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Earlier this month, the California Supreme Court, in Yahoo Inc. v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania, Supreme Court of California No. S253593, ruled in favor of Yahoo, Inc. (Yahoo!), a policyholder seeking insurance coverage for Telephone Consumer Protection Act (TCPA) claims.

The case came to the California Supreme Court as a certified question of law from the Ninth Circuit Court of Appeals. The Supreme Court reviewed the federal district court’s ruling, which dismissed Yahoo!’s insurance coverage action, and entered a judgment in favor of National Union Fire Insurance Company of Pittsburgh, PA (National Union). The high court disagreed, applying well-settled California rules of insurance policy interpretation, and found that the commercial general liability policy was ambiguous and must be interpreted in accordance with Yahoo!’s objectively reasonable expectations.

The facts

Congress passed the TCPA in 1991 to protect telephone users from unsolicited robocalls, robotexts, and junk faxes. Yahoo! has been named in a series of putative class action lawsuits alleging unsolicited text messages in violation of the TCPA. National Union declined to defend or indemnify Yahoo! in these lawsuits, claiming that the policy language in its commercial general liability insurance policy unambiguously bars coverage.…

Continue Reading California Supreme Court rules in favor of policyholders: what we learn from Yahoo! Inc. v. National Fire Insurance 

A fundamental canon of construction used to interpret statutes and contracts is noscitur a sociis, which translates to “it is known by the company it keeps.”  In Virginia v. Tennessee, 148 U.S. 503, 519 (1893), the United States Supreme Court explained that “the meaning of a term may be enlarged or restrained by reference to the object of the whole clause in which it is used.”  In other words, context is key.

Noscitur a sociis is often utilized when terms are used in a list, allowing words to draw meaning from the common elements of the list.  To take a simple example, the word “mustang” could have a different intended meaning when used with “ranger” and “explorer” (vehicles manufactured by Ford) than if used with “filly” and “mare” (horses).  Finding the common connection between words in a list is helpful in discerning meaning.

Insurance policies have special interpretive rules

An insurance policy is a special kind of contract, one where ambiguous insurance policy language must be interpreted in favor of insurance coverage for the policyholder.  Provisions that grant insurance coverage are read broadly, and exclusions to insurance coverage are construed narrowly.  In insurance law, noscitur a sociis is most often used to narrow the reach of exclusions, resolving contextual ambiguities in favor of finding coverage.  It can also be used appropriately to construe insuring agreements broadly and to identify multiple reasonable meanings of insurance policy language.  Noscitur a sociis should never be used to narrow insuring agreements or to expand exclusions by interpretation.

A provision can be ambiguous in context

Because insurance policies must be read as a whole, the doctrine of noscitur a sociis is an appropriate tool to identify an ambiguity in insurance policy language where a plain-meaning reading of isolated provisions could appear, at first blush, to lack ambiguity.

In Flagship Credit Corp. v. Indian Harbor Ins. Co., 481 F. App’x 907, 910-12 (5th Cir. 2012), the Fifth Circuit considered whether statutory damages for violations of the Texas Business and Commercial Code constituted a “penalty” that fell within an exclusion of “fines, penalties or taxes imposed by law.”  The court determined that the word “penalties” gained meaning from the words “fines” and “taxes,” which are paid to the government.  While the definition of “penalty” could possibly extend to private settlements for civil wrongs of the type prohibited by the Texas Business and Commercial Code, in context, the terms “fines” and “taxes” made clear that the term “penalties” should be limited to payments to the government.

Likewise, in Hunters Ridge Condo. Ass’n v. Sherwood Crossing, LLC, 395 P.3d 892 (Or. Ct. App. 2017), the court used the doctrine of noscitur a sociis to determine that the word “condominium” was ambiguous in the context of a building being used for both residential and commercial purposes.  The other listed structures in the policy definition of “condominium”—“apartment” and “townhouse”—were residential in character, shedding “considerable light” on how a purchaser of insurance would interpret the term “condominium.”  Accordingly, the court limited the exclusion to wholly residential structures.…

Continue Reading Reading insurance policies: context is key

What is an insurance company “in run-off”?

An insurance company is considered to be in run-off when it ceases selling new insurance policies. The essential business of an insurance company is risk pooling. Insurance companies evaluate risks, price and sell insurance policies that assume risks, and pay claims to policyholders that suffer losses covered by the insurance. Insurance companies generate revenue to pay claims principally from two sources: premiums and investment income. Insurance companies also typically buy insurance to insure the risks they have assumed – called reinsurance – which acts as a secondary risk pool. When an insurance company enters run-off, it loses the benefit of ongoing premiums as a source of income to pay claims. The only sources of income become investment earnings, sales of assets, and potential recovery from reinsurance.

What does run-off mean for the policyholder?

Being in run-off does not absolve an insurance company of its duties under policies it has already sold. The contractual relationships between the insurance company and its policyholders do not end. The insurance company still owes to its policyholders the full complement of duties that the policyholder purchased with its premiums. Most important, the insurance company must pay claims as they come due under the policies.

While entering run-off cannot rewrite the terms of existing insurance policies, in practice, many policyholders encounter unexpected challenges from an insurance company in run-off. Because the insurance company is no longer writing new business, its claims-handling protocol may not prioritize customer service as an active company, seeking to maintain its customers, might. In many circumstances, the insurance company may contract with a professional run-off administrator to handle claims. While, again, a run-off insurance company and its agents are subject to the same duties to policyholders as existed before the run-off, from the policyholder’s perspective, the quality of claims handling is often diminished.…

Continue Reading Insurance companies in run-off

Increasingly, companies are being named as defendants in putative class actions, like those brought under the Fair Credit Reporting Act and Telephone Consumer Protection Act, involving violations of statutes that contain provisions mandating certain damages or ranges of damages. One question raised is whether “statutory damages” are uncovered “fines” or “penalties,” or whether they are covered losses.
Continue Reading Insurance Coverage for Statutory Damages Under Professional Liability Policies