We have often said that even a sophisticated consumer needs the help of an insurance professional when buying insurance. That warning is once again illustrated by the opinion of the United States Court of Appeals for the Eleventh Circuit in the case, ECB USA, INC., et al v. CHUBB INSURANCE COMPANY OF NEW JERSEY, issued on August 1, 2024.
The Facts of the Case
This case involved a coverage dispute. In 2001, Constantin Control Associates, LP (Constantin), a “sophisticated commercial entity that provides accounting services”, obtained a professional liability insurance policy from a subsidiary of the defendant, Chubb Insurance Company of New Jersey (Chubb). Constantin renewed the policy for several years, including the relevant policy years of 2016-2017 and 2017-2018.
During the relevant policy years, Constantin performed an audit of a company called Schratter Foods Incorporated (Schratter). Schratter, as its name suggests, was a food company, a fact, which turned out to be dispositive. The Court’s opinion provides no further details about Schratter’s business. The plaintiffs in this case subsequently purchased Schratter and relied upon the audit of Schratter’s financial statements performed by Constantin.
After the closing, the plaintiffs discovered certain problems with Schratter’s financials, which had not been disclosed in the audit performed by Constantin. So, as often happens, the plaintiffs sued Constantin for professional wrongdoing in connection with Constantin’s audit of Schratter’s financial statements. Constantin settled the lawsuit with the plaintiffs and assigned its rights under the Chubb policy to the plaintiffs. When Chubb refused to pay the settlement amount, the plaintiffs sued Chubb.
Chubb denied responsibility under the policy for reasons that will be discussed below. The District Court agreed with Chubb that there was no coverage under the policy and entered summary judgment for Chubb. The plaintiffs appealed to the United States Court of Appeals for the Eleventh Circuit, which affirmed summary judgment in favor of Chubb.
The Insurance Policy
The insurance policy involved in this case was a professional liability insurance policy that covered professional services that Constantin performed for others for a fee. Like most professional liability policies, it covered liability that resulted from “Wrongful Acts” in the performance of professional services and defined “Wrongful Acts’, in part, as those that occurred:
. . . in the performance of (1) “Computer Consulting including computer system architecture and design; (2) Temporary Placement Agency Services, and (3) “Management consulting services.”
The policy further defined “management consulting services” as
. . . services directed toward expertise in banking finance, accounting, risk and systems analysis, design and implementation, asset recovery and strategy planning for financial institutions. (emphasis in Court’s opinion).
As stated above, Chubb denied coverage under the policy. It relied upon the phrase “for financial institutions” and claimed that the policy only covered professional services performed for financial institutions. Since Schratter was a food company, and not a financial institution, Constantin’s audit of Schratter’s financial statements was not covered. The plaintiffs, on the other hand, claimed that the phrase “for financial institutions” only modified “strategy planning” and that the other services, including accounting, provided by Constantin to any client, regardless of industry, was covered.
That was the issue for the court. Did the policy only cover professional services provided to financial institutions or was the coverage more broad?
Canons of Construction
An insurance policy is a contract between the insurer and the insured and will be interpreted like any contract. The meaning of a contract is a matter of law for a court to decide, and a court, when interpreting a contract, will attempt to give meaning to the intent of the parties to the contract. If the language of a contract is clear and unambiguous, the court will give effect to the plain meaning of the language. A court should not attempt to give either party to the contract a better deal than they bargained for.
However, there are certain “canons of construction”, which courts can use to help it determine the plain meaning of contract language. The “canons of construction” used by the Court in this case are:
- the last-antecedent canon;
- the series-qualifier canon; and
- contra proferentem (because every discussion of legal issues requires a little Latin).
What is the Last-Antecedent Canon?
Simply stated, the last-antecedent canon means that, when a list of nouns is followed by a modifying phrase, the modifying phrase refers only to the noun closest to it in the sentence. Under this canon, the phrase “for financial institutions”, would refer only to “strategy planning” and would not modify the other nouns in the sentence, such as “accounting”. This was the canon preferred by the plaintiffs to support its claim that Constantin’s negligence in performing an audit of a food company was covered by the policy.
What is the Series-Qualifier Canon?
In contrast to the last-antecedent canon, the series-qualifier canon says that, when a list of nouns is followed by a modifying phrase, the modifying phrase includes the entire list of nouns. Under this canon, the phrase “for financial institutions” would refer to the entire list of professional services, including “accounting”. This was the canon preferred by Chubb to support its denial of coverage of the plaintiffs’ claim, since the audit of Schratter was of a food company and not a financial institution.
Which Canon did the Court Apply?
For reasons beyond the scope of this article, the Court determined that it made the most sense to apply the series-qualifier canon. It said that canon makes the most sense given the nature of Constantin’s business and the other provisions of the insurance policy. For that reason, the Court found that the audit of Schratter’s financial statements, which is an accounting service, was not covered under the policy, because Schratter was a food company and not a financial institution.
What Happened to Contra Proferentem?
Contra proferentem is a canon of construction that says that, when a contract is ambiguous, it is generally interpreted against the drafter of the contract. In the case of an insurance policy, the policy is almost always drafted by the insurance company. That is why an insurance policy found to be ambiguous by a court will almost always be interpreted to provide coverage.
The Court found that this canon of construction does not apply, again for reasons beyond the scope of this article. It held that a contract is not ambiguous simply because the parties to the contract may have different interpretations of its meaning. The Court found that, by applying the series-qualifier canon, the meaning of the disputed language was clear and unambiguous and that it could give effect to the intent of the parties.
So What Happened to the Comma?
The title of this article asks how a comma can affect the meaning of an insurance policy. It might have been more accurate to ask how the lack of a comma can affect insurance coverage.
The Court discussed that, typically, when applying the series-qualifier canon, there would be a comma after the last noun and before the modifying phrase to indicate that the modifying phrase refers to the entire series of nouns, rather than the last antecedent. In this case, there should have been a comma after “strategy planning” and before “for financial institutions” to make clear that the phrase “for financial institutions” modified the entire list of services, rather than just “strategy planning”. However, in the end, the Court had no trouble applying the series-qualifier canon and finding that the phrase “for financial institutions” refers to the litany of professional services listed and not just “strategy planning”. For that reason, the Court upheld the grant of summary judgment in favor of Chubb and found that the claim against Constantin for failure to properly perform the audit of Schratter’s financial statements was not covered by the policy.
Get Professional Advice!
The moral of the story is that even the most sophisticated businesspeople are not insurance experts and can get tripped up by contract language. Consult with an insurance professional, like RMC, to make sure that your business is getting the insurance coverage that it expects and needs.