Where an insured established that a policy’s “war” exclusions had “special” meaning based on usage in the insurance industry, the “special” meaning (not the “plain and ordinary” meaning) applied. (Universal Cable Productions, LLC v. Atlantic Specialty Insurance Company (2019 9th Cir.) 929 F.3d 1143)
Facts
Universal Cable Productions, LLC (“Universal”) negotiated with Atlantic Specialty Insurance Company (“Atlantic”) for the purchase of a television production insurance policy. Universal’s broker informed Atlantic that Universal was planning to film a series in Israel, and the broker proposed certain policy language, including some exclusions. The proposed exclusions were based on standard Insurance Service Office, Inc. (“ISO”) forms. After Atlantic slightly modified the proposed exclusions, the policy covered certain losses caused by terrorism, but excluded losses caused by (1) “war,” (2) “warlike action by a military force” or (3) “insurrection, rebellion, [or] revolution.”
Hamas is an organization that operates in Palestine and Gaza. The United States has never recognized Palestine or Gaza as a sovereign territorial nation, nor has the United States ever recognized Hamas as a sovereign or quasi-sovereign (i.e., a de jure or de facto government). In fact, the United States has designated Hamas as a terrorist organization.
While Universal was filming a television series in Israel, three Israelis were kidnapped and killed, and Hamas was suspected of involvement in the deaths. Soon after, a Palestinian teenager was abducted and killed, presumably in retaliation. Hamas then began firing rockets into Israel.
As a result of the rocket fire, Universal temporarily suspended the television production and, eventually, Universal moved the production out of Israel altogether. Universal incurred significant expenses as a result of the suspension and move, and then filed an insurance claim for coverage of those costs. Atlantic denied coverage, stating that although the policy covered certain expenses related to terrorism, Hamas’ actions were excluded as (1) “war” or (2) “warlike action by a military force.”
Universal sued Atlantic for breach of contract and bad faith. Atlantic moved for summary judgment, arguing that the exclusions for (1) “war” and (2) “warlike action by a military force” eliminated coverage for Universal’s claims. Universal moved for partial summary judgment, and argued that these exclusions did not apply because the terms had a specialized meaning in the insurance industry.
Universal provided the district court with unrebutted evidence that, in the insurance context, the term “war” has a special meaning that requires the existence of hostilities between de jure or de facto governments. Universal relied on caselaw, insurance treatises and expert testimony to show the existence of this industry custom. In short, Universal argued that “war” and “warlike action by a military force” required hostilities between de jure or de facto sovereigns, that Hamas was not acting as a sovereign and that, therefore, Hamas’ actions were not excluded from coverage.
The district court granted summary judgment to Atlantic and held that, the terms “war” and “warlike action by a military force” – when interpreted in light of their plain and ordinary meanings – eliminated coverage. The district court held that Hamas’ actions clearly constituted “war” and “warlike action by a military force” (which were excluded) rather than acts of terrorism (which were covered). Because the district court found the policy excluded coverage, the court also granted summary judgment to Atlantic on Universal’s bad faith claim. In addition, because the district court determined the first two exclusions applied, the district court did not determine the third exclusion applied, i.e., whether Hamas’ actions constituted “insurrection, rebellion, [or] revolution.” Universal appealed.
Holding
The Ninth Circuit Court of Appeals reversed the order granting summary judgment in favor of Atlantic and held that that the exclusions for “war” and “warlike action by a military force” did not apply. The Court recited the familiar rule that, when an ambiguity exists, the ambiguity generally will be construed against the party – typically, the insurer – who drafted the language. But the Court also noted that, if the insured drafted the language, the language could be construed against the insured.
The Court of Appeals noted that Universal was a sophisticated purchaser of insurance with at least some bargaining strength. The Court also noted that, during the course of negotiations for the policy, Universal’s broker had offered the relevant language of the exclusions, but had not actually drafted the language. Instead, the language was standard ISO “form” language that Atlantic itself (and many other carriers) used in other policies. Under these circumstances, the Court of Appeals declined to construe any ambiguity against either Atlantic or Universal.
Pursuant to California Civil Code section 1644, the terms in an insurance policy are “understood in their ordinary and popular sense, rather than according to their strict legal meaning; unless used by the parties in a technical sense, or unless a special meaning is given to them by usage, in which case the latter must be followed.” The Court of Appeals determined the terms “war” and “warlike action by a military force” have a specialized meaning in the insurance context and the parties had, at the least, constructive notice of the meaning of these terms. Under that specialized meaning, both “war” and “warlike action by a military force” require hostilities between either de jure or de facto sovereigns, and Hamas constitutes neither.
Although the district court erroneously determined the first two exclusions applied, the district court did not determine whether the third exclusion (for “insurrection, rebellion, [or] revolution”) applied. Thus, the Court of Appeals remanded the case to the district court for a determination of that issue.
Comment
California Civil Code section 1644 requires courts to apply the specialized meaning of a term – instead of the plain, ordinary meaning – when that specialized meaning has been developed from customary usage in a given industry and when both parties have constructive notice of that usage. Here, the Court of Appeals relied on the fact that Universal’s broker had knowledge of the trade meaning of the two exclusions, and that Universal therefore had constructive knowledge of the meaning.
The impact of this case likely will be somewhat confined, because most insureds do not propose policy language to insurers, and most insureds do not have constructive notice of the specialized meaning, if any, of a term in a policy.