Limitations on the use of the Reasonable Expectations Doctrine and the contra proferentem rule by sophisticated policyholders

Insurers are well familiar with a policyholder argument against enforcing an insurance contract as written, based upon legal principles designed to protect “unsophisticated” consumer policyholders. Specifically, policyholders often look to apply the contra proferentem rule of contract interpretation or the Reasonable Expectations Doctrine. The contra proferentem rule provides that if there is an ambiguity in the language of an insurance contract, courts may strictly construe the language against the insurer instead of interpreting the language in an evenhanded fashion. The Reasonable Expectations Doctrine refers to the principle that an insurance policy should be interpreted in accordance with the terms the policyholder thought it was purchasing, even if that interpretation is contrary to the plain terms of the policy.

Do these principles have a place in coverage disputes where the policyholder is a sophisticated entity? The answer should be “no.” Commercial policyholders purchase insurance with the assistance of insurance brokers, who provide guidance to policyholders in understanding the terms of an insurance policy before procurement. Sometimes, policyholders retain counsel in addition to a broker to offer even more expertise in understanding and negotiating the terms of their policies. If that was not enough, many companies have specialized personnel whose entire roles are dedicated to procuring insurance for the company. Thus, when there is a dispute between an insurer and a policyholder in this context, it is a dispute between two sophisticated entities that have specifically understood and bargained for the terms of the insurance contract at issue.

Recent decisions

Courts have increasingly recognized the sophisticated nature of policyholders as a reason to interpret an insurance contract in an even-handed fashion. Last year the New Jersey Supreme Court published its strongest statement to date as to why the contra proferentem rule and the Reasonable Expectations Doctrine should not apply to the interpretation of commercial insurance contracts issued to sophisticated policyholders. In Oxford Realty Grp. Cedar v. Travelers Excess & Surplus Lines Co., 229 N.J. 196 (2017), the court held that contra proferentem is a consumer-protective doctrine only available in situations where the parties have unequal bargaining power. If both parties are equally astute and sophisticated, contra proferentem is inappropriate. Similar to the doctrine of contra proferentem, the court concluded that the doctrine of reasonable expectations is less applicable to commercial contracts. In the same vein, the Third Circuit in FIN Assocs. LP v. Hudson Specialty Ins. Co., 2018 U.S. App. LEXIS 20695 (3d Cir. July 25, 2018) relied on the sophistication of the insured as the basis to enforce a policy’s New York choice-of-law provision even though the insured risk was located almost entirely in New Jersey.

Despite this increased recognition from courts, insurers should be careful to make a record of facts demonstrating the sophistication and bargaining power of the policyholder when litigating commercial coverage disputes. A recent Indiana federal court decision presents a cautionary tale for insurers that fail to make such a record when faced with arguments relying on the contra proferentem rule. Emmis Commc’ns. Corp. v. Ill. Nat'l Ins. Co., 2018 U.S. Dist. 323 F.Supp.3d 1012 (S.D. Ind. Mar. 21, 2018). In Emmis, even though the policyholder was a large conglomerate corporation, the court still applied the contra proferentem rule to construe the language of a D&O policy against the insurer. According to the court, the insurer had failed to introduce evidence of the policyholder’s sophistication that would be required to avoid contra proferentem rule of contract interpretation. Id. at 1024; see also Certain Underwriters at Lloyds London v. Perraud, 623 F. App'x 628 (5th Cir. 2015) (refusing to apply the sophisticated-insured exception to the contra proferentem rule “[a]bsent any information about the content of the [insurance contract] negotiations, how the contracts were prepared, or other indicators of relative bargaining power”).


An insurer engaged in a coverage dispute with a sophisticated insured should insist that the insurance contract be interpreted by its terms, without regard for the insured’s claimed expectations concerning the coverage it purchased. Moreover, where the contra proferentem rule of contract interpretation or the Reasonable Expectations Doctrine are placed at issue in a coverage litigation, decisions like Emmis highlight the importance of making a factual record of a commercial policyholder’s sophistication and bargaining power, even when those facts would seem self-evident.

Read other items in Coverage Digest - February 2019