Opinion ID: 2550236
Heading Depth: 1
Heading Rank: 6

Heading: The Policy is Ambiguous

Text: This Court has adopted traditional principles of contract interpretation. One such principle is to give effect to the plain meaning of a contract's terms and provisions when the contract is clear and unambiguous. [9] But, when we may reasonably ascribe multiple and different interpretations to a contract, we will find that the contract is ambiguous. [10] We interpret insurance contracts similarly. Clear and unambiguous language in an insurance contract should be given `its ordinary and usual meaning.' [11] [W]here the language of a policy is clear and unequivocal, the parties are to be bound by its plain meaning. [12] In construing insurance contracts, we have held that an ambiguity does not exist where the court can determine the meaning of a contract `without any other guide than a knowledge of the simple facts on which, from the nature of language in general, its meaning depends.' [13] An insurance contract is not ambiguous simply because the parties do not agree on its proper construction. [14] [C]reating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities and duties to which the parties had not assented. [15] But, we also have explained that an insurance contract is ambiguous when it is reasonably or fairly susceptible of different interpretations or may have two or more different meanings. [16] Applying those principles to this case, we conclude that the Policy is ambiguous, not simply because the parties do not agree on its proper construction, [17] but also because multiple and different interpretations may reasonably be ascribed to it. [18] On the one hand, one reasonably may interpret the Lot or Batch Provision as limiting coverage. The Lot or Batch Provision defines a lot or batch as a single production run at a single facility not to exceed a 7 day period. The Lot or Batch Provision provides that all Bodily Injury or Property Damages arising out of one lot or batch of products . . . shall be considered one Occurrence. Reading those two elements of the Lot or Batch Provision together, one reasonably may interpret the Lot or Batch Provision as segmenting, for insurance coverage purposes, claims into separate seven day periods. That interpretation would disregard the actual number of Occurrences. Under that interpretation, Lexington's duties would be triggered only when ConAgra incurred $5 million in liability for a given seven day period. The Superior Court adopted that interpretation as the only reasonable interpretation of the Policy. [19] At least one other court has found that interpretation persuasive. In London Market Insurers v. Superior Court, [20] a California appellate court considered whether a similarly worded lot or batch provision permitted thousands of individual asbestos exposures to be deemed a single occurrence for insurance coverage purposes. [21] The insurance policy at issue in London Market relevantly provided: All . . . damages arising out of one lot of goods or products prepared or acquired by the Named Insured or by another trading under his name shall be considered as arising out of one occurrence. [22] Although the London Market court concluded that the provision was ambiguous, [23] the court also explained that the lot or batch provision preclude[d] treating all asbestos claims as a single `occurrence.' [24] On the other hand, one also reasonably could interpret the Lot or Batch Provision as expanding coverage. Under that interpretation, the Lot or Batch Provision would operate to convert multiple claims in one lot or batch into a single Occurrence for insurance coverage purposes. But, that provision would not operate to convert multiple claims arising out of multiple lots or batches into distinct multiple Occurrences. Consistent with that interpretation, the Retained Limit for a General Liability Occurrence would apply. That is, Lexington's duties would be triggered when ConAgra paid $3 million of liability claims. Under that interpretation, the Lot or Batch Provision would supplement the General Liability Occurrence. If multiple Occurrences arose from a single lot created during a seven-day period, those Occurrences would be aggregated pursuant to the Lot or Batch Provision. But, if only one Occurrence arose, the Lot or Batch Provision would not balkanize that one Occurrence into multiple Occurrences corresponding to seven-day intervals. At least two other courts have adopted this interpretation. In Diamond Shamrock Chemicals Co. v. Aetna Casualty & Surety Co., [25] a New Jersey appellate court interpreted a similarly worded lot or batch provision in the context of claims arising from the use of Agent Orange during the Vietnam War. [26] The United States used Agent Orange to defoliate Vietnamese jungle trails to deny enemy forces the benefit of concealment. [27] But, Agent Orange had a side effectit made Vietnam War veterans more susceptible to various diseases. [28] Several veterans brought suit, and the chemical company that made Agent Orange sought insurance coverage. [29] The policy at issue in Diamond Shamrock relevantly provided: [A]ll [] damages arising out of one lot of goods or products prepared or acquired by the named insured or by another trading under his name shall be considered as arising out of one occurrence. [30] The insurers contended that the provision operated to make each of the 133 lots of Agent Orange delivered to the military a single occurrence. [31] The Diamond Shamrock court rejected that argument and agreed with the lower court that the provision was intended to apply only to manufacturing defects, and not to design errors. [32] The court recognized that the manufacturing-design distinction was debatable, but it concluded that the following principle was indisputable: The intent of the parties in adding the batch clause to the policies was to minimize the number of occurrences in order to maximize coverage. If the batch clause is interpreted to require aggregation of deductibles to correspond with the number of lots distributed, it will run counter to the parties' intent. On the other hand, although the language of the batch clause makes no distinction between manufacturing and design defects, the Chancery Division's interpretation of the provision is consistent with the purpose of the clause and the parties' understanding. While the question is far from clear, we choose the interpretation of the contractual language that best advances the purpose of the clause and comports with the parties' intent. We are convinced that the clause should be applied only where the product manufactured is nonconforming, not where the product is consistent with a faulty design. The equation of lots and occurrences is consistent with the idea that the clause is designed to prevent the stacking of deductibles where manufacturing errors have taken place. The Chancery Division's construction of the clause also comports with the rationale of the cases we cited previously, referring to the cause of the injury in defining the number of occurrences. [33] The United States District Court for the District of Maryland and the United States Court of Appeals for the Fourth Circuit also have concluded that a lot or batch provision similar to the one in this case should be interpreted to expand coverage. In Nationwide Mutual Insurance Co. v. Lafarge Corp., [34] those courts interpreted that provision in the context of claims for property damage arising from the sale of poorly performing cement. [35] The policy at issue in Lafarge relevantly provided: [W]hen goods or products are of one prepared or acquired lot, all claims arising therefrom shall be deemed to have arisen from a common cause and to constitute one occurrence or accident. [36] The insurer contended that the provision operated to make each lot of defective cement a single occurrence. [37] The district court rejected the insurer's interpretation and explained: The purpose of a batch clause is to limit the number of occurrences, not to expand it. If this Court were to find that each lot constituted an occurrence, then Lafarge's insurance coverage would be eviscerated. That result is clearly not what the parties intended. [38] The district court concluded: The lot clauses plainly apply to situations when multiple claims arise from a single defective lot. They do not purport to extend to situations when multiple claims arise from multiple lots. [39] The Fourth Circuit agreed with that interpretation and explained: After reviewing the district court's extensive opinion from the bench on this issue, we agree with the court's interpretation of each occurrence, its conclusion that the occurrence and underlying cause of the liability was the continuous, large-scale manufacture and sale of defective cement, and its holding that there was only one occurrence for deductible purposes. Here, we affirm on the reasoning of the district court. [40] Given the two reasonable and competing interpretations before usone that limits coverage and one that expands coverage we conclude that the Lot or Batch Provision is ambiguous. [41] That ambiguity permits a court to consider extrinsic evidence of the parties' intent. [42] In this case, the extrinsic evidence reveals that the Lot or Batch Provision was negotiated. [43] We therefore remand this case for the Superior Court to consider extrinsic evidence of what the parties intended when agreeing to Endorsement # 3. If the extrinsic evidence does not reveal the parties' intent as to the Lot or Batch Provision, then the Superior Court should apply the last resort rule of contra proferentem and interpret it in favor of ConAgra. [44]