The Entire Policy Must Be Read in Context to Interpret its Meaning
The most difficult task faced by an insurer is to write a clear, unambiguous and easy to read contract of insurance. Because rules of insurance contract interpretation require that any ambiguity a court finds in the language of the policy must be construed against the needs of the drafter of the policy.
In Erie Insurance Exchange v. EPC MD 15, LLC, Record No. 180120, Supreme Court of Appeals of Virginia (January 17, 2019) EPC MD 15, LLC (“EPC”) insurance policy interpretation needed the assistance of the Virginia Supreme Court. EPC was a named insured on a commercial property policy issued by Erie Insurance Exchange (“Erie”). EPC sued Erie and claimed coverage for fire damage to a building owned by a subsidiary of EPC.
The subsidiary, however, was not a named insured, and no provision of the policy identified the subsidiary as an additional insured. On cross-motions for summary judgment, the circuit court held that EPC’s ability to control its subsidiary meant that, for insurance-coverage purposes, EPC thereby acquired all of the subsidiary’s property under a coverage-extension provision in the policy.
EPC is a limited liability company organized under Maryland law. EPC purchased an insurance policy from Erie that was issued for one year beginning on June 15, 2013. At the time of the purchase, EPC owned real property in Maryland. The policy identified EPC as the named insured and covered fire damage among other losses. No policy provision defined the term “named insured” to include EPC’s subsidiaries. The Declarations pages identified EPC as the named insured and described the property interest that the policy covered as the “interest of named insured in such premises — owner.”
The policy included various “Extensions of Coverage.” One such provision covered buildings newly “acquired” by EPC after the issuance of the policy. Another coverage-extension provision applied to “Business Personal Property” newly acquired by EPC and to “Personal Property of Others” located in a building newly “acquired or leased” by EPC. None of the extension of coverage provisions, however, expressly extended coverage to the buildings of others.
The Declarations pages of the policy listed EPC’s Maryland property and no other. Approximately nine months after Erie had issued the policy, EPC acquired the sole membership interest in Cyrus Square, LLC (“Cyrus Square”), a limited liability company organized under Virginia law. Cyrus Square owned a building located in Winchester, Virginia.
The Fire Loss
Within 90 days of EPC acquiring this membership interest in Cyrus Square, a fire damaged the building that Cyrus Square owned in Winchester. On cross-motions for summary judgment based upon stipulated facts, the circuit court agreed with EPC by holding that the word “acquired” is ambiguous and hence should be construed against Erie as the drafter. The court entered final judgment in favor of EPC against Erie.
On appeal, Erie argues that the circuit court misread the policy language and found an ambiguity where none existed. In context, Erie contends, the coverage-extension provision for newly acquired buildings cannot be fairly read to apply to property of a newly acquired subsidiary that is neither a named nor an additional insured on the parent company’s policy. Nor can this provision be reasonably read to mean that a parent company “acquires” the real property of a subsidiary merely by virtue of the creation of a parent-subsidiary relationship after issuance of the policy at issue.
Insurance Policy Interpretation
Virginia courts interpret insurance policies, like other contracts, in accordance with the intention of the parties gleaned from the words they have used in the document. If the terms of an insurance policy do not conflict with any provision of law, the terms of the contract, as written, will govern and limit the extent of recovery under the policy.
The search for this plain meaning looks at a word in the context of a sentence, a sentence in the context of a paragraph, and a paragraph in the context of the entire agreement. Every word, clause, and provision of the policy should be considered and construed together and seemingly conflicting provisions harmonized when that can be reasonably done, so as to effectuate the intention of the parties as expressed therein.
If the plain meaning is undiscoverable, Virginia courts apply the contra proferentem canon, which construes ambiguities against the drafter of the ambiguous language. Under Virginia law, conflicting interpretations reveal an ambiguity only where they are reasonable. A “reasonable” or “fairly claimed” interpretation is one arising from two competing interpretations that are “equally possible” given the text and context of the disputed provision.
The fact that one may hypothesize “opposing interpretations” of the same contractual provision does not necessarily render the contract ambiguous because a contract is not ambiguous simply because the parties to the contract disagree about the meaning of its language. Instead, in the search for plain meaning of any part of a contract, the court will construe the contract as a whole, striving not to place emphasis on isolated terms wrenched from the larger contractual context.
What is an LLC?
Created to amalgamate characteristics of both partnerships and incorporated entities, an LLC is a legal entity entirely separate and distinct from the members who compose it. Consequently, a transfer of property from a member to the LLC is more than a change in the form of ownership; it is a transfer from one entity or person to another.
The Supreme Court found that the District court incorrectly concluded that this indirect control was tantamount to EPC acquiring all of Cyrus Square’s real property. If control of a mere membership interest were enough, every named insured owning a controlling interest in an LLC could be said to have acquired the controlee’s property for purposes of a similar coverage-extension provision — even though the insurer had no underwriting information necessary to make a risk assessment and established no premium rating on the de facto insured that actually owned the newly acquired property.
The pertinent coverage-extension provision states that “you” may extend coverage for “[n]ewly acquired buildings.” The Declarations pages not only identify EPC (not Cyrus Square or any other entity) as the named insured but also imply that the “interest” of the named insured is its ownership interest in the premises covered by the policy. of others that is in your care,
Under EPC’s interpretation, after Erie had paid EPC for the loss, EPC would be obligated to assist Erie in recovering those very payments from the disgruntled employee of EPC’s own subsidiary and, if respondeat superior principles permitted it, directly from the subsidiary itself.
In short, the Declarations in the policy, the language in the coverage and coverage-extension provisions, and the language in the subrogation and exclusion provisions all undermine the reasonableness of EPC’s argument that, merely because it had “control” over Cyrus Square, EPC “acquired” the real property of Cyrus Square.
Because the Erie policy did not cover the damaged property of Cyrus Square, the circuit court erred in granting EPC’s motion for summary judgment and in denying Erie’s motion for summary judgment. The Supreme Court, therefore, issued final judgment in favor of Erie and dismissed EPC’s claim with prejudice.
Much to the disdain of EPC an insurance contract is nothing more than a contract and must be interpreted in accordance with the terms and conditions of the policy. The District Court found an ambiguity that did not exist since EPC was a totally different entity than its newly acquired subsidiary, Cyrus Square. Since an insurer has an unquestioned right to decide who it will insure and who it will not insure, the property that belonged to Cyrus Square, LLC (an entity not named on the policy) was not insured nor was the insurer given the opportunity to underwrite the risk. The problem could have been resolved by purchasing a policy in the name of Cyrus Square or by asking Erie to insure it against the risk of loss of the property. Since it did not do so EPC purchased an LLC that owned an uninsured property.
© 2019 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
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 50 years in the insurance business. He is available at http://www.zalma.com and firstname.lastname@example.org.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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