Ordinary Meaning v. Expert Testimony

When is a lie on an Application Potentially Truthful?

Insurance contracts are based upon an application – a request for an offer of insurance – from the potential insured. The facts stated in the application must be absolutely true and if a false statement on an application is material the insurer has the option to rescind the policy from its inception.

In Scottsdale Insurance Company v. Computer Sciences Corporation, a Nevada corporation, CSC Agility Platform, Inc., FKA Servicemesh, Inc., a Delaware corporation, No. 19-55249, United States Court Of Appeals For The Ninth Circuit (May 7, 2020) Computer Sciences Corporation and CSC Agility Platform, Inc. (collectively, “CSC”) appealed the judgment entered by the district court in favor of Scottsdale Insurance Company.

In its summary judgment ruling, the district court afforded Question 8 of the insurance renewal application its “ordinary meaning.” In doing so, the district court rejected CSC’s expert testimony regarding trade usage as “arguably irrelevant under California law.” CSC contends that this constituted error.


CSC’s expert, who is described as an expert on insurance policies covering technology start-ups, testified that, “[i]n the context of underwriting a D&O policy for a technology start-up, ‘contemplating being acquired’ is a term we use to mean ‘actively considering an offer to buy the company.'” He further opined that “a technology start-up cannot be ‘contemplating being acquired’ without a term sheet or concrete offer to purchase ‘the Company’ that can be ‘actively considered.'”

CSC argued that this testimony constituted evidence of trade usage in the technology start-up industry. The Ninth Circuit agreed with CSC that the trade usage evidence could be relevant. The words of a contract are to be understood in their ordinary and popular sense unless a special meaning is given to them by usage, in which case the latter must be followed.

While words in a contract are ordinarily to be construed according to their plain, ordinary, popular or legal meaning, as the case may be, yet if in reference to the subject matter of the contract, particular expressions have by trade usage acquired a different meaning, and both parties are engaged in that trade, the parties to the contract are deemed to have used them according to their different and peculiar sense as shown by such trade usage.


Accordingly, the Ninth Circuit remanded for the district court to consider CSC’s trade usage argument under the foregoing legal standards. They expressed no opinion as to the merits of the argument, namely, whether the parties in fact intended the phrase “contemplate transacting any mergers or acquisitions” to have a particular trade usage meaning and, if so, the nature of that particularized meaning. The district court on remand may consider allowing the parties the opportunity for additional briefing on these questions in determining whether there is a genuine issue of material fact under the proper legal standards.


The district court did not err by concluding as a matter of law that ServiceMesh’s answer to Question 8 was material.  CSC’s own expert testified that the answer to Question 8 was material, and Scottsdale’s underwriter described the many ways in which a “yes” answer to Question 8 may have affected Scottsdale’s underwriting decision. Furthermore, under California law, the fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law.

Here, Scottsdale knew only that ServiceMesh was involved in merger discussions in October 2013 and was acquired in November 2013. These facts did not distinctly imply that ServiceMesh was in acquisition discussions in June 2013, when ServiceMesh submitted the application. Waiver, therefore, does not apply.

The district court also properly rejected CSC’s estoppel defense. Under California law, “where an insurer has actual knowledge that answers in an application were false, the insurer may be estopped from arguing it was defrauded. Here, Scottsdale did not know that ServiceMesh’s answers were false. Thus, estoppel does not apply.


The issue for the trial court to resolve is whether, even with the special meaning pointed out by the expert, whether the insured told the truth or lied. If the evidence showed that the answer was false then the insurer can rescind. If not, if general usuage in the trade made it appropriate, the insurer will have coverage.

© 2020 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 52 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 52 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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