragraphs,

but in one particularly relevant paragraph, entitled “Property

Insured & Insurable Interest,” states:

“This Policy covers, for account of whom it may

concern, shipments of lawful goods and

merchandise consisting principally of:

MERCHANDISE INCIDENTAL

TO THE ASSURED’S
5

BUSINESS, CONSISTING

PRINCIPALLY OF

AUTOMOBILE PARTS

Under or on deck, consigned to or shipped by

others for account or control of the Assured or in

which the Assured has the risk of loss, but

excluding shipments either sold or purchased by

the Assured subject to the terms of sale (or

purchase) whereby the Assured is not obligated to

furnish Ocean Marine insurance.

Notwithstanding the foregoing, this Policy also

covers all shipments of lawful goods and

merchandise for the account of others from whom

the Assured has received written instructions to

insure provided such instructions are received

prior to any known or reported loss, damage, or

accident and prior to sailing of the vessel.”

In another particularly relevant paragraph, with the caption

“Geographical Limits,” the Ocean Cargo section also states:

“Always excepting adventures which are illegal

under the laws of the United States this Policy

covers Property Insured at and from ports and/or

places in the world to ports and/or places in the

world excluding shipments originating in the

United States (meaning the forty-eight (48)

contiguous states and the District of Columbia) or

Canada for shipment to destination[s] in the

Continental United States or Canada.”
6

Turning to Sections II and III of the Policy, the Domestic

Transportation Insurance section states, in pertinent part:

“Effective as to all shipments made on or after

July 1, 1999 this Policy is hereby extended,

subject to its terms and conditions, to cover

shipments of the Property Insured while in due

course of transit only at the risk of the assured

WORLDWIDE excluding the former Soviet

Union and Russian Federation from the time the

property leaves the store, warehouse, or factory at

initial point of shipment and continuously

thereafter, including while on docks, wharves,

piers, bulkheads, depots, stations or platforms;

until delivered at store, warehouse or factory at

destination.”

Lastly, the Warehouse Storage Insurance section states, in

relevant part:

“It is understood and agreed that, subject to all

terms and conditions which do not conflict with

the provisions set forth herein, this Policy is

extended to cover property insured under Section

I which is the property of the Assured or the

property of others from whom the Assured has

written instructions to insure while temporarily
1

The Schedule listed eleven locations by name and also

provided coverage for unnamed locations within the continental

United States. Among the expressly named locations was a

warehouse in Franklin, Massachusetts. The amount of coverage

for this warehouse was limited to $2.5 million.

2

Subsequent to the fire, the parties cancelled the Policy,

effective July 1, 2003.

7

stored in warehouses at locations listed in the

attached Schedule.”1

Additionally, Sections II and III both provide that “[n]othing

herein contained shall be held to vary, waive, alter or extend any

of the terms, conditions, declarations or agreements of the

Policy other than as expressly stated in this Coverage Section.”

The Policy renewed automatically on an annual basis.

On April 1, 2003, a fire occurred at KSI’s warehouse in

Franklin, Massachusetts resulting in a significant loss of KSI’s

inventory.2

 At that time, Astro was a leasehold tenant of the

Franklin warehouse and was using it to store inventory. KSI

submitted a claim to Royal for its loss of inventory pursuant to

the Warehouse Storage Insurance section of the Policy. KSI

claimed that the inventory destroyed or ruined by the fire was in

excess of the $2.5 million limit scheduled for the Franklin

warehouse. On March 9, 2004, in a written notice, Royal

disclaimed coverage for the portion of the loss attributable to

KSI’s domestically acquired merchandise. Instead, Royal

agreed to reimburse KSI in the amount of $768,766.10 – which

was Royal’s estimate of the net value of the internationally
8

acquired merchandise that was lost in the fire – minus salvage

and a $5,000 deductible. KSI maintained that it was entitled to

reimbursement from Royal for the full extent of its loss, up to

the Policy’s $2.5 million limit.

On February 24, 2004, Royal filed a Complaint in the

District Court seeking a declaratory judgment against KSI and

Astro (collectively KSI) with respect to its indemnification

obligations. KSI filed an Answer in which it asserted

counterclaims against Royal for breach of contract, fraud, unjust

enrichment, and bad faith. KSI also filed a Third Party

Complaint against LIG, Joiner, and one other named individual

(collectively LIG). Subsequently, KSI filed an Amended

Answer and Amended Counterclaims, which included

counterclaims for breach of the implied covenant of good faith

and fair dealing, reformation based on fraud, and reformation

based upon mutual mistake.

