One of the more common questions that clients ask coverage counsel is how a court will interpret a new policy provision. This is especially true of clients that make a point of using the latest endorsements which may not have been tested in a particular state’s courts. The issue is complicated by the different policy interpretation approaches taken by different states, which make it difficult to apply out of state law even when the particular policy provision at issue is identical to one interpreted in a case from another jurisdiction. In states like Oregon and Washington, where case law interpreting newer policy language may be scarce, insurers can put themselves at increased risk if they rely too heavily on their own interpretation of the policy’s “plain meaning” or their experience in other jurisdictions.
For instance, insurance policy interpretation in both Washington and Oregon is a question of law. Overton v. Consolidated Ins. Co., 145 Wn.2d 417, 424 (2002); Timberline Equipment v. St. Paul Fire & Marine Ins. Co., 281 Or. 639, 643 (1978). The analysis from this point forward, however, differs in subtle but potentially significant ways.
Washington law provides that an “[i]nsurance contract should be given a practical and reasonable, rather than a literal, interpretation, and should not be given a construction which would lead to an absurd conclusion or render the policy nonsensical or ineffective.” Wash. Pub. Util. Dists.’ Utils. Sys. v. Pub. Util. Dist. No. 1 of Clallam Cnty., 112 Wash.2d 1, 11 (1989). A court must give the terms of the policy a “fair, reasonable, and sensible construction as would be given to the contract by the average person purchasing insurance.” Id. Moreover, “the entire contact must be construed together so as to give force and effect to each clause.” Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 876 (1990). Undefined terms are given their plain, ordinary, and popular meaning as set forth in standard English language dictionaries. Overton, 145 Wn.2d at 428. Washington courts will find ambiguity if the policy language “is fairly susceptible to two different but reasonable interpretations.” Allstate Ins. Co. v. Peasley, 131 Wn.2d 420, 424 (1997). Washington courts may rely on extrinsic evidence of the intent of the parties to resolve an ambiguity, but any ambiguity remaining after examination of the applicable extrinsic evidence is resolved in favor of the insured. Quadrant Corp. v. Am. States Ins. Co., 154 Wn.2d 165, 171-72 (2005). Notably, however, the court’s consideration of extrinsic evidence is limited to evidence extrinsic to the policy and only allowed when determining the intent of the parties under the insurance contract. An insurer may not look to evidence outside the complaint to deny a defense. Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 54 (2007) (“The liability insurer may not rely on facts extrinsic to the complaint to deny the duty to defend-it may do so only to trigger the duty.”). Finally, Washington courts will strictly construed policy exclusions against the drafter, but a strict application will not trump the plain, clear language of the exclusion such that a strained or forced construction results. Quadrant Corp., 154 Wn.2d at 171.
In comparison, Oregon courts apply a somewhat more objective standard of policy interpretation. The Oregon Supreme Court has emphasized that “[t]he primary and governing rule of the construction of insurance contracts is to ascertain the intention of the parties.” Hoffman Construction Co. of Alaska v. Fred S. James & Co., 313 Or. 464, 469 (1992). Oregon courts will first attempt to determine the intention of the parties based on the terms and conditions of the insurance policy. Id. If a term at issue is not defined in the policy, the court looks to the plain meaning of the term. Id. at 470. If there is more than one reasonable interpretation of the term’s plain meaning, the court will then scrutinize each interpretation “in light of . . . the particular context in which that term is used in the policy and the broader context of the policy as a whole.” Id. A proposed interpretation of a term that may be plausible in isolation is not reasonable if it would render another term redundant or meaningless. Id. at 471. If both purported interpretations of the policy remain reasonable after this contextual inquiry, the term will be construed in favor of the insured as a matter of law. Id.
While Oregon and Washington seem to use a similar approach to policy interpretation, there are key differences. Oregon’s “intention of the parties” approach may, depending on the insured, produce a different result than the “average person purchasing insurance” standard applied in Washington. Similarly, unlike Washington, Oregon generally prohibits the use of extrinsic evidence when interpreting policy provisions and will not consider extrinsic evidence of the parties’ intent before construing an ambiguous term against the drafter. But see Navigators Ins. Co. v. K & O Contracting LLC, 2013 WL 6383878, *5 (D. Or. Dec. 4, 2013) (discussing Oregon’s recognized exceptions to the rule against the use of extrinsic evidence when determining the duty to defend). Oregon also does not have a requirement that could lead to different interpretive standards being used for exclusions and other policy terms. Finally, the consequences of misjudging a court’s likely interpretation of a policy can be considerably more severe in Washington, where an insurer’s refusal to defend an insured based on even an arguable interpretation of its policy can amount to bad faith if a court later determines that a defense was owed. See, e.g., American Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 413 (2010) (holding that an insurer must give the insured the benefit of the doubt if there is any reasonable interpretation of the facts or law that could result in coverage) (emphasis added).
The lesson from the cases cited above is that predicting how a court will interpret a policy provision can be difficult and may be more risky than many insurers realize. Even when the law among different states is articulated very similarly, insurers and their counsel must be aware that hidden differences likely exist in the application, outcomes, and consequences of policy interpretation practices. The challenge for coverage counsel and their clients is to understand when to admit there is no easy answer, and then to find the best approach for managing the risk inherent in complex policy interpretation cases. Using local counsel with experience litigating in the state where the action is pending can go a long way toward helping mitigate these risks.