When a court declares an insurance policy provision ambiguous it is often said that it’s game over for the insurer. Cue the noise of Pac-Man being touched by Blinky, Pinky, Inky or Clyde. But that need not be the case. While, obviously, it’s not a good thing for an insurer to have a policy provision be found ambiguous, sometimes an insurer still has a page left in its playbook. Namely, an ability to use extrinsic evidence to demonstrate that the provision is not ambiguous.

This was the situation in American Commercial Lines v. Water Quality Insurance Syndicate, No. 16-91 (2nd Cir. Feb. 10, 2017). The District Court concluded that a provision in an insurer’s policy was ambiguous, costing the insurer over $3 million. But the Second Circuit remanded the case to the District Court, to determine ambiguity, now in the context of the consideration of extrinsic evidence.

A barge owned by American Commercial Lines spilled 300,000 gallons of oil into the Mississippi River. ACL’s primary insurer was Water Quality Insurance Syndicate. At issue was the extent of WQIS’s liability. To understand the decision requires examining the specifics of two parts of the policy.

Coverage A provided $5 million of coverage per vessel for liability associated with the discharge of oil.

Coverage C provided coverage for “[c]osts and expenses incurred by [ACL] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A . . . .” The Policy also provided: “The amounts payable for costs and expenses incurred by [ACL] with the prior consent of WQIS for investigation of, or defense against, any liabilities covered under COVERAGE A . . . shall be in addition to the limits of liability stated in ARTICLE A(1) of PART II [$5 million per vessel].

Basically, the policy says that it pays $5,000,000, per vessel, for an oil spill, plus supplemental defense costs.

The parties agreed that WQIS’s liabilities under Coverage A reached the $5 million limit on a date certain. But here’s the rub.

ACL sought coverage for at least $2 million in defense costs incurred and that would continue to be incurred after the $5 million limit was reached. The District Court found in favor of ACL, awarding it over 3.5 million in defense costs.

How can this be you say? Supplemental – on top of limits – defense costs is one thing. But defense costs being required to be paid after the policy limit has been exhausted? No. That’s not how it works. The insurer appealed to the Second Circuit.

The appeals court concluded that the policy was ambiguous as it had more than one possible meaning: “While Coverage A and Coverage C could be read, as the district court concluded, as operating independently of each other, a reasonably intelligent person who has considered the context of the Policy as a whole and who is cognizant of the customs and practices of the trade could conclude that WIQS’s liability under Coverage C ceased once the Coverage A limit was reached.”

However, instead of game over, the court threw the insurer a lifeline, allowing for the consideration of extrinsic evidence to support the insurer’s argument that the parties could not have intended that the insurer’s obligation to pay defense costs continued after the limit of liability was exhausted.

The appeals court remanded the case to the District Court, to assess extrinsic evidence, as well as any further evidence adduced through discovery and give effect to the intent of the parties. And, interestingly, the court noted that the insurer had extrinsic evidence on its side: “[T]o the extent extrinsic evidence is relevant – and we think it is -- the record contains extrinsic evidence to support WQIS’s assertion that the parties could not have intended that its obligation to pay for defense costs under Coverage C continued after it exhausted the limits under Coverage A. For example, WQIS submitted two affidavits by its Vice President of Claims declaring that, after WQIS exhausted its $5 million of liability under the Policy, (1) its employees withdrew from the oil spill response and cleanup efforts; (2) plaintiffs separately hired WQIS’s spill response team, with WQIS’s permission, to continue managing the oil spill response and cleanup efforts; (3) the excess insurers fully reimbursed ACL for all incurred defense costs; (4) ACL did not request or receive WQIS’s consent prior to incurring the defense costs; and (5) ACL did not submit a claim for defense costs to WQIS until after filing this action. The record also includes an affidavit from the representative of an excess insurer stating that WQIS ceased its active participation in ACL’s claims after reaching $5 million of liability under the Policy. The parties’ actions after the $5 million limit was reached provide some evidence of their intent and the customs and practices of the industry.”