On June 13, 2005, Royal filed a motion for summary

judgment against KSI seeking a declaration that the Warehouse

Storage Insurance section of the Policy only covered goods that

originated overseas and did not cover goods that originated

domestically. KSI cross-moved against Royal for summary

judgment on its counterclaim for breach of contract on the

ground that no genuine issue of material fact existed with

respect to Royal’s obligation to reimburse KSI for all of the loss

it incurred as a result of the warehouse fire (up to the Policy

limits).

On February 17, 2006, the District Court granted

summary judgment in favor of Royal and denied it as to KSI,

finding that the Policy only provided warehouse coverage for
3

Although LIG joined in the Notice of Appeal, according

to KSI and LIG, on October 5, 2007, after the notice was filed,

they stipulated to a discontinuance of KSI’s third-party action

against LIG.

9

internationally acquired merchandise. Consequently, the

District Court found that, under the plain language of the Policy,

Royal had no obligation to indemnify KSI for the loss of its

domestically acquired merchandise that resulted from the

warehouse fire. The District Court also dismissed KSI’s claims

for breach of contract.

As a result of clerical error, the case was listed as

“terminated” on the District Court’s docket; however, because

KSI’s counterclaims for reformation were not the subject of any

party’s motion for summary judgment, KSI and LIG filed a

motion to reinstate the counterclaims. On June 19, 2006, the

District Court amended its Decision and Order to clarify that the

reformation counterclaims remained viable. Subsequently,

Royal moved for summary judgment on these two remaining

counterclaims, and KSI filed an opposition to the motion. On

August 22, 2007, the District Court granted Royal’s motion for

summary judgment and entered its order the next day, thus

rendering a final judgment.

KSI timely appealed from the District Court’s Decision

and Order of February 17, 2006, as amended by the Decision

and Order of June 19, 2006, and from the District Court’s

Decision and Order entered August 23, 2007.3

II.
10

The District Court had diversity jurisdiction over this

matter pursuant to 28 U.S.C. § 1332(a)(1). We have jurisdiction

over the appeal pursuant to 28 U.S.C. § 1291. Our review of a

district court’s grant of summary judgment is plenary. Pittston

Co. Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 515 (3d

Cir. 1997). Summary judgment is appropriate if “there is no

genuine issue as to any material fact and . . . the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).

“In making this determination, we must consider the evidence

in the record in a light most favorable to the nonmoving party.”

Pittston Co. Ultramar Am. Ltd., 124 F.3d at 515 (citing

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). We

exercise “plenary review over a district court’s interpretation of

state law, as well as its conclusion as to the legal operation of an

insurance policy.” Id. (internal citation omitted). Determining

whether ambiguity exists in an insurance policy is a question of

law subject to plenary review. Id. at 520.

III.

The central issue on appeal is whether the Marine Open

Cargo insurance policy, issued to KSI by Royal, covered KSI’s

domestically acquired merchandise while it was stored in KSI’s

Franklin warehouse. As an initial matter, maritime contracts are

governed by federal admiralty law when there is an established

federal rule, but absent such a rule, state law applies. Wilburn

Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 313-14, 321

(1955); see also Pittston Co. v. Allianz Ins. Co., 795 F. Supp.

678, 689 n.10 (D.N.J. 1992) (“[I]n the absence of a controlling

federal statute or an established rule of general maritime law,

state law governs the scope and validity of contracts of marine

insurance.”). Because there is no applicable federal rule
11

governing the construction of the Policy at issue in the present

case, state law applies, and the parties do not dispute that New

Jersey law is the relevant body of law for this purpose.

Under New Jersey law, an insurance policy “‘is simply

a contract and its provisions should, of course, be construed as

in any other contract.’” Pennbarr Corp. v. Ins. Co. of N. Am.,

976 F.2d 145, 151 (3d Cir. 1992) (quoting Caruso v. John

Hancock Mut. Life Ins. Co., 57 A.2d 359, 360 (N.J. 1948)). As

is the case with other types of contracts, an insurance policy “is

to be governed by its own terms without recourse to other

documents unless its own language so requires.” Herbert L.

Farkas Co. v. N.Y. Fire Ins. Co., 76 A.2d 895, 897 (N.J. 1950).

In the absence of any ambiguity, the terms of an insurance

policy should “be given their plain, ordinary meaning.”

