                                                                                                                           Opinions of the United
2000 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


2-9-2000

James v. Zurich-American
Precedential or Non-Precedential:

Docket 98-7542




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Recommended Citation
"James v. Zurich-American" (2000). 2000 Decisions. Paper 25.
http://digitalcommons.law.villanova.edu/thirdcircuit_2000/25


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Filed February 9, 2000

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 98-7542 and 98-7543

LESVILLE JAMES, as assignee of the rights of MERIDIAN
ENGINEERING, INC. and COMPANION, INC., d/b/a
COMPANION ASSURANCE COMPANY,

       Appellant in No. 98-7543

v.

ZURICH-AMERICAN INSURANCE COMPANY OF ILLINOIS,

       Appellant in No. 98-7542

APPEAL FROM THE DISTRICT COURT
OF THE VIRGIN ISLANDS,
DIVISION OF ST. CROIX: CHRISTIANSTED
(D.C. Civil Action No. 95-cv-00117)(RLF)
District Judge: Honorable Raymond L. Finch

Argued September 10, 1999

BEFORE: ROTH and WEIS, Circuit Judges,
and SHADUR,* District Judge

Opinion Filed February 9, 2000



_________________________________________________________________
* Honorable Milton I. Shadur, Senior United States District Judge for the
Northern District of Illinois, sitting by designation.


       Joel H. Holt, Esquire (ARGUED)
       Law Offices of Joel H. Holt
       2132 Company Street, Suite 2
       Christiansted, St. Croix
       U.S. Virgin Islands, 00820

       Attorney for Appellant
       Lesville James as assignee of the
       rights of Meridian Engineering, Inc.
       and Companion, Inc. d/b/a
       Companion Assurance Company.

       Ignatius J. Melito, Esquire
        (ARGUED)
       S. Dwight Stephens, Esquire
       Wendy S. Kennedy, Esquire
       Melito & Adolfsen P.C.
       233 Broadway
       New York, New York 10279

       Douglas L. Capdeville, Esquire
       Law Offices of Douglas L. Capdeville
       P.O. Box 4191
       2107 Company Street, Lot #4
       Christiansted, St. Croix
       U.S. Virgin Islands, 00822

       Attorneys for Appellant
       Zurich-American Insurance Company
       of Illinois.

OPINION OF THE COURT

SHADUR, Senior District Judge:

We are asked to interpret what may at worst be labeled
an ambiguous provision of an insurance policy, to
determine whether the policy provided coverage for a third
party, not the insured itself. Upon review we find that
whatever might be said as to the literal meaning of the
disputed provision, the practical construction given to its
terms by the actual parties to the policy--the insurer and
the insured--resolved any arguable ambiguity and excluded

                                 2


coverage for the third party. We therefore reverse the order
of the District Court to the contrary.

Background

Zurich-American Insurance Company of Illinois ("Zurich")
appeals an adverse decision in an insurance coverage
declaratory judgment action instituted against it by Lesville
James ("James") as assignee of the rights of Meridian
Engineering Inc. ("Meridian") and Companion Assurance
Company ("Companion"). This action arose out of a dispute
between Zurich and Companion as to their respective
responsibilities for damages suffered by James, as
determined in a personal injury action that he hadfiled
against Meridian. Although it is uncontested that Meridian
had procured its own liability insurance policy from
Companion, what is at issue in the present litigation is
whether Zurich was a coinsurer.

Companion had earlier claimed (and now James claims)
that Meridian was insured under a policy issued by Zurich
to Hess Oil Virgin Islands Corp. ("Hess Oil" or "HOVIC")1
covering a construction project ("FCCU Project") at the Hess
Oil refinery in St. Croix, Virgin Islands. That Zurich policy
became effective on December 1, 1990 and continued for
the duration of the project.2 As part of the FCCU Project,
Hess Oil contracted with Meridian to pave some roads.
While working under Meridian's supervision on August 31,
1993, James suffered an injury that he asserted resulted in
a below-the-knee amputation of his right leg. On June 24,
_________________________________________________________________

1. Amerada Hess Corporation ("Amerada Hess") is Hess Oil's parent
company. Because Hess Oil did not have its own insurance department,
Amerada Hess was involved in procuring the Zurich policy on Hess Oil's
behalf. To that end Amerada Hess utilized the assistance of the Marsh
& McClennan ("Marsh") brokerage firm.

