Recently, the Arizona Court of Appeals, Division Two, revisited the “reasonably susceptible” analysis in determining whether to consider parol evidence to interpret a contract. In Donsen v. Farmers Insurance, No. 2 CA-CV 2017-0174 (October 3, 2018), plaintiff Samuel Donsen (“Donsen”) filed a complaint against Farmers Insurance (“Farmers”) claiming breach of contract, declaratory relief, insurance bad faith, and interference with contract. Donsen filed the lawsuit after suffering injuries in an automobile accident in which he incurred approximately $22,000 in medical expenses. A portion of his medical expenses were paid by workers’ compensation benefits. Donsen also recovered $15,000 from the third-party tortfeasor and, pursuant to A.R.S. § 23-1203(D), was required to reimburse his workers’ compensation insurer in the amount of $8,750.

The Insurance Policy

Insured by Farmers, Donsen’s policy had a “medpay” provision that provided coverage for injuries sustained in an automobile accident. The policy also contained an exclusion for “bodily injury” that “occurred during the course of employment if workers’ or workmen’s compensation benefits are required.” Donsen submitted a claim for medical bills that Farmers denied. Donsen filed the lawsuit. Farmers filed a motion to dismiss the complaint asserting the medpay claim was properly denied under the exclusion. The trial court granted the motion holding the exclusion was unambiguous. Donsen timely appealed.

Considering Parole Evidence to Interpret the Policy

On appeal, Donsen argued the trial court erred in granting the motion to dismiss because it did not consider other factors including the intent of the parties, public policy considerations, and extrinsic evidence. The Court of Appeals affirmed the trial court’s ruling finding the language of the exclusion was not “reasonably susceptible” to Donsen’s interpretation.

In arriving to its ruling, the Court of Appeals identified the sole issue on appeal as whether the policy exclusion language providing for no coverage when “workmen’s compensation benefits are required” apply if the injured worker has recovered from a third-party tortfeasor and reimbursed the employer’s insurer for workers’ compensation benefits pursuant to A.R.S. § 23-1203(D).

In determining whether to consider Donsen’s parol evidence argument when interpreting a contract, a “judge first considers the offered evidence and, if he or she finds that contract language is ‘reasonably susceptible’ to the interpretation asserted by its proponent, the evidence is admissible to determine the meaning intended by the parties.” (Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 154 (1993).).

The Court of Appeals cited Bailey v. Interinsurance Exchange, 122 Cal. Rptr. 508 (App. 1975), as instructive and applicable to the subject matter. In Bailey, the policy exclusion stated “This policy does not apply to bodily injury sustained by any person if benefits therefor are in whole or in part either payable or required to be provided under any Workmen’s Compensation Law.” (Id. at 509.). The court ruled the policy exclusion applied because “the additional language ‘required to be provided under any workmen’s compensation law’ creates an exclusion which is susceptible of only one reasonable and logical interpretation.” (Id.).

The Court of Appeals agreed with Donsen that it must “interpret an insurance policy according to its plain and ordinary meaning, examining it from the viewpoint of an individual untrained in law or business.” (Desert Mountain Props. Ltd. P’ship v. Liberty Mut. Fire Ins. Co., 225 Ariz. 194 (App. 2010).). Unfortunately for Donsen, the Court of Appeals ruled he failed to explain why the average insurance consumer would attribute any other interpretation of the exclusion other than the facially plain meaning of the provision at issue, or how the language of the contract supports his interpretation.

Recommendations for Reasonably Susceptible Interpretations

When considering whether policy coverage is applicable, it is important to examine the exclusion language and determine whether the language is “reasonably susceptible” to a different interpretation. If so, be prepared to provide sufficient evidence to support your interpretation.

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