Zacarias v. Allstate Ins. Co., 775 A.2d 1262, 1264 (N.J. 2001);

see Bd. of Ed. of Florham Park v. Utica Mut. Ins. Co., 798 A.2d

605, 610 (N.J. 2002) (“In the absence of any ambiguity, courts

should not write for the insured a better policy of insurance than

the one purchased.” (internal quotation marks omitted)); Kampf

v. Franklin Life Ins. Co., 161 A.2d 717, 720 (N.J. 1960) (“When

the terms of an insurance contract are clear, it is the function of

a court to enforce it as written and not to make a better contract

for either of the parties.”).

Ambiguity exists “where the phrasing of the policy is so

confusing that the average policyholder cannot make out the

boundaries of coverage.” Weedo v. Stone-E-Brick, Inc., 405

A.2d 788, 795 (N.J. 1979). New Jersey caselaw “does not

require that we credit every conceivable deconstruction of

contractual language,” but rather instructs that “the ‘doctrine of

ambiguity’ should be invoked only to resolve ‘genuine’
12

ambiguities, not ‘artificial’ ambiguities created by ‘semantical

ingenuity.’” A & S Fuel Oil Co. v. Royal Indem. Co., 652 A.2d

1236, 1237-38 (N.J. Super. Ct. App. Div. 1995) (quoting Weedo,

405 A.2d at 795). Determining whether genuine ambiguity is

present in an insurance policy requires interpreting the policy

“as a whole, by giving a reasonable meaning to its form and

cast.” Arrow Indus. Carriers, Inc. v. Continental Ins. Co. of

N.J., 556 A.2d 1310, 1314 (N.J. Super. Ct. App. Div. 1989).

Where genuine ambiguity exists, such that “the

controlling language will support two meanings, one favorable

to the insurer, and the other favorable to the insured, the

interpretation sustaining coverage must be applied.” Mazzilli v.

Accident & Cas. Ins. Co. of Winterthur, Switz., 170 A.2d 800,

803 (N.J. 1961); see Customized Distribution Servs. v. Zurich

Ins. Co., 862 A.2d 560, 564 (N.J. Super. Ct. App. Div. 2004)

(“[I]f an insurance policy’s terms are capable of supporting two

distinct outcomes as to whether there is coverage, the subject

language must be interpreted in favor of the insured.”). In an

effort to avoid subjecting insureds “to technical encumbrances

or to hidden pitfalls . . . policies should be construed liberally in

their favor to the end that coverage is afforded to the full extent

that any fair interpretation will allow.” Meier v. N.J. Life Ins.

Co., 503 A.2d 862, 870 (N.J. 1986) (internal quotation marks

omitted). Moreover, when the issue of ambiguity arises from an

“exclusion or exception, designed to limit the protection, a strict

interpretation is applied.” Mazzilli, 170 A.2d at 804.

Therefore, if the insurance policy’s language is

“insufficiently clear to justify depriving the insured of her

reasonable expectation that coverage would be provided,” the

policy must be interpreted in favor of the insured. Sparks v. St.
13

Paul Ins. Co., 495 A.2d 406, 413 (N.J. 1985); see Zacarias, 775

A.2d at 1264 (“When there is ambiguity in an insurance

contract, courts interpret the contract to comport with the

reasonable expectations of the insured.”). The rationale

underlying the principle (referred to as contra proferentem) that

ambiguities in insurance contracts should be resolved in favor

of the insured “is that because most insurance agreements are

drafted by the insurance industry, they are essentially contracts

of adhesion.” Pittston Co. Ultramar Am. Ltd., 124 F.3d at 520

(citing Meier, 503 A.2d at 869). This rationale has less force

when it is applied to “a sophisticated insured” who has

participated in the drafting process. Id. at 521 (citing OwensIllinois, Inc. v. United Ins. Co., 650 A.2d 974, 991 (N.J. 1994)).

Against this backdrop, KSI argues that the Policy

provided warehouse coverage for “property insured,” which, as

defined in Section I of the Policy, means “merchandise

incidental to the assured’s business, consisting principally of

automobile parts,” and by its terms included all of KSI’s

merchandise, regardless of its origin. In the alternative, KSI

contends that the Policy should be reformed under equitable

principles. In contrast, Royal argues that Section I of the Policy

only provided coverage for the transportation of international

cargo because, in addition to the language cited by KSI, Section

I contains a paragraph on geographical limitations which

excludes from coverage any merchandise that originated and

remained in the United States or Canada. Confronted with these

conflicting interpretations, we begin our own analysis with the

plain language of the Policy’s terms to determine if a genuine

ambiguity exists. See A & S Fuel Oil Co., 652 A.2d at 1237.
14

Paragraph 1 of the Warehouse Storage Insurance section

states:

“It is understood and agreed that, subject to all

terms and conditions which do not conflict with

the provisions set forth herein, this Policy is

extended to cover property insured under Section

I . . . while temporarily stored in warehouses at

locations listed in the attached Schedule.”

