Omni Berkshire Corp. v. Wells Fargo Bank, N.A

Brief Fact Summary.

Omni Berkshire Corp. (Plaintiff) had a loan serviced by Wells Fargo Bank, N.A. (Defendant) that Defendant claimed required Plaintiff to carry expensive stand-alone terrorism coverage on the five hotels securing the loan.

Synopsis of Rule of Law.

When a term in a contract is ambiguous, extrinsic evidence, including circumstantial evidence, may be admitted in order to allow the court to determine the parties’ intent.

Facts.

Plaintiff borrowed $250 million and secured the loan with five of its hotels in 1998. The loan agreement required Plaintiff to carry comprehensive all risk insurance on the hotels as well as reasonable other insurance as the lender might reasonably require to insure against risks that were insured against for similar properties in the area in which the hotels were located. Neither provision referred specifically to terrorism coverage. Before the terrorist attacks of September 11, 2001, comprehensive all risk insurance included terrorism. After those attacks, terrorism was excluded from all risk policies and was instead provided in stand-alone, expensive policies. Plaintiff did not purchase a terrorism policy due to the cost of that coverage. The loan servicing company, which later became Defendant, informed Plaintiff that it needed to carry terrorism coverage. Plaintiff claimed that this coverage was not required under the terms of the loan agreement. The parties negotiated a reduced amount of coverage at a reduced price, but ultimately Plaintiff decided not to purchase it. Plaintiff then sued for a declaratory judgment that the terms of the loan agreement did not require Plaintiff to carry terrorism insurance. After the action was filed, the Terrorism Risk Insurance Act of 2002 was enacted, requiring insurers to provide insurance for non-domestic terrorism without restricting what insurers could charge for such coverage.

Issue.

When a contract term is ambiguous, will the court allow extrinsic evidence in order to determine the intent of the parties?

Held.

(Chin, J.) Yes. When a term in a contract is ambiguous, extrinsic evidence, including circumstantial evidence, may be admitted in order to allow the court to determine the parties’ intent. The first issue is whether the loan agreement’s “all risk” clause required Plaintiff to carry terrorism coverage after such coverage was excluded from all risk policies. The court must determine the parties’ purpose and intent. Where the contract language is ambiguous, the court may consider extrinsic evidence in this determination. Here, the term “all risk” and “comprehensive all risk insurance” are not defined and the parameters of such coverage are not laid out. The agreement never mentions terrorism or terrorism coverage. The term “all risk” is misleading because it expressly excludes certain types of risk. Extrinsic evidence of intent is not helpful because when the agreement was made terrorism was covered in all risk policies. However, circumstantial evidence helps to determine the parties’ intent because the parties must have understood that “all risk” insurance could change over time or else they would have defined it in the agreement. Since all risk policies change and the parties knew that, if the parties had intended for Plaintiff to carry insurance of the type covered by “all risk” insurance in 1998, they would have said so. Because they didn’t, it can be determined that the parties intended to require only the insurance generally required in the industry. This is further supported by the fact that the parties had a separate provision for risks that might be excluded from all risk policies. Plaintiff was therefore only required to carry all risk insurance as it evolved over time, and not as it was in 1998.

The agreement did contain a separate provision requiring Plaintiff to acquire reasonable insurance in such reasonable amounts as the lender might reasonably require to insure against risks that were insured against for similar properties in the area in which the hotels were located. Here, Defendant’s request for terrorism coverage was reasonable and met the agreement’s requirements. The complaint is dismissed with prejudice.

Discussion.

“All risk” insurance covers damage resulting from all risks other than those that are specifically excluded from coverage. If a risk is not specifically excluded, it is considered included. Typically, war, pollution, earthquakes, and flood are excluded from all risk policies. Over time, the standard exclusions have changed. In the mid- to late 1990s, the “Y2K” exclusion eliminated coverage for damages resulting from the anticipated failure of computer systems to recognize the year 2000. Mold has more recently been excluded as well. The post-9/11 exclusion of terrorism was also a change to standard practice. This evolution of coverage in “all risk” policies is understood in the industry and was an important consideration in the court’s decision.