2. Although the policy states that the estimated time for the project's
completion was 44 months, Zurich Br. 43 states that"the parties to the
contract have been consistently administering the claims under the
Zurich policy for nine years. . . ."

                               3


1994 James filed his personal injury action against
Meridian.3

Upon learning of James' lawsuit, "Meridian looked for
insurance policies that might cover its liability for James'
claim. Meridian identified Companion and Zurich as
potential co-insurers. . . ." (James v. Zurich-American Ins.
Co. of Ill., No. 95-117F, slip op. at 4 (D.V.I. Sept. 9, 1998)).4
Defense of the case was tendered to Zurich as well as
Companion, but Zurich denied coverage on the predicate
that Meridian was not insured under its policy. Companion
proceeded to defend the action, but it also tendered defense
of the claim to Zurich after initial discovery. Zurich again
denied coverage, and Companion then brought this
declaratory judgment action.

James, Companion and Meridian later began settlement
discussions. Zurich was afforded the opportunity to
participate in those talks, but it declined. Those
discussions led to an agreement under which Meridian
stipulated to a $1 million judgment and assigned whatever
rights it had against Zurich and Companion to James in
exchange for James' promise not to execute the judgment
against Meridian. For its part, Companion agreed to pay
James $125,000 as a discharge payment for its share of the
stipulated judgment, and it too assigned its rights against
Zurich to James. Because Companion's policy limit was $1
million and Zurich's was $2 million, James stipulated that
Zurich's maximum liability would be two-thirds of the $1
million stipulated judgment.5 James was then substituted
as the sole plaintiff in the federal action. Hence the nature
_________________________________________________________________

3. Hess Oil and United Dominion Constructors, Inc. ("United Dominion")
were originally named as codefendants, but they were later voluntarily
dismissed from the case.

4. Both James and Zurich seem to dispute the District Court's just-
quoted statement, instead identifying Companion as having discovered
that Meridian might be covered under the Zurich policy.

5. Each of the Zurich and Companion policies contains a coinsurance
provision stating that if another policy covers the same claim, the two
policies are to be treated as coinsurance policies, with each insurer
responsible for a pro-rata share of coverage based upon the respective
policy limits.

                               4


of the relief sought in the declaratory judgment action
before the District Court was a declaration that Zurich was
a coinsurer, so that James could collect $666,666 from it
under the settlement agreement.

On the litigants' cross-motions for summary judgment,
the District Court determined (in its June 23, 1998 slip
opinion, the "Summary Judgment Opinion"6) that the
contract provision identifying the entities covered under the
policy ("the Named Insured provision") was ambiguous, so
that the need for extrinsic evidence precluded a decision as
a matter of law. Here is the Named Insured provision
(emphasis added):

       Hess Oil Virgin Islands Corps. (HOVIC), Amerada Hess
       Corporation and its directly and indirectly owned
       subsidiary companies and/or interests in associated
       and/or affiliated companies and/or organizations and
       any other companies or entities over which Amerada
       Hess Corporation is responsible to insure and/or
       required to insure under contract or otherwise in respect
       of their involvement in the HOVIC FCCU Project, and
       Litwin Engineers and Contractors, Inc. and/or
       Contractors, Subcontractors and Employees and/or
       Consulting Engineers; and suppliers as required.

At the ensuing bench trial Zurich stressed that the"as
required" language at the end of the provision refers back
to the entities that Hess Oil is "responsible to insure" or is
"required to insure under contract." In contrast, James
argued that the provision provided coverage for all
contractors and subcontractors performing work on the
FCCU Project because the "as required" phrase relates only
to "suppliers."
Both sides produced extrinsic evidence to support their
respective interpretations of the provision. Zurich and Hess
Oil representatives testified7 that the intent of the Named
_________________________________________________________________

6. To distinguish between that opinion and the District Court's opinion
rendered later at the trial, the latter slip opinion (which has earlier
been
quoted from in the text at n.4) will be referred to as "Trial Op."

7. All of the testimonial evidence for the bench trial was proffered
through submissions of the witnesses' depositions and affidavits, not
through live testimony.

