Appellate Court Finds the Word "Claim" Ambiguous in Policy Requiring Payment of a "Per Claim Self-Insured Retention"

July 22, 2010

Insurance coverage lawsuits often involve disputes over whether an insurance policy is wrapped in "plain meaning" that can be discerned from its "four corners," or whether it contains "ambiguities" that need to be analyzed and explained. More than 40 years ago, the California Supreme Court in Pacific Gas & Elec. Co. v. G.W. Thomas Drayage and Rigging Co., Inc. adopted a broad view to determine whether a contract provision truly has a "plain meaning."[1] Because a word does not have "an objective meaning, [or] one true meaning," the court concluded that "the meaning of a writing … can only be found by interpretation in the light of all the circumstances that reveal the sense in which the writer used the words."[2] A court interpreting a contract must therefore "place itself in the same situation in which the parties found themselves at the time of contracting."[3]

This principle was illustrated recently in Clarendon National Ins. Co. v. North American Capacity Ins. Co.[4] At issue in this dispute between two insurance companies was the meaning of the word "claim" in an insurance policy under which the policyholder had agreed to absorb the first $25,000 of loss incurred on each "claim." The owners of 43 homes in a housing development filed a lawsuit against a developer seeking recovery for construction defects.

The two companies that insured the developer agreed that the defects at eight of the 43 homes were potentially covered under a policy issued by North American Capacity Insurance Company (NAC). NAC asserted, however, that it did not need to defend the lawsuit until the insured spent $200,000 (eight times $25,000) of its own money defending and settling the eight "claims" in the lawsuit. It pointed to an endorsement in its policy that said: "Per Claim Self-Insured Retention: $25,000 Per Claim." That provision also stated that it applied to "each and every claim made against any insured … regardless of how many claims arise from a single 'occurrence' or are combined in a single 'suit.'" (emphasis in original). NAC thus asserted that the words "claim" and "suit" were synonymous in the policy and that eight separate "per claim" retentions need to be paid by the policyholder before it became involved in the lawsuit.

The court of appeal disagreed that the "per claim" endorsement, by itself, resolved the dispute over the undefined word "claim" in the policy. It examined several other provisions in the NAC policy to determine whether, at the time the policy was issued, a reasonable person in the position of the developer would have understood that the $25,000 "per claim" retention applied to lawsuit "as a whole," rather than separately to each of the eight homes involved in the lawsuit for which coverage potentially existed. It did this by examining, in detail, the use of the word "suit" in various portions of the NAC policy and concluded that "claim" and "suit" sometimes were used synonymously in the policy, but other times were used differently.

This meant that the word "claim" was "ambiguous" because it could reasonably mean two different things within the context of the case: "Based on the terms of the NAC policy as a whole, including the SIR [self-insured retention] endorsement, we discern no reason why the term 'claim' must be understood as referring to each home" involved in the lawsuit. The court therefore concluded that NAC "has not shown that a reasonable insured in [the developer's] position could not have reasonably expected that the $25,000 'per claim' SIR would apply only once to a single construction defect suit, regardless of the number of homes or homeowners involved in the suit, at the time the policy was issued." NAC thus failed to show that it did not need to defend against the construction defect lawsuit until the developer paid eight retentions, or $200,000.

The Clarendon decision shows that an insurance policy provision requiring the payment of a $25,000 "per claim" retention for "each and every claim … regardless of how many claims … are combined in a single 'suit'" might not actually require the payment of a $25,000 retention for each "claim" that is "combined in a single suit." More broadly, however, the decision underscores the importance of interpreting the words of an insurance policy in the context of the contract as a whole and based on its application to all of the circumstances involved in the dispute. After all, as the California Supreme Court noted in Dore v. Arnold Worldwide, Inc., the "meaning of language is to be found in its applications. An indeterminacy in the application of language signals its vagueness or ambiguity. An ambiguity arises when language is reasonably susceptible of more than one application to material facts. There cannot be an ambiguity per se, i.e., an ambiguity unrelated to an application."[5]

If you have any questions or would like more information on any of the issues discussed in this LawFlash, please contact either of the following Morgan Lewis attorneys:

Washington, D.C.
Paul A. Zevnik

Los Angeles
Michel Yves Horton

[1] Pacific Gas & Elec. Co. v. G.W. Thomas Drayage and Rigging Co., Inc., 69 Cal. 2d 33 (1968).

[2] Id. at 38-39.

[3] Id. at 40.

[4] Clarendon National Ins. Co. v. North American Capacity Ins. Co., 2010 WL 2377835 (Cal. App. 4th, June 15, 2010).

[5] Dore v. Arnold Worldwide, Inc., 39 Cal. 4th 384, 391 (2006).