Lynott v. National Union Fire Ins. Co. of Pittsburgh, Pa.

• Decision Date: 31 March 1994
• Docket Number: No. 60281-6,60281-6
• Citation: 871 P.2d 146,123 Wn.2d 678
• Parties: Frank B. LYNOTT, B. James Lowe, Ralph M. Davis, Walter B. Taibleson, Kenneth Fox, Charles B. Hall, and Employers Insurance of Wausau, a Wisconsin corporation, Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, Pa., a Pennsylvania corporation, Petitioner.
• Court: Washington Supreme Court

Page 678

123 Wn.2d 678

871 P.2d 146

Frank B. LYNOTT, B. James Lowe, Ralph M. Davis, Walter B Taibleson, Kenneth Fox, Charles B. Hall, and Employers Insurance of Wausau, a Wisconsin corporation, Respondents, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, Pa., a Pennsylvania corporation, Petitioner.

No. 60281-6.

Supreme Court of Washington En Banc.

March 31, 1994.

Culp, Guterson & Grader, Bradley D. Stam, Robert M. Sulkin, Seattle, for petitioner.

Zelle & Larson, Sandra Wallace, Michelle K. Enright, Minneapolis, MN, Hallmark, Keating & Abbott, P.C., William E. Fitzharris, Jr., Seattle, for respondents.

BRACHTENBACH, Justice.

Defendant National Union Fire Insurance Company of Pittsburgh, PA. (National Union) issued a Directors and Officers Liability and Corporation Reimbursement insurance policy with Tacoma Boatbuilding Company (TBC) as the named insured. The limit of liability was $10 million; the 1-year premium was $145,500. The policy was effective from October 1, 1984, to October 1, 1985 (policy period). Clerk's Papers, at 81.

The individual plaintiffs herein were directors and/or officers of TBC during the policy period. A lawsuit was brought against a number of defendants, including individuals who are now plaintiffs herein, claiming liability for numerous alleged wrongful acts and omissions while acting as directors and/or officers of TBC and arising from the sale of TBC stock to 21 investors. National Union denied coverage and refused to defend.

Employers Insurance of Wausau had provided director and officer liability insurance to TBC for the period September 17, 1981, to September 17, 1984. Coverage was later extended by endorsement to October 1, 1985, but only with respect to any wrongful act committed before October 1, 1984. Because of a possible overlap in coverage, Wausau advanced approximately $4.9 million to plaintiff directors/officers under a Loan Receipt and Assignment with a reservation of rights. Plaintiff directors/officers assigned their claims against National Union to Employers Insurance of Wausau.

Plaintiffs sued for damages arising from National Union's denial of coverage and refusal to defend and settle the litigation against them. National Union raised numerous defenses, including a policy exclusion defense. Both sides moved for summary judgment. The trial court granted summary judgment to National Union based on the policy exclusion. The Court of Appeals reversed in an unpublished opinion. Lynott v. National Union Fire Ins. Co. of Pittsburgh, PA., noted at 68 Wash.App. 1033 (1993). We affirm the Court of Appeals.

We briefly summarize the background facts. Tacoma Boatbuilding Company was having financial difficulties; it needed an infusion of cash. Through a broker, TBC was put in contact with Midland Capital Corporation, a business development corporation from New York. Eventually, Midland Capital sought persons and entities to become investors in TBC. In December 1984 and January 1985, agreements for the sale of TBC stock were entered into between TBC and a subsidiary of TBC and 21 investors. These agreements will be referred to as the January 1985 purchase. Those investors purchased approximately 61 percent of the stock of TBC. No single investor acquired a majority of the outstanding stock of TBC. The largest percentage, 14.9 percent, was purchased by a limited partnership. The purchasers were individuals, limited partnerships, trusts, and corporations. Each purchaser warranted and she/he/it was purchasing for her/his/its own account and for investment purposes. Clerk's Papers, at 675-757.

Later litigation was started by the investors. They sued directors/officers of TBC, among others, alleging wrongful acts and omissions in connection with the sales of stock to the investors, and losses therefrom.

The National Union directors and officers liability policy contained endorsement 12 which reads as follows:

In consideration of the premium charged, it is hereby understood and agreed that the insurer shall not be liable to make any payment for any claim or claims made against Directors and Officers arising out of any merger, acquisition or divestiture or any merger, acquisition or divestiture negotiations, or any attempted merger, acquisition or divestiture negotiations involving the insured, any other entity any/or [sic ] individual, including but not limited to all subsequent shareholder derivitive [sic ] or representative actions resulting therefrom.

Clerk's Papers, at 100.

