Justice HECHT delivered the opinion of the Court, in which Justice WAINWRIGHT, Justice MEDINA, Justice GREEN, and Justice GUZMAN joined, and in Parts I and III of which Justice JOHNSON joined.
The parties dispute whether an "all risk" property damage insurance policy provides indemnity for certain expenses incurred in connection with a covered loss. Coverage was negotiated in the London market, and as is customary there, the parties reached agreement by lining through provisions in a form policy. One such provision would have required reimbursement of the disputed expenses, and the question is whether the strike-through reflects the parties' intention that those expenses would not be reimbursed. We agree with the court of appeals that the answer is yes.
In 2002, Offshore Specialty Fabricators, Inc. agreed to construct a drilling platform in the Gulf of Mexico for The Houston Exploration Company. Their contract required Offshore to obtain builder's risk insurance naming Houston as an additional insured. Offshore contacted a local broker, Greg Lary at Lary Insurance Services, Inc., who turned to Lloyd's of London for the insurance.
"Lloyd's began as a coffee house but has developed into one of the world's leading markets for insurance. This market, however, operates in accordance with age-old customs that are, to say the least, unusual in American business law."
As required by Lloyd's, Lary requested an approved London broker, Tysers International Insurance & Reinsurance Brokers, to obtain insurance for Offshore and Houston ("the Assureds"). Tysers negotiated with respondent Wellington Underwriting Agencies Limited as lead for a group of underwriters ("the Underwriters").
The policy terms provided that the Underwriters would indemnify the Assureds for "costs necessarily incurred and duly justified in repair or replacement" of lost or damaged property (¶ 1 a). The cost of hiring vessels, equipment, and labor "used in or about the repair . . . of losses covered by Section I" was also recoverable, as was a reasonable charge for Offshore's "utilis[ing]" its own equipment (¶ 1 d). Other provisions required payment for loss due to governmental action to prevent pollution (¶ 6); certain defective parts (¶ 7); certain salvage charges (¶ 8); and wreckage removal (¶ 11). But five provisions calling for reimbursement of other expenses associated with covered losses were struck through:
Following these terms were almost two pages of exclusions. As altered,
A few weeks later, the drilling platform Offshore was constructing for Houston became unstable, requiring immediate repairs. But work was delayed by severe storms in the Gulf, during which Offshore kept repair vessels standing by so that they could resume repairs as soon as the weather improved. The Assureds submitted a claim for $3,256,174, which included about $1 million for weather stand-by charges. The Underwriters paid $2,034,961, acknowledging that the platform damage was a covered occurrence, but refused to pay for the weather stand-by charges. Paragraph 13, which was struck through in the policy, would have required indemnity for those charges.
The Assureds sued the Underwriters on the policy, and the Underwriters counter-claimed,
(Emphasis in original.) Later, the trial court signed an agreed order for an interlocutory appeal on two questions:
The trial court found these were "controlling questions of law as to which there is substantial ground for difference of opinion", and that "an immediate interlocutory appeal . . . will materially advance the ultimate termination of this litigation".
The court of appeals answered the first question no, thereby mooting the second question.
We initially denied the Assureds' petitions for review
A written contract must be construed to give effect to the parties' intent expressed in the text as understood in light of the facts and circumstances surrounding the contract's execution, subject to the parol evidence rule.
As we have said, "[negotiations of the parties may have some relevance in ascertaining the dominant purpose and intent of the parties embodied in the contract interpreted
The Assureds argue that by deleting requirements that specific kinds of costs be reimbursed, the parties did not intend that the costs not be reimbursed. Rather, they contend, the deletions are completely irrelevant, and the policy must be construed as if the struck-through provisions had not been included in the form in the first place. This not only ignores but distorts the negotiation process. The parties did not try to write a policy from scratch. They took an existing form, deleted some payment requirements and kept others. The purpose of the process was to decide both what costs would be paid by the policy and what costs would not be paid. To see the deletions as irrelevant blinks reality.
