California Supreme Court: Selecting Among Insurer-Authored Options Is Not Policy "Drafting"

• Published date: 19 December 2022
• Subject Matter: Insurance, Litigation, Mediation & Arbitration, Privacy, Insurance Laws and Products, Privacy Protection, Personal Injury
• Law Firm: Jenner & Block
• Author: Mr David M Kroeger and Steven Tinetti

When it comes to insurance policies, it is well-established and commonly understood that the applicable rules of contract construction generally favor the policyholder over the insurance company. Indeed, the policyholder's advantage is so significant (or at least is perceived as such) that insurers routinely try to find some basis to argue that contra proferentem'the principle that ambiguities in a contract should be resolved against the drafter'and other policyholder-friendly rules of construction should not apply. One of those purported exceptions is for so-called 'sophisticated insureds.'

For at least the past few decades, and with increasing regularity, insurers have argued that 'sophisticated insureds'i.e., large commercial policyholders with the asserted resources and ability to more fully understand the terms of their insurance policies and/or even have the ability to 'negotiate' some of the language in that policy'are not entitled to benefit from policyholder-friendly rules of construction that are purportedly based solely on unequal bargaining power and asymmetric access to information. The court decisions have been mixed. While some courts have at times limited the application of contra proferentem and other policyholder-friendly construction rules, others have not, and almost all courts have been reticent to summarily displace the rules of construction that traditionally apply to insurance policies.¹

One of the most recent courts to weigh in on the insurers' 'sophisticated insured' argument is the California Supreme Court. In Yahoo Inc. v. National Union Fire Insurance Company of Pittsburgh, Pa., the Court responded to a certified question, as rephrased, from the United States Court of Appeals for the Ninth Circuit.²At issue was Yahoo's quest for CGL insurance coverage with respect to class action lawsuits alleging that Yahoo had sent unsolicited text messages in violation of the Telephone Consumer Protection Act of 1991 (TCPA). The insurer, National Union, had declined to defend or indemnify Yahoo on the ground that the loss purportedly was excluded under the terms of each of four consecutive National Union policies covering the period May 31, 2008 to May 31, 2012. In order to help it resolve the appeal, the Ninth Circuit asked the California Supreme Court for guidance as to how Yahoo's policies should be construed in the context of TCPA claims.³

The specifics of the Yahoo coverage were discussed in detail by the Court. Basically, the standard...