Stated generally, the issue is whether the stock purchases under the January 5, 1985, agreement by the 21 investors was an "acquisition" involving TBC within the terms of endorsement 12. More specifically, National Union argues that (1) extrinsic evidence shows a mutual intent by it and TBC to exclude the January 1985 transaction as an "acquisition" within the terms of endorsement 12, and (2) the word "acquisition" in the policy is not ambiguous, claiming that it has ordinary meaning within which the January 1985 purchases fell.

We hold: (1) The relevant extrinsic evidence fails to show an objective manifestation of mutual intent as to the meaning of "acquisition" or that the January 1985 purchases were specifically excluded from coverage. (2) The word "acquisition" is ambiguous, even under the five different and inconsistent "ordinary" meanings urged by National Union. Therefore, the exclusion is not stated in clear and unequivocal language and must be construed strictly against the insurer.

Before considering the extrinsic evidence, we answer National Union's contention in its petition for review that there is confusion concerning the use of extrinsic evidence in interpreting insurance policies and application of rules of interpretation particularly applicable to insurance policies. National Union argues that the Court of Appeals did not follow the "context" rule of Berg v. Hudesman, 115 Wash.2d 657, 801 P.2d 222 (1990).

The confusion, if it exists, is easily dispelled. First, the special and specific rules of interpretation governing the interpretation of insurance policies, some of which are discussed hereafter, were not changed by the Berg holding. Second, the holding of Berg v. Hudesman, supra, was no revolutionary change in the principles of contract interpretation. Berg recognized an inconsistency in prior Washington cases. Some of those cases stated the "plain meaning" principle; other cases used the "context" rule. Berg noted that the plain meaning rule has been criticized by the leading scholars, e.g., A. Corbin, S. Williston and J. Wigmore, has been rejected by the Uniform Commercial Code, and is inconsistent with the Restatement (Second) of Contracts. Berg, at 666-67, 801 P.2d 222.

We held in Berg that ambiguity in the meaning of contract language need not exist before evidence of the circumstances surrounding the making of the contract could be admissible. However, we carefully noted the substantial limitation on the purpose and use of such evidence. We repeat part of that holding which was taken from J.W. Seavey Hop Corp. v. Pollock, 20 Wash.2d 337, 348-49, 147 P.2d 310 (1944) and which was reaffirmed specifically in Berg, 115 Wash.2d at 669, 801 P.2d 222:

May we say here that we are mindful of the general rule that parol evidence is not admissible for the purpose of adding to, modifying, or contradicting the terms of a written contract, in the absence of fraud, accident, or mistake. But, as stated in Olsen v. Nichols, 86 Wash. 185, 149 P. 668 [ (1915) ], parol evidence is admissible to show the situation of the parties and the circumstances under which a written instrument was executed, for the purpose of ascertaining the intention of the parties and properly construing the writing. Such evidence, however, is admitted, not for the purpose of importing into a writing an intention not expressed therein, but with the view of elucidating the meaning of the words employed. Evidence of this character is admitted for the purpose of aiding in the interpretation of what is in the instrument, and not for the purpose of showing intention independent of the instrument. It is the duty of the court to declare the meaning of what is written, and not what was intended to be written. If the evidence goes no further than to show the situation of the parties and the circumstances under which the instrument was executed, then it is admissible.

Berg, 115 Wash.2d at 669, 801 P.2d 222 (quoting Pollock, 20 Wash.2d at 348-49, 147 P.2d 310).

We emphasize the language that "[e]vidence of this character is admitted for the purpose of aiding in the interpretation of what is in the instrument, and not for the purpose of showing intention independent of the instrument." (Italics ours.) Berg, 115 Wash.2d at 669, 801 P.2d 222 (quoting Pollock ). The underlying principle is well established and was not changed by Berg.

[W]e have long adhered to the objective manifestation theory of contracts. This theory means that we impute to a person an intention corresponding to the reasonable meaning of his words and acts. Petitioner's unexpressed impressions are meaningless when attempting to ascertain the mutual intentions [of the parties].

Dwelley v. Chesterfield, 88 Wash.2d 331, 335, 560 P.2d 353 (1977).

The principle is quite simple. Unilateral or subjective purposes and intentions about the meanings of what is written do not constitute evidence of the parties' intentions. Watkins v. Restorative Care Ctr., Inc., 66 Wash.App. 178, 192, 831 P.2d 1085, review denied, 120 Wash.2d 1007, 841 P.2d 47 (1992). "[T]he relevant intention of a party is that manifested by him rather than any different undisclosed intention." Restatement (Second) of Contracts § 212, comment a (1965).

One of the practical considerations in applying the context rule to interpreting insurance policies is that it is unusual for the terms of the policy to be negotiated. However, where there are actual negotiations, the context...