We have twice held that deletions in a printed form agreement are indicative of the parties' intent. In Gibson v. Turner, lessors leased all the minerals in 922 acres, even though they owned only an undivided 9/40ths.
In Houston Pipe Line Co. v. Dwyer, landowners claimed that a natural gas pipeline easement had terminated when the defendant removed the existing pipeline and replaced it with a larger one to meet increased demand.
Gibson and Dwyer establish that deletions in a printed form agreement must be considered in construing the other provisions.
The Assureds argue that deletions in a printed form should be treated no differently than deletions in a draft, all evidence of which is omitted from the final agreement. But the law has long recognized that changes in a printed form must be accorded special weight in construing the instrument. The Uniform Commercial Code, for example, provides that handwritten and typewritten terms prevail over contradictory printed terms.
We conclude that the effect of the deletion of paragraph 13 was to remove weather stand-by charges from the costs for which the policy provided indemnity.
The Assureds contend that indemnification for weather stand-by charges is required by policy provisions other than paragraph 13, and that if the deletion of that paragraph is construed as an exclusion, then its effect must be "strictly construed against the insurer and in favor of the insured."
The Assureds argue that payment of weather stand-by charges is required by the policy's general provision that "insures against all risks of physical loss of and/or physical damage to [covered] property". But that provision is expressly "[s]ubject to the terms" that follow in the policy, one of which would have been paragraph 13. Treating its deletion as an exclusion makes it an express exception to the general "all risks" insurance provision.
The Assureds argue that weather stand-by charges are "costs necessarily incurred and duly justified in repair or replacement" of lost or damaged property, which must be paid under paragraph 1a. But weather stand-by charges are not necessarily
The Assureds argue that weather stand-by charges are part of the costs of equipment and labor "used" or "utilise[d]" in repairing covered property under paragraph 1d, but the opposite is true: the charges are for equipment and labor that are standing by, awaiting use when the weather clears. If paragraph 1d covered weather stand-by charges, paragraph 13 would be surplusage in a policy in which it was not struck through, as in this policy.
Finally, the Assureds argue that because the policy provided a deductible for weather standby charges, the charges must have been payable under the policy. But the deductible provision was another part of the printed form. Having struck paragraph 13, the parties might well have struck the deductible provision, but failing to do so simply left it inoperative.
For these reasons, we conclude that the judgment of the court of appeals should be
Affirmed.
Justice JOHNSON filed a concurring opinion.
Chief Justice JEFFERSON filed a dissenting opinion, in which Justice WILLETT and Justice LEHRMANN joined.
Justice JOHNSON, concurring.
I join parts I and III of the Court's opinion and its judgment. I write to explain my view of why the stricken language of paragraph 13 can and should be considered for context.
First, the stricken language of paragraph 13 need not be considered in determining the policy's coverage. As explained in part III of the Court's opinion and by the court of appeals, 267 S.W.3d 277, 283-87, the policy is unambiguous regardless of the presence of the stricken language. The policy provides coverage for repairs and vessels engaged in "or about" repairs; it does not provide coverage for vessels on standby for an extended period of time and not actively preparing for, supporting, or engaged in repairs.
Next, this was not a one-size-fits-all insurance agreement. The insurance contract was negotiated based on Offshore's particular risks. The striking of paragraph 13 and other language from the form policy is an objective reflection of the setting surrounding the creation of the policy; it assists in giving context to how the policy terms were reached through negotiations. See 352 S.W.3d 462 at 474 (Jefferson, C.J., dissenting) (citing 11 RICHARD A. LORD, WILLISTON ON CONTRACTS § 32.7 (4th ed.1999)). The strikings show that the parties negotiating the contract were experienced with the type of coverage being negotiated and that "standby charges" was a term of art reflecting a particular, recognized category of risk. Moreover, the presence of the clause providing a deductible for standby charges does not indicate that the policy covers standby charges as the dissent posits. To the contrary, it indicates the opposite: standby charges were a separate, recognized category of expense. The insuring portions of the policy did not provide coverage
Chief Justice JEFFERSON, joined by Justice WILLETT and Justice LEHRMANN, dissenting.