                                5


Insured provision was to provide coverage only for"FCCU
contractors," a term referring to contractors and
subcontractors that Hess Oil had contractually promised to
insure. As Hess Oil's Property and Casualty Claims
Administrator John Talarico ("Talarico") explained, an
"FCCU contractor is a term of art we use to describe those
whom HOVIC had agreed to provide insurance coverage as
embodied by the Zurich Wrap Up policy."

Witnesses from Zurich, Hess Oil and Amerada Hess
uniformly stated that the Named Insured provision was
intended to provide coverage solely for FCCU contractors.
As Talarico explained in a letter to Zurich:

       We purchased the Wrap Up liability insurance first,
       then the contract provisions were drafted to reflect the
       coverage terms and limits. The intent is to provide
       [general liability] and auto coverage for all FCCU
       contractors in all instances.

Among those bolstering that view were Andrew Wade
("Wade"), the Zurich underwriter who negotiated the policy,
James Foley and Ed Weinman, the present and former
Hess Oil controllers who dealt extensively with Hess Oil's
various contractors, and Kevin Beebe, Amerada Hess'
Manager of Corporate Insurance.8

Zurich and Hess Oil employees also testified that the
policy was administered in accordance with the
understanding that the provision covered only FCCU
contractors. Talarico stated that in administering claims
under the policy Zurich and Hess Oil acted consistently
with that understanding. Jackie Ward ("Ward"), a former
litigation claims specialist with Zurich, assumed
responsibility for handling claims under the policy in 1993
--well after the policy had become effective but before
James was injured. Ward said that she was told at that
time "[t]hat HOVIC or [Amerada] Hess would designate
those contractors they wanted to insure, and that I was
_________________________________________________________________

8. For example, Wade testified that the policy covered only FCCU
contractors and that "FCCU contractors are those that . . . HOVIC is
obligated to insure because . . . HOVIC offered them insurance as part
of their contract . . . for the project."

                               6


then to insure them under the policy with all of the terms
of it." She further answered "no" to the question whether
"the word `FCCU contractor' is a word of art used in the
policy,"9 but she then went on to confirm that "[i]t's a term
that John Talarico and I used to simplify our dealings with
each other." Finally, it is undisputed that when James filed
suit Zurich did undertake the defense of another company
--a codefendant in James' action--that was an"FCCU
contractor" that Zurich was contractually obligated to
insure.

On the other side of the dispute as to original intent,
some written extrinsic evidence submitted by James
appeared to indicate that the Zurich policy as written
provided coverage for all contractors and subcontractors
who worked on the FCCU project. First, during negotiations
for the policy Amerada Hess sent Zurich's proposal to
Marsh and attached Exhibit II(a) as a summarization of the
policy's terms. Exhibit II(a) listed substantially the same
language that ultimately appeared in the Named Insured
provision and went on with this skeletal description of that
provision:

       Policy names as requested Amerada Hess, HOVIC,
       Litwin and any other contractor or subcontractor.

Another abbreviated summary of the Zurich policy prepared
by Wade stated that coverage extended to "Hess Oil Virgin
Islands Corporation (HOVIC) and all Contractors and Sub-
Contractors for FCCU Project." Finally, though this added
factor is at best a slim reed, the policy premium was
calculated on the total cost of the FCCU Project (which thus
included the amounts payable on all of the subcontracts,
including Meridian's).

Because it found that extrinsic evidence in support of
Meridian's contention more credible and relevant to the
original contractual intent, the District Court held"that the
intent of the parties in negotiating the contract was to
provide coverage for all contractors and subcontractors who
_________________________________________________________________
9. That question is inherently misleading. When the term "FCCU
contractor" as such does not appear in the policy at all, what sensible
meaning can be given to the question whether it is a"word of art" there?

                                7


worked on the FCCU Project" (Trial Op. 13). Alternatively,
despite its earlier summary judgment ruling, the court
reached the same conclusion as a matter of law because it
determined that the ambiguous Named Insured provision
should automatically be construed against the insurer (id.
12-13).

