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Business Problems Arise Out Of Ambiguous Contract Terms

One area where lawyers must continue to improve is drafting contracts. It is imperative that lawyers learn the intricacies of legal writing and the different meanings words have in the legal community and their ordinary meaning. If a word or phrase in a company’s contract is ambiguous, it is susceptible to multiple interpretations and might result in litigation at some point. A common example of litigation like this involves insurance policies. Therefore, it’s important to draft clear and concise contracts in order to save the time, money, and effort associated with litigation.

Ambiguous contractual provisions are to be strictly construed against the insurer and in favor of coverage for the insured. Insurance coverage is meant to protect the insured, so the public policy reflects this favoring. However, this strict construction rule applies only if the ambiguous policy provision is susceptible to two or more reasonable interpretations. The key is that it must be reasonable, not just another interpretation. If the word or phrase is clear, then no further interpretation is necessary. The words and phrases used in insurance policies are to be construed using their plain, ordinary, and generally prevailing meaning unless the words have acquired a technical meaning.

This seems to be a clear explanation of how contract terms are to be interpreted, but even so, many cases arise with an insured claiming that a certain phrase is ambiguous and they should not be denied relief under their policy. For example, Herbert Farms, who conducts a rice farming operation in St. Landry Parish, Louisiana, claimed the phrase “rice drying house” in their policy was ambiguous and other reasonable interpretations of the phrase was possible. Herbert Farms filed a claim for losses under its policy when its rice was damaged while in storage, seeking coverage under a section that listed “grain tanks” as covered property. However, there is a clear and unambiguous exclusionary clause that states that property covered in certain sections, including the section listing grain tanks, is not covered. The two pertinent pieces of property not covered in Herbert Farms’ policy were the contents of a rice warehouse and rice drying houses.

Herbert Farms argued that since the grain tanks were specifically listed in the coverage section, they policy should not be allowed to later exclude these tanks from coverage. They also argued that the storage bins were cylindrical in shape, and therefore do not comport with what a normal person would consider a “house.”

Even though “rice drying house” is not specifically defined in the policy, it does not make that term ambiguous. The court looked at the ordinary, plain, and generally prevailing meaning of the phrase. The court held that “contents of a rice warehouse” normally includes the rice bins and any other rice storage devices. Furthermore, the grain tanks even meet the ordinary definition of house,” which means structure in the context of rice storage. So when grain tanks are used to store rice that is being dried, they are “rice drying houses” and the contents of the tanks is not covered. Therefore, the court denied Herbert Farms’ claim and affirmed the Western District of Louisiana’s ruling against Herbert Farms.

Herbert Farms’ rice was ruined because three fans stopped operating. Unable to dry the rice until they were repaired, the rice was stained, making it far less valuable. As a result, Herbert Farms had to sell the rice at a lower price, costing them almost a quarter of a million dollars. Trying to recoup some of these losses, Herbert Farms was likely hoping for a settlement from the insurance company. Unfortunately, when a contract is drafted clearly and concisely, it is imperative for courts not to create ambiguity and stick to the black letter law.