This section of the Policy does not independently identify the

property to which it extends insurance coverage, but it does

provide a cross-reference to Section I. Thus, in order to

understand which property is insured while temporarily stored

in KSI warehouses, we are directed to look to the Ocean Cargo

section of the Policy.

Turning to this section, although the term “property

insured” is never clearly defined, paragraph 3, which is

captioned “Property Insured & Insurable Interest,” certainly

suggests a definition for this term when it states:

“This Policy covers, for account of whom it may

concern, shipments of lawful goods and

merchandise consisting principally of:

MERCHANDISE INCIDENTAL

TO THE ASSURED’S

BUSINESS, CONSISTING

PRINCIPALLY OF

AUTOMOBILE PARTS
15

Under or on deck, consigned to or shipped by

others for account or control of the Assured in

which the Assured has the risk of loss, but

excluding shipments either sold or purchased by

the Assured subject to the terms of sale (or

purchase) whereby the Assured is not obligated to

furnish Ocean Marine insurance. . . .”

Notwithstanding the fact that the words “property insured” are

never used in this passage, the use of all capital letters and

offsetting text, coupled with the caption “Property Insured and

Insurable Interest,” is a strong indication that “property insured”

is best understood to mean “merchandise incidental to the

assured’s business, consisting principally of automobile parts.”

Accepting this as the most plausible definition of

“property insured” and applying it to Section III would result in

finding that any and all of KSI’s merchandise (consisting

principally of automobile parts) was insured while temporarily

stored in one of KSI’s warehouses, regardless of whether this

property originated in the United States or overseas. Under this

interpretation, the losses to domestic inventory which KSI

incurred during the Franklin warehouse fire would have been

covered by the Policy and Royal would be obligated to

indemnify KSI (up to the limits set forth in the Policy) for these

losses.

However, the wording of the Warehouse Storage

Insurance section does not clearly indicate whether we are

looking for a definition of “property insured” in Section I or

whether we are looking to determine the scope of the property

that is insured under Section I. If the latter is the proper inquiry,
16

our analysis is quite different, because even within paragraph 3

of Section I, which contains the purported definition of

“property insured,” we are able to locate language that narrows

the scope of the property covered by this section. For example,

paragraph 3 begins by stating that the “Policy covers . . .

shipments of lawful goods and merchandise,” and thereby

suggests that only property in transit is insured under the Policy.

Paragraph 3 also refers to merchandise that is “[u]nder or on

deck,” suggesting that the property insured under Section I of

the Policy is further limited to marine cargo transported by sea.

Moreover, paragraph 5 of Section I suggests additional

limitations on the scope of the property that is insured.

Specifically, it states: “[T]his Policy covers Property Insured at

and from ports and/or places in the world to ports and/or places

in the world excluding shipments originating in the

[Continental] United States . . . or Canada for shipment to

destination[s] in the Continental United States or Canada.” By

its terms, this paragraph indicates that the property covered

under Section I of the Policy is limited to merchandise that

traveled overseas. Transferring this understanding of the

property that is insured under Section I into Section III suggests

that coverage does not extend to domestically acquired

merchandise that is temporarily stored in a KSI warehouse.

Consequently, Royal would not be obligated to reimburse KSI

for the losses it suffered to its domestic inventory.

As this analysis of the plain language demonstrates, the

Policy is “capable of supporting two distinct outcomes as to

whether there is coverage,” Customized Distribution Servs., 862

A.2d at 564, and therefore indicates that a genuine ambiguity

exists. Nonetheless, because we are instructed to “give effect to
17

the whole policy, not just one part of it,” Arrow Indus. Carriers,

Inc., 556 A.2d at 1315, we will also consider the Domestic

Transportation Insurance section, which constitutes the

remainder of the Policy. Although this section refers to

“Property Insured,” it does not contain a definition for this term,

thus suggesting that the meaning must be located elsewhere in

the Policy. But if “property insured” is limited to imported

inventory by operation of paragraph 5 of Section I, this would

severely undermine Section II of the Policy, which expressly

provides coverage to KSI’s inventory during domestic transport.