Hence, after having determined that Zurich was bound
by the James-Meridian-Companion settlement agreement,10
the District Court held that Zurich was a coinsurer of
Meridian and ordered it to pay James $666,666 plus
interest. This appeal then ensued. James also cross-
appeals, arguing that the District Court erred infinding
that the policy language was ambiguous.
_________________________________________________________________

10. Although we have on several occasions upheld (as a matter of
applicable state law) the validity of two-tiered settlements where they
are

reasonable and entered into in good faith (see, e.g., Trustees of the
Univ.

of Pa. v. Lexington Ins. Co., 815 F.2d 890 (3d Cir. 1987) and Greater N.Y.
Mut. Ins. Co. v. North River Ins. Co., 85 F.3d 1088 (3d Cir. 1996)), from
the very outset we have been "not unmindful of the dangers presented
by two-tiered settlements" (Lexington, 815 F.2d at 902), particularly
"that

two-tiered settlements are fraught with the danger of self-dealing and
should be scrutinized with extra care" (id .). In this instance James'
covenant not to execute the $1 million consent judgment against
Meridian left the latter totally indifferent to whether the price tag
attached to that judgment was really $1 million or (say) twice or three
times that amount. During the pendency of this declaratory judgment
action, Companion wrote Zurich that James' action could be settled in
the range of $300,000, a demand that was apparently then lowered to
$250,000. Even on the predicate that Companion (which indisputably
was obligated to cover Meridian, and hence the James claim, under its
own $1 million policy) would come up with just $125,000 in cash as its
contribution, that $250,000 figure would have capped out Zurich's
liability at $125,000 if it had caved in to the demand that it join in a
global settlement. Instead the $1 million figure that was nominally
attached to the consent judgment ("nominally" because it meant nothing
to either Meridian or Companion) placed Zurich at risk for $666,666 as
the price for having taken this case to trial and now to appeal. This
scenario appears to provide a classic instance of the concerns that we
voiced in Lexington. But our disposition of this appeal on other grounds
makes it unnecessary for us to issue a definitive ruling, rather than
merely this caveat, on that score.

                               8


Jurisdiction and Standard of Review

Jurisdiction in the District Court was invoked on
diversity-of-citizenship grounds under 28 U.S.C.S1332.
Appellate jurisdiction over the District Court'sfinal
judgment exists under 28 U.S.C. S1291.

We exercise plenary review as to the correct construction
and legal operation of an insurance policy (see New Castle
County v. Hartford Accident & Indem. Co., 970 F.2d 1267,
1270 (3d Cir. 1994); Pittston Co. Ultramar Am. Ltd. v.
Allianz Ins. Co., 124 F.3d 508, 515 (3d Cir. 1997)). Finally,
the District Court found (Trial Op. 10-11), and neither
party disputes, that Virgin Islands contract law applies to
this case. As such, we both (1) apply Virgin Islands contract
law and (2) exercise de novo review over the District Court's
interpretation of that law (see Chemical Leaman Tank Lines,
Inc. v. Aetna Cas. & Sur. Co., 89 F.3d 976, 983 (3d Cir.
1996)). In doing so we credit the District Court's factual
findings.

Whom Does Zurich's Policy Cover?

As stated earlier, Zurich insists that the Named Insured
provision covers only "FCCU Contractors," a term that does
not encompass Meridian. Even more importantly, that
reading is supported by the uncontradicted testimony of
persons on both sides of the contract itself, as well as the
consistent post-contracting course of dealings between
Zurich and Hess Oil. But relying on the ambiguities of
language and some extrinsic evidence, James asserts that
Meridian is included as a named insured under the policy.
Thus the situation is that both parties to the contract say
that the provision means "X," while a stranger to the
contract--Meridian--says it means "Y."

We agree with the District Court that the Named Insured
provision is ambiguous.11 But any extended (or even brief)
_________________________________________________________________

11. As we have stated, James disputes that in its cross-appeal. But the
issue turns out to be irrelevant to the outcome. As the ensuing
discussion reveals, even if the provision were not ambiguous the parties
to the contract were free to modify its terms, either by express
amendment or by their conduct.
                               9


colloquy on how the extrinsic evidence should be weighed
is entirely unnecessary, because the consistent practical
construction given to that provision by the parties to the
contract controls its terms. As the second of its alternative
rulings, the District Court held that Meridian was covered
under the policy because extrinsic evidence indicated "that
the intent of the parties in negotiating the contract was to
provide coverage for all contractors and subcontractors who
worked on the FCCU project" (Trial Op. 13, emphasis
added). So the District Court cast its searchlight of analysis
solely on the presumed intention of the parties at the time
of contract formation, not at all on how the contracting
parties then proceeded to construe the policy in operation.12