The Court holds that language manifestly stricken from a contract, and thereby made inoperative by the parties, nonetheless determines the contract's meaning. The Court believes that industry custom controls and that our precedent demands this outcome. But there is no evidence of such a custom, and old precedent, to the extent that it employs inoperative language to interpret a contract, is overwhelmed by modern views of parol evidence. I respectfully dissent.
Based on what it believes to be the custom of the Lloyd's market,
The content of a deleted provision, like the negotiations preceding the contract's execution, is extrinsic and cannot be considered in interpreting the contract. In Sun Oil Co. v. Madeley, 626 S.W.2d 726, 731 (Tex.1981), we made clear that while a court may consider the circumstances surrounding a contract's execution, it could do so only as an aid to the interpretation of the contract's language. Neither surrounding circumstances nor extrinsic evidence may be consulted if they introduce ambiguity, as consideration of paragraph 13 does here. Sun Oil Co., 626 S.W.2d at 732 ("[P]arol evidence is not admissible to render a contract ambiguous. . . ." (quoting Lewis v. E. Tex. Fin. Co., 136 Tex. 149, 146 S.W.2d 977, 980 (1941))). Extrinsic evidence, moreover, may be considered only when the contract's meaning cannot be determined from the text. See Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517, 521 (Tex.1995) (holding that extrinsic evidence may not be introduced where the contract is unambiguous); Sun Oil Co., 626 S.W.2d at 732 (same). The circumstances that a court may consider are limited to the facts constituting the context of the contract's execution, not extrinsic evidence of the negotiations among the parties. Professor Williston explains that the rule permitting consideration of surrounding circumstances should not be read to eviscerate the parol evidence rule by allowing extrinsic evidence; rather, surrounding circumstance "refers to the commercial or other setting in which the contract was negotiated and other objectively determinable factors that give a context to the transaction between the parties"—factors such as the parties' experience, sophistication, and age.
The evidence that Wellington wishes to admit does not provide context for the negotiation and execution of the contract in a way that elaborates on the meaning of the contract's language; rather, Wellington seeks to use language the parties rejected to tell us directly what the contract means. Cf. Fiess, 202 S.W.3d at 745 (noting that we construe contracts according to what they say, "not what . . . insurers thought [they] said"). Paragraph 13 is not evidence of a surrounding circumstance; it is parol evidence, and the Court gives no reason, beyond two old cases that conflict with the spirit of our recent precedent, for why it should be considered here.
When contracting parties strike through proposed language, the stricken language is inoperative. Though the deleted text is legible, we must not summon dead words for live contracts. See 11 LORD, WILLISTON ON CONTRACTS § 32:13 (noting that deletions "manifest[] an unwillingness to be bound according to the deleted terms"). Deleted language is extrinsic to the contract, valid only where the law otherwise permits its consideration. Most other courts considering this issue have reached this conclusion. See, e.g., Gateway Frontier Props., Inc. v. Selner, Glaser, Komen, Berger & Galganski, P.C., 974 S.W.2d 566, 570 (Mo.Ct.App.1998) (noting that the majority of "jurisdictions considering the issue have held that stricken language is extrinsic and may not be resorted to in construing an integrated, unambiguous contract"). In one of the earliest opinions to address the effect of deleted language on contract interpretation, the Supreme Court of South Carolina wrote:
Straub v. Screven, 19 S.C. 445, 449-50 (1883).
Meaning derived from stricken language can never be more than a mere inference—a reading of intent into an action without clear meaning—and thus the Court substitutes guesswork for operative language. The Court believes the words were deleted because the parties rejected their substance. I disagree, as explained below. But even if the Court were right in this case, the intent behind deletions will not always—or even usually—be so clear. Parties delete language because of "an unwillingness to be bound according to the deleted terms." 11 LORD, WILLISTON ON CONTRACTS § 32.13. Why they were unwilling to be bound by those terms—or even whether the parties wished not to be bound by them for the same reason
The contract must be interpreted without reference to the deleted paragraph 13, and coverage for standby charges is otherwise established by the contract's language.
