Insurance law often is ironically regarded as both consistent and confusing. However, the 1980s saw significant flowering in the development of an insurance coverage interpretation doctrine that, although seriously flawed in its present form, offers the as yet untapped potential of substantial improvement in judicial construction of commercial insurance policies through seemingly inconsistent treatment of insurance coverage disputes.
During the past two decades, in response to the prodding of lawyers representing insurers, courts have increasingly noted that not all insurance policyholders are equal. Some have more money and bargaining clout than others. Some have more sophistication and understanding about the nature, structure, custom, and practice of the insurance industry. Some employ professionals such as brokers and attorneys to represent their interests in procuring insurance. In general, some policyholders are less subservient to insurers. These “sophisticated” policyholders are primarily large commercial enterprises. Other policyholders, such as individuals and small organizations, particularly voluntary associations or nonprofit enterprises, might be classified as “ordinary” or unsophisticated policyholders.
Recognizing the distinction between the average home or automobile owner and a major manufacturer, courts have diverged on whether the status of the policyholders should affect a court's approach to the interpretation of insurance contracts. During the 1980s, courts increasingly appeared receptive to some revision of the usual approach to insurance contract construction. In particular, a number of courts declared that the contract axiom “contra proferentem,” the rule that ambiguous contract terms should be construed against the drafter of the term, did not apply when the policyholder was sophisticated. This development seems to have subsided, but counsel for insurers continue to press the argument as a means of stripping policyholders of the ambiguity advantage often decisive in insurance coverage litigation. Despite a seeming recent hiatus in the judicial adoption of the argument, courts probably have not seen the last of the sophisticated policyholder defense.
42 Drake L. Rev. 807 (1993).
Stempel, Jeffrey W., "Reassessing The Sophisticated Policyholder Defense in Insurance Coverage Litigation" (1993). Scholarly Works. Paper 199.