But as Capitol Bus Co. v. Blue Bird Coach Lines, Inc., 478
F.2d 556, 560 (3d Cir. 1973) exemplifies, a basic rule of
contract construction is that "[a] contract must be
interpreted in light of the meaning which the parties have
accorded to it as evidenced by their conduct in its
performance."13 All of the ALI Restatements of the Law (thus
including the Restatement (Second) of Contracts
("Restatement")) have been adopted as definitive sources of
rules of decision by the Virgin Islands Legislature. 14 And
Restatement S201(1) echoes the teachings of Capitol Bus:
_________________________________________________________________

12. For example, the District Court did not credit the testimony of Hess
Oil's current and former controllers because "none of these individuals
had been involved in the negotiation of the policy, and most if not all of
them had not even seen the policy" (Trial Op. 8). Similarly, Talarico's
testimony was discredited in part because "Talarico did not even work
for Hess at the time the policy was negotiated" (id.) In stark contrast,
the
extrinsic evidence produced by James was given greater weight because
it was generated during the policy's negotiation (id. 6-8).

13. See also such cases as Insurance Corp. of Am. v. Dillon, Hardamon &
Cohen, 725 F.Supp. 1461, 1464 (N.D. Ind. 1988), adopting the view that
"where, as here, the insurer and the insureds agree on the interpretation
of a particular provision . . ., their agreement ends the inquiry," and
Pioneer Life Ins. Co. v. Alliance Ins. Co., 374 Ill. 576, 590, 30 N.E.2d
66,
73 (1940) ("Where the terms of an agreement are in any respect
ambiguous and the parties have by their own acts placed a reasonable
construction upon them, their interpretation will be adopted by the
court").

14. V.I. Code Ann. tit. 1, S4 (1999) states:

                               10
       Where the parties have attached the same meaning to
       a promise or agreement or a term thereof, it is
       interpreted in accordance with that meaning.

That same message is conveyed throughout the
Restatement, as in Restatement S202(5)(emphasis added):

       Wherever reasonable, the manifestations of intention of
       the parties to a promise or agreement are interpreted
       as consistent with each other and with any relevant
       course of performance, course of dealing, or usage or
       trade.

Restatement S202, comm. g adds:

       The parties to an agreement know best what they
       meant, and their action under it is often the strongest
       evidence of their meaning. But such "practical
       construction" is not conclusive of meaning. Conduct
       must be weighed in the light of the terms of the
       agreement and their possible meanings. Where it is
       unreasonable to interpret the contract in accordance
       with the course of performance, the conduct of the
       parties may be evidence of an agreed modification or of
       a waiver by one party.

Zurich's and Hess Oil's post-contracting conduct, as
manifested by their consistent administration of the Zurich
policy, was eminently reasonable in practical terms,
whether adopted as a sensible way to resolve the ambiguity
of the Named Insured provision's opaque language (framed
as it was in a way that would fail English Grammar and
Syntax 101), or even if adopted as a sensible course of
dealing instead of what might have been perceived as an
awkward literal meaning of the provision. Either way, the
contracting parties' uniform course of dealing made it clear
that they viewed the policy as covering only contractors and
_________________________________________________________________

       The rules of the common law, as expressed in the restatements of
       the law approved by the American Law Institute, and to the extent
       not so expressed, as generally understood and applied in the United
       States, shall be the rules of decision in the courts of the Virgin
       Islands in cases to which they apply, in the absence of local laws
to
       the contrary.

                                  11


subcontractors that Hess Oil had a contractual obligation
to insure.
Indeed, as the District Court itself noted in its ruling on
the parties' cross-motions for summary judgment
(Summary Judgment Op. 8):

       The affidavits, depositions and other documentation
       submitted by Zurich show that the individuals that
       have administered the insurance policy [at Zurich,
       Amerada Hess and Hess Oil] all agree that Meridian
       would not be covered according to the way that the
       Zurich policy has been administered.

