1.5 Ambiguity

• Jurisdiction: Arizona

The insurance industry was born in the mid-eighteenth century when the first maritime "insurance" agreement was conceived at Lloyd's Coffeehouse in London, England.^[43] These first agreements were struck through negotiation among relative equals in an uncontrolled atmosphere.^[44] Large risk syndicates evolved into insurance companies that began selling standard-form, mass-marketed contracts. As the insurance industry grew, so did judicial concern over how boilerplate contracts disadvantaged the relatively unsophisticated individuals who were purchasing them. Courts began utilizing various doctrinal devices to protect vulnerable insureds from the harshness of enforcing boilerplate contract terms. The predominant weapon in the judicial armamentarium was the ambiguity doctrine.

Initially, the ambiguity doctrine began as an extension of the contract law tie-breaking rule of contra proferentum.^[45] One commentator has described the contra proferentum rule as follows:

Under contract law, contra proferentum was strictly a device of last resort. It was not to be employed until the Court had first examined all the contemporaneous circumstances and communications, any past agreements between the two parties, the local, general, technical and trade usages of the disputed terms, and finally the customs of the relevant community. Only after the court had engaged in a rigorous, interpretative inquiry and two reasonable interpretations still remained could the doctrine be invoked. Contra proferentum was thus the final resistance against arbitrariness.^[46]

The ambiguity doctrine evolved from the contra proferentum rule into a distinct principle of insurance law that required courts to find for the insured when a particular contract term was ambiguous.

In this theoretical application, invocation of the doctrine gave judges flexibility to choose among possible dispute resolutions and thereby permitted judges to achieve equitable results without relying upon the cumbersome equitable principles of estoppel or contract reformation. In practice, the doctrine led to great uncertainty resulting from the divergent personal values and inclinations of the applicators, the judges.^[47]

The ambiguity doctrine has come under criticism in recent years where opponents of the doctrine claim that it is nothing more than a cloak for the exercise of limitless judicial discretion. These critics often acknowledge that while the ambiguity doctrine is typically invoked to protect vulnerable insureds, judges have not identified the class of cases or persons deserving such protection with sufficient precision to justify the doctrine's continued use. Critics argue that judges apply the doctrine primarily as a result of judicial sympathy in preventing uncompensated injury and from a systematic bias against insurance carriers.

Recently, the supreme court has joined the critics in questioning whether the ambiguity doctrine provides a principled decisional mechanism for resolving coverage disputes.^[48] In State Farm Mutual Automobile Insurance Co. v. Wilson,^[49] the supreme court criticized the indiscriminate judicial invocation of the ambiguity doctrine as being the single most-used mechanism utilized by the courts in extending coverage to insureds without fair consideration of the circumstances surrounding the insurance purchase.

The court in Wilson re-established the ambiguity doctrine as the rule of interpretation of last resort. The court reiterated that the rule in Arizona is to "determine the meaning of a clause which is subject to different interpretations by examining the language of the clause, public policy considerations, and the transaction as a whole."^[50] In performing this initial analysis the court does not ignore the ambiguity question. The court stated:

[W]hen a question of interpretation arises, we are not compelled in every case of apparent ambiguity to blindly follow the interpretation least favorable to the insurer. The policy language is essential to our analysis, but neither language nor apparent ambiguity alone is dispositive without first addressing questions as to the requirements established by the legislature, public policy required to fulfill legislative goals, and the dominant purpose of the transaction. [Citation omitted.] The existence of ambiguity that militates in favor of construction against the drafter can be determined only after these questions have been answered.^[51]

The determination that an ambiguity must be construed against the insurance company comes at the end of the judicial inquiry and not at the beginning.

Considerations of legislative goals, social policy, and examination of the transaction as a whole, including the reasonable expectations of the insured, may indicate . . . [that the court] . . . should not automatically construe a clause susceptible to various interpretations in favor of the insured.^[52]

In his concurring opinion in Phoenix Control Systems v. Insurance Co. of North America,^[53] then Vice-Chief Justice Feldman demonstrated how, analytically, application of the ambiguity rule is utilized by the courts as a doctrine of last resort:

In this case . . . the words have no plain meaning. The clause in question can be reasonably interpreted to have either the meaning advanced by the insured or that advanced by the insurer. In most cases, we should interpret it considering legislative or contract goals, social policy, and examination of the transaction as a whole. Wilson. None of those principles is applicable here because no statute applies and the nature of the transaction may be equally well served by either meaning. What we are left with, in other words, is simply a...