Although not inconceivable that the Domestic Transportation

Insurance section only covered international merchandise, this

more limited definition of “property insured” produces an odd

result in the context of this section and seems unlikely to

accurately reflect the intended scope of coverage. At the very

least, a review of Section II does not help to clarify what

“property insured” means or whether domestic merchandise was

covered while temporarily stored in KSI’s warehouses.

Therefore, after reviewing the plain language of the entire

Policy, our confusion regarding the boundaries of coverage

remains, and we are compelled to conclude that the Policy

contains a genuine ambiguity as to whether domestically

acquired merchandise was insured while temporarily stored in

KSI’s warehouses. See Weedo, 405 A.2d at 795 (“We conceive

a genuine ambiguity to arise where the phrasing of the policy is

so confusing that the average policyholder cannot make out the

boundaries of coverage.”). As a result of this genuine

ambiguity, we must construe the Policy “liberally in [the

insured’s] favor to the end that coverage is afforded to the full

extent that any fair interpretation will allow.” Meier, 503 A.2d

at 870 (internal quotation marks omitted). Our analysis of the
18

Policy resulted in two plausible interpretations of the scope of

warehouse coverage – either all of KSI’s merchandise,

regardless of geographical origin, was insured while temporarily

stored in warehouses based on the unrestricted definition of

“property insured” located in paragraph 3 of Section I, or only

KSI’s merchandise which was transported overseas, as opposed

to solely within the United States and Canada, was insured while

temporarily stored in warehouses based on the geographical

limitations contained in paragraph 5 of Section I and other

limiting language within the section.

Because both of these interpretations represent a fair

reading of the terms of the Policy, New Jersey law requires that

we adopt the more liberal construction and err in favor of

finding coverage for the insured. See Mazzilli, 170 A.2d at 803;

Meier, 503 A.2d at 870. Although the rationale for applying the

principle of contra proferentem and construing ambiguities in

favor of the insured may be less persuasive because KSI is a

corporate entity and was represented by an insurance broker

who made arrangements with Royal for the insurance coverage,

neither KSI nor LIG actually participated in drafting the Policy,

and therefore New Jersey law still calls for us to interpret the

Policy so as to resolve ambiguities in favor of the insured. See

Pittston Co. Ultramar Am. Ltd., 124 F.3d at 521. Accordingly,

we conclude that the Policy should be construed to provide

coverage to KSI for all of its inventory, whether of domestic or

international origin, while it was temporarily stored in KSI’s

Franklin warehouse.

Our decision to adopt this more liberal reading of the

Policy is further reinforced by KSI’s reasonable expectations of

coverage. When genuine ambiguity exists, New Jersey law
19

permits courts to consider objective indicia of the insured’s

reasonable expectations in order to resolve the ambiguity in

favor of the insured. See Zacarias, 775 A.2d at 1264 (“When

there is ambiguity in an insurance contract, courts interpret the

contract to comport with the reasonable expectations of the

insured . . . .”); see also Pittston Co. Ultramar Am. Ltd., 124

F.3d at 523 (explaining that consideration of extrinsic evidence

is appropriate to the extent that it “provides objective indicia” of

the meaning of the terms of the insurance policy “from the

linguistic reference point of the parties” (internal quotation

marks omitted)).

We find that the method for calculating KSI’s premium

– which was based on KSI’s total annual sales, as opposed to

being derived from sales of its international merchandise alone

– is a strong, objective indication that KSI understood the terms

of the Policy to cover all of its merchandise and reasonably

expected this coverage. Additionally, the initial quotation of

warehouse coverage that Royal provided to KSI, which did not

contain any restricting language regarding the origins of the

property that would be insured, is another objective indication

that KSI reasonably expected the Policy’s coverage to extend to

both its domestic and internationally acquired merchandise.

Because we conclude that the Policy is ambiguous and

that a fair interpretation of its terms, when construed in favor of

the insured, warrants finding that all of KSI’s merchandise,

regardless of its origin, was insured while temporarily stored in

KSI’s Franklin warehouse, we need not reach KSI’s alternative

reformation of contract arguments.
20

IV.

In light of the ambiguity created by the express terms

of the Policy, we must adopt an interpretation that provides

coverage to KSI to the full extent that a fair reading will

allow. In doing so, we conclude that the Warehouse Storage

Insurance section of the Policy covers all of KSI’s inventory,

regardless of where that property originated, and we hold that

KSI is entitled to indemnification for all of the loss it suffered

in the Franklin warehouse fire, up to the monetary limits set

forth in the Policy. Therefore, we will reverse the District

Court’s orders and enter judgment in favor of KSI.