That acknowledgment should really have spelled the end of
the matter. After all, the parties to a contract are free to
define and clarify--or even to change--the contract's terms,
and Zurich and Hess Oil did precisely that by pursuing a
course of conduct consistent with their mutual
understanding of the Named Insured provision.15

Most importantly for the present appeal, suppose that the
District Court were right in its parsing of the original paper
record as indicating that Zurich and Hess Oil had originally
intended to provide coverage for all subcontractors, thus
including Meridian. Even so, their later practical
application of the Named Insured provision in a totally
different fashion must prevail, because Meridian never had
any vested rights in the terms of the policy as originally
written. It is really irrelevant what the extrinsic evidence of
the original contract negotiations may have shown, because
Zurich and Hess Oil remained free to modify the contract's
terms. Restatement S311(2) explains that in the absence of
_________________________________________________________________

15. Citing an opinion from the same District Court in Coakley Bay
Condominium Ass'n v. Continental Ins. Co., 770 F.Supp. 1046, 1050
(D.V.I. 1991), the district judge said "[t]he interpretation of a contract
is
dependant upon the meaning of the language used by the parties to the
contract, and the Court must assume that the parties embodied their
whole intentions in the contract" (Trial Op. 11). That statement ignores
the dictates of the Restatement, approved and adopted as it has been by
the Virgin Islands legislature. As such, the District Court's single-
minded

focus on the perceived intentions of the parties as assertedly embodied
in the language of the contract closed off all inquiry into the
controlling

relevance of the policy's post-contractual administration.

                                12


an explicit provision to the contrary, "the promisor and
promisee retain power to discharge or modify the duty [to
an intended beneficiary] by subsequent agreement." Here
there was certainly no explicit provision in the Zurich policy
to negate that retained power.

At most Meridian (and hence James as its assignee)
could lay claim to benefits under the policy as an intended
third-party beneficiary. And on that score, Restatement
S311(3) lists three vesting events that signal when a
contract may no longer be modified without the consent of
an intended beneficiary:

       Such a power [the one referred to in the preceding
       paragraph's quotation from Restatement S311(2)]
       terminates when the beneficiary, before he receives
       notification of the discharge or modification, materially
       changes his position in justifiable reliance on the
       promise or brings suit on it or manifests assent to it at
       the request of the promisor or promisee.

Without question, no potential third-party rights that
Meridian may assertedly have claimed under the contract
ever vested under any of those alternatives.

First, the record establishes without contradiction that
Meridian never materially changed its position in reliance
on the Zurich policy. It will be remembered that Meridian
purchased its own liability insurance from Companion--
indeed, it was not even aware of any possible coverage
under the Zurich policy until after James had already filed
suit against Meridian.16

Second, Meridian was confronted with Zurich's totally
different (and adverse) view of the policy's coverage before
James (standing in Meridian's shoes via assignment)filed
the present declaratory judgment action. James' initial
action against Meridian cannot of course be considered a
suit on the contract under Restatement S311(3): It was a
_________________________________________________________________

16. At best, as the District Court found (Trial Op. 4), it was only after
James' suit was filed that "Meridian looked for insurance policies that
might cover its liability." At worst, as discussed in n. 4, Meridian never
even knew about any possible coverage under the Zurich policy until
Companion had taken over the James personal injury case.

                               13


personal injury action, not a suit on the contract, and
neither Companion nor Zurich was named as a party in
that case. Finally, it is also beyond dispute that neither
Zurich nor Hess Oil ever requested Meridian's assent to any
promise that it would be covered under the policy (a
promise that was never conveyed to Meridian at all).
In sum, it is clear that the earliest time at which
Meridian could even arguably have claimed any type of
"interest" was the date on which James was injured and
Meridian's liability for that injury arose. Before that date
Zurich and Hess Oil were free to modify the policy's terms
if and to the extent that they desired. And the
uncontroverted record evidence is that even if there had
been any intent, as read into the original policy terms, to
cover subcontractors such as Meridian, that presumed
intent was supplanted by the mutual understanding--
arrived at well before James' injury--that the policy covered
only "FCCU contractors." And the identical result follows if
the contracting parties' course of conduct were to be viewed
as a clarification of ambiguous language. As Federal Ins.
Co. v. Americas Ins. Co., 691 N.Y.S.2d 508, 513 (N.Y. App.
Div. 1999) has put it:

       Moreover, where, as here, the parties themselves
       agreed to clarify the policy

       . . . their agreement will be enforced even if the rights
       of a third party are affected, unless the third party can
       show that it changed its position in reliance upon the
       agreement as originally written.

