Conflicting Interpretations of Insurance Policy Must Be Reasonable to Create an Ambiguity

The Virginia Supreme Court  recently held that in insurance coverage dispute cases, in order for there to be an ambiguity in an insurance policy, there must be conflicting interpretations of policy language that are reasonable. In Erie Insurance Exchange v. EPC MD 15, LLC (decided January 17, 2019)  Erie Insurance Exchange (“Erie”) issued a commercial property policy to EPC MD 15, LLC.  The policy identified EPC as the named insured and covered fire damage among other losses.  The policy also included an “extension of coverage” that provided that buildings newly “acquired” by EPC after the issuance of the policy would be covered.  The declaration page of the Erie policy identified only one Maryland property owned by EPC.  About nine months after the policy was issued, EPC acquired sole membership in another limited liability company, Cyrus Square, LLC, which LLC owned property in Winchester, Virginia.  Within 90 days of EPC acquiring its membership interest in Cyrus Square, a fire damaged Cyrus Square’s Winchester building.

After Erie denied coverage for this loss, EPC filed suit.  In the suit , EPC alleged that it “acquired” the Winchester property when it became the sole member of Cyrus Square.  The trial court agreed that the term “acquired” as applied to the facts of this case was ambiguous and found that Erie was obligated to cover the loss.

On appeal, the Supreme Court of Virginia reversed.  In doing so, it noted that pursuant to Virginia law, ambiguities in a contract are construed against the drafter of the ambiguous language.  In insurance cases, the disfavored drafter is almost always the insurer.  The Supreme Court stated: “That fact alone counsels caution because of the analytical ease with which a court may give up quickly on the search for a plain meaning by resorting to the truism that a great many words – viewed in isolation – have alternative, and sometimes quite different, dictionary meanings.  If we took this approach the rule [that ambiguities are to be construed against the drafter] would apply to nearly every interpretation of nearly every insurance policy.  Our prior opinions have recognized this temptation and resisted it.”

The court then went on to find that the trial court had incorrectly concluded that because EPC had indirectly acquired control of Cyrus Square’s real property that this indirect control was tantamount to EPC acquiring that real property.  Rather, in order for EPC to have been covered for the loss, it needed to actually acquire the property, not merely acquire the property owner.

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