When the deletion is honored as a banishment, there is only one reference to standby charges: a clause stating a deductible for standby charges. Surplusage being strongly disfavored in the interpretation of contracts, this alone is strong evidence of coverage. If standby charges were not covered, what would be the rationale for including the deductible? It is "our duty . . . to give effect to all contract
Coverage becomes more clear when the deductible provision is considered alongside the contract's other provisions. Paragraph 1.a. of the Basis of Recovery section promises indemnification for "installation and all other costs necessarily incurred and duly justified in repair or replacement." Paragraph 1.d. of the Basis of Recovery section provides that in the event of a loss caused by a covered occurrence, with respect to
These clauses provide coverage for weather standby charges. Paragraph 1.a. does not, by its terms, restrict coverage to actual repair costs. Rather, the provision covers all costs that are "necessarily incurred and duly justified" in the course of repairs, even if those costs are not for actual repairs. Here, Houston and Offshore incurred the weather standby costs in the course of the repairs. Though the immediate cause of the charges was the weather, it is apparent that they were in fact incurred as a result of the covered occurrence—the vessels put on standby were hired to perform covered repairs, but the weather intervened. These vessels, while on standby, continued to be hired for the purposes of repair. Absent clearer exclusionary language in the contract, the standby charges are necessarily incurred and duly justified.
Paragraph 1.d. supports this conclusion. It has two relevant clauses. The first deals with hired vessels "used in or about the repair." Wellington narrowly defines the term "about" and argues that this provision restricts indemnification to costs associated with the use of the vessels while
The second clause of paragraph 1.d. indemnifies the Assureds for hire costs related to boats owned by the Assured and "utilise[d] . . . for" repairs. Because most of the standby charges at issue are related to vessels owned by Offshore, this provision is especially relevant. As with the previous clause, the contract's language here does not limit indemnification to the vessel's expenses while actually engaged in repairs. Crucially, the preposition changes from the previous sentence. There, the parties wrote "used in"—implying actual repairs costs—while here it is "utilized for." Like "about," the use of "for" broadens the coverage, indicating that indemnification should include costs incurred with regard to those vessels while they are generally engaged in repair-related activities, even if they are not actively making repairs. Here, Offshore's vessels were being "utilise[d] . . . for" repairs to the platform when the storms forced them to quit. While the storms passed, Offshore and Houston kept those vessels on standby, ensuring their continued availability when repairs could recommence. As such, even as they waited out the storms, the vessels continued to be used for the repairs. Indeed, waiting on standby was their use, meant to ensure that repairs continued with haste.
Thus, standby charges are covered under the contract.
The Lloyd's process is odd and opaque. Even after extensive discovery, it remains unclear how the insurance contract came into being or to what extent its language was accepted by the parties. Taking into account language that was removed from a contract, and trying to read the record of the negotiations, only confuses things. Here, there is a deletion and a failure to delete; there are changed stories; there are conflicting explanations. This is not clear evidence of noncoverage because it is clear evidence of nothing. Considering this extraneous information inhibits rather than enhances clarity, and it makes our interpretive task more difficult. The Court should not have gone down this road in Gibson or Dwyer, and the Court should not compound its mistake today.
We interpret language, not its absence. The expressive content of an act of deletion will frequently be indeterminate; here, it could have been intended to remove coverage, remove redundancy, or remove a sublimit. Deleted language is therefore best regarded as extrinsic evidence, inadmissible for the purposes of varying or contradicting the language of an unambiguous contract. Accordingly, I respectfully dissent.
Or perhaps paragraph 13's deletion removed a sublimit, as the brokers argued to the Underwriters. To this the Court again says no, writing that "the way to delete the [sublimit] was to strike the introductory phrase" rather than the whole paragraph. 352 S.W.3d at 472 (emphasis added). The way: in the Court's opinion, there could be no other way to remove a sublimit.