The Second Circuit Court of Appeals recently found an insurer’s decision to waive discovery foreclosed its ability to provide extrinsic evidence to resolve an ambiguous insurance policy. In Ezrasons Inc. v. Travelers Indemnity Co., the insurer, Travelers Property Casualty Co., had refused to indemnify its insured, Ezrasons Inc., for the full policy limit because it contended the loss did not occur at an “approved location” under the policy. The Second Circuit ultimately determined there was insufficient extrinsic evidence to support Travelers’ position.

Travelers provided Ezrasons a marine cargo insurance policy providing coverage for “goods and/or merchandise while temporarily detained in warehouses and/or processing locations.” The maximum limit of coverage depended on whether the loss occurred at an “approved location.” One of the policy’s two specified approved locations was “Chamad Warehouse Inc., [56 Branch Street], Marion, NC 28752.”

The Chamad site consists of three warehouse buildings on a 19.03-acre parcel of land. One of the warehouses on the property fronts Branch Street and is located at 56 Branch Street. A second warehouse fronts Virginia Road and is known for some purposes as 1386 Virginia Road. Ezrasons consigned its goods to Chamad for storage and the goods were stored in the Virginia Road Warehouse. On August 14, 2019, Ezrasons’ goods stored in the Virginia Road Warehouse were destroyed by a fire. Travelers refused to pay Ezrasons the upper policy limit because it contended only the Branch Road warehouse, not the Virginia Road warehouse, was an approved location under the policy.

Ezrasons filed suit in New York state court, seeking to recover the higher policy limit, and Travelers removed the case to federal court on grounds of diversity of citizenship. The parties submitted a joint letter to the district court agreeing that neither party required discovery before proceeding to summary judgment. The district court ruled the Virginia Road warehouse was unambiguously not within the policy’s definition of an approved location.

The Second Circuit acknowledged that, under New York law, extrinsic evidence is usually not admissible to create ambiguity in a facially unambiguous contract. The court noted, however, that latent ambiguities in a contract present an exception to that rule. The court found the policy contained a latent ambiguity because the specified approved location could reasonably have meant all three warehouses on the property or only the Branch Street warehouse. The court noted that faced with an ambiguity, the court will consider admissible extrinsic evidence to resolve the ambiguity. If there is no admissible extrinsic evidence, New York law provides that the ambiguity should be construed in favor of the insured if the insured’s interpretation of the policy is reasonable.

The court then turned to the extrinsic evidence submitted by each of the parties to resolve the ambiguity. Travelers relied on a declaration from an employee purporting to prove that it had not engaged in its extensive underwriting process for the Virginia Road warehouse and that Ezrasons only advised Travelers about the Branch Street warehouse. Travelers argued this proved that neither party intended the Virginia Road warehouse to be an approved location. The court rejected this argument, noting that “what Travelers did or did not do on its own in agreeing to the Policy language is irrelevant to what the Insured could reasonably understand to be the meaning of the Policy.” Because the declarant did not have personal knowledge of the negotiations between Travelers and Ezrasons, he was not a competent witness as to what the parties meant to include in the policy. The declaration also did not provide any business records that could have supported the declaration’s assertions.

Given that Travelers was unable to provide sufficient extrinsic evidence in support of its position, and the fact that the court determined that the insured’s reading that the approved location was comprised of all warehouses at the site was reasonable, the court was required by law to construe the policy in favor of Ezrasons. The Second Circuit noted that Travelers could have presented evidence at trial to support its contention that the Virginia Road warehouse was not intended to be an approved location. However, both parties had agreed to forgo discovery. By doing so, “Travelers, like the Insured, faced the risk that, if the record on the other side’s motion showed the other side’s entitlement to summary judgment, summary judgment would be granted, conclusively foreclosing any opportunity to take discovery.” Here, it was Travelers that bore that risk unsuccessfully. The Second Circuit reversed and remanded the matter to the district court to enter judgment in favor of Ezrasons.