That’s not what I meant either! — Ambiguous drafting thwarts (one party’s version of its) intent, again


A few weeks ago I posted about an Eighth Circuit case that once again illustrated how, despite the drafter’s precision carrying the day most of the time, sometimes a litigator’s creativity can trump it. Well, it’s happened again. And again the issue is whether a dispute between and insured and a carrier is subject to arbitration. And again, the carrier wanted to arbitrate but the court kept the case. This time it’s the Second District California Court of Appeal, in Diamond Blue Enterprises v. Gemini Insurance Company. Before I say more, let me caution all the lawyers preparing to cite the case that it’s unpublished.

(I chuckle to myself as I write that given the difference between “published” and “unpublished”. Sure, the case won’t end up in a bound reporter on a library shelf collecting dust, but other than that and the fact that the judges who wrote it not wanting it to be precedent, what’s the difference between a published and unpublished case?) But enough of my editorializing; on to the case.

The insureds were sued by a third party and tendered the case to the carrier, who initially declined to defend. The insureds then incurred nearly $400,000 in defense costs but the carrier then picked up the defense. The insureds sued the carrier for reimbursement of the defense costs and the carrier moved to compel arbitration based on this clause in the policy: “If we and the insured do not agree whether coverage is provided under this Coverage Part for a claim made against the insured, then either party may make a written demand for arbitration.”

The word “coverage” was not defined in the policy, so the Court of Appeal looked at the duty to defend and the duty to indemnify and explained: “The duty to defend is triggered if a third party sues the insured seeking damages for a covered risk, but is not triggered if the lawsuit seeks damages for a risk ‘to which this insurance does not apply.’ Under the terms of the policy, coverage defines the risks and the duty to defend is triggered by the scope of coverage. Thus, the duty to defend and coverage are related by not synonymous.” The difference between the duty to defend and the duty to indemnify means that “there may ultimately be no coverage for a claim even though the insurer has an obligation to defend the claim.”

As a result, “[t]he arbitration clause is ambiguous as to whether it was meant to apply to a dispute over the duty to defend, and ambiguities in an arbitration agreement, like any other contract, are resolved against the party that drafted the agreement.”