Any way you slice it, then, the undisputed conduct of the
parties controls the terms of the contract between them,
thus excluding coverage for Meridian.

Zurich and Hess Oil's in-practice application of the policy
likewise torpedoes the District Court's alternative ruling.
Having found that the policy was ambiguous, the District
Court said that extrinsic evidence need not be consulted
because Virgin Islands law mandates that "the
interpretation more favorable to coverage must prevail"
(Trial Op. 12). On that premise, the District Court
summarily ruled that the policy should be construed to
include coverage for Meridian, and hence in James' favor.

                               14


But such generalized doctrines of contract interpretation
must not be applied in a vacuum. Contra proferentem
construction of an ambiguous insurance policy against an
insurer may well come into play where the contract dispute
is between the insurer and its insured, each contending for
a different reading of the insured's coverage under a policy.
But here we are called on to decide a very different
question: whether a third-party entity is entitled to policy
coverage where the contracting parties have agreed on a
negative answer but that third party objects.
Such cases in our Circuit as Rich Maid Kitchens, Inc. v.
Pennsylvania Lumbermens Mut. Ins. Co., 641 F.Supp. 297,
307-08 (E.D. Pa. 1986), aff 'd without published op. 833
F.2d 307 (3d Cir. 1987), and Hodgins v. American Mut.
Liability Ins. Co., 261 F.Supp. 129, 130-31 (E.D.Pa. 1966)
have properly made that very distinction, rejecting the
application of contra proferentem principles in such a
context. Here too there is no "doubt as to what the parties
themselves intended" (the language in Hodgins , id. at 130).17
Hence the District Court was clearly mistaken in applying
the doctrine to Zurich's disadvantage in the matrix of this
case.

It is thus unnecessary to decide the mooted question
whether Virgin Islands law will construe ambiguous policy
language against the insurer when the parties to the policy
have equal bargaining power. But it is worth observing that
the very existence of that exception in many jurisdictions
emphasizes that the doctrine itself is to be employed only in
disputes between parties to an insurance policy, for it is
fundamental that the purpose of judicial interpretation of a
contract is to ascertain the intent of the parties. Where
both parties have equal bargaining power, any judicial
concerns about "take it or leave it" contracts of adhesion
are lessened, and mutual agreement is more readily
assumed. Here the parties to the contract have agreed on
_________________________________________________________________

17. Indeed, James Br. 30 concedes that a policy provision is strictly
construed against the insurer only when it is capable of two reasonable
interpretations--again a proposition based on the differences in
interpretation between an insurer and its insured. Here both parties to
the policy agree on its interpretation, so the principle is inapplicable.

                               15


its terms, and it would subvert freedom of contract
principles to benefit a third party by employing a legal
doctrine--useful merely as an aid to interpretation--that
yields a contrary result.

Conclusion

We apply the Named Insured provision, just as the
contracting parties have in their own practical construction
of that provision, in Zurich's favor regarding the exclusion
of coverage for Meridian. Even if the policy as originally
drafted were to be construed in Meridian's (and hence
James') favor, Meridian's (and hence James') rights as a
third-party beneficiary would not have vested before Zurich
and Hess Oil had established a consistent course of
conduct in administering the policy that excluded coverage
for any subcontractor such as Meridian. Because it is
undisputed that Meridian was not a "FCCU contractor," we
hold that the Zurich policy did not provide coverage for
Meridian as the time of the incident that resulted in James'
injuries.18 We AFFIRM as to the District Court's
determination that the policy provision at issue is
ambiguous (though, as stated earlier, that makes no
difference in the result), and we REVERSE and order the
entry of final judgment in favor of Zurich and against
James.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit
_________________________________________________________________

18. Counsel for James submitted a post-argument letter, obviously
stimulated by questions from our panel during oral argument, raising
the objection that Zurich had not advanced the precise legal position
that we have articulated here. But both before the District Court and on
appeal Zurich has urged that the case should be controlled by the
undisputed evidence demonstrating the uniform post-contract
understanding of the parties to the policy. We see no principled
jurisprudential reason for ignoring the first-year law school contracts
teaching that confirms the correctness of that position.

                               16




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