California Supreme Court Review: January 2023

The California Supreme Court’s recent decision, Yahoo Inc. v. National Union Fire Insurance Company of Pittsburgh, laid out a framework for analyzing ambiguities in insurance policies. This article explores the Court’s careful reasoning and provides guidance on the drafting of not only insurance policies but also other contracts.

In Yahoo Inc. v. National Union Fire Insurance Company of Pittsburgh, PA 519 P.3d 992 (2022), Yahoo Inc. (Yahoo), the multinational technology company, submitted claims to its insurer, National Union Fire Insurance Company (National Union), seeking to invoke National Union’s duty to defend Yahoo against a series of class action lawsuits that alleged that Yahoo’s unsolicited text message advertising violated the Telephone Consumer Protection Act of 1991 (TCPA). Yahoo’s insurance policy was drafted using National Union’s standard form contract, and modified by a number of endorsements, including ones that brought TCPA violations and advertising injury within its coverage. National Union denied the coverage request and Yahoo filed suit in federal district court. The court dismissed the claim on a motion to dismiss by National Union and Yahoo appealed. At the request of the U.S. Court of Appeals for the Ninth Circuit, the California Supreme Court granted review to determine as a matter of state law whether an insurer’s duty to defend is triggered by alleged violations of the TCPA where the commercial insurance policy in question provides coverage for “‘personal injury’ defined as ‘injury … arising out of … [o]ral or written publication, in any manner, of material that violates a person’s right of privacy’” and which has been modified by endorsements as described above. Id. at 997.

In rendering its decision, the Court articulated a road map for analyzing contract ambiguities with a specific order of operations: first, identify ambiguities in the insurance policy. Second, apply standard tools of contract construction to resolve those ambiguities. Where such tools fail to resolve the question, look to the objectively reasonable expectations of the insured party. If the evidence does not instruct what those are, litigate to discover them. Finally, if discovery fails to illuminate the situation, default to the rule of contra proferentem, or “against the drafter,” to resolve all ambiguities in favor of the non-drafting party.

The application of this framework by the Supreme Court makes plain that a court must conduct a fulsome analysis of the four-corners of a contract before consideration of parole evidence.

However, drafters of form contracts, and insurers especially, should recognize that if the plain meaning of the contract fails to support the drafter’s interpretation, the law is of little more help. Litigation which might follow focuses on the “objectively reasonable expectations” of the non-drafting party only—not both parties. More challenging still is that any remaining ambiguities are resolved in favor of the insured, or non-drafter.

In this case, the Court ultimately determined that after a thorough reading of the policy, it could not resolve the ambiguities through an intrinsic analysis of its terms and ordered, first, further litigation to determine Yahoo’s “objectively reasonable expectations” in entering into the policy, and second, should discovery not reveal those expectations, all ambiguities will be resolved in favor of Yahoo as the non-drafting party. Id. at 1001.

The holding in Yahoo has potential implications for any business that uses form contracts. Notable in the Court’s analysis is that use of the National Union’s standard form contract precluded a finding that Yahoo “be charged with creating the ambiguit[ies]” and thus, it was “appropriate for courts to interpret any unresolvable ambiguities” in their favor. Id. The Court applied the approach even to the non-standard endorsements because, here, the endorsement language was taken from other insurer-drafted policies.

Obviously, this holding is a call for insurance carriers to review their standard form policies for potential ambiguities, including carefully defining terms and simplifying seminal clauses to seek more clarity. In addition, the Court’s determination that the insured could not be held accountable for ambiguities in a form contract that it did not prepare has broad implications for all contracts. The Court has made clear that under California law inferences can and should be drawn against the party who provides the paper when using form contracts. As such, though not explicitly stated, other form commercial contracts, for goods, services, licenses, etc., should also be revisited for the purpose of avoiding any ambiguity as to avoid these adverse inferences.