9th Circuit confirms use of extrinsic evidence in interpreting insurance policies

Insurance coverage disputes always start with questions about the interpretation of insurance policies. Despite decades of court decisions explaining the governing principles, differences persist in how to approach interpretation. One key question is whether and when extrinsic evidence can be considered.

The California Supreme Court addressed this issue nearly 60 years ago, saying, "A rule that would limit the determination of the meaning of a written instrument to its four-corners merely because it seems to the court to be clear and unambiguous, would either deny the relevance of the intention of the parties or presuppose a degree of verbal precision and stability our language has not attained," holding that "rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties." Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 69 Cal. 2d 33, 37 (1968) ("PG&E"). See Town v. Eisner, 245 U.S. 418, 425 (1918) ("A word is not a crystal, transparent and unchanged, it is the skin of a living thought and may vary greatly in color and content according to the circumstances and the time in which it is used."). Therefore, the court held, "rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties." (footnote omitted).

Since then, courts consistently have held that extrinsic evidence must be at least provisionally considered. See, e.g., So. Pac. Land Co. v. Westlake Farms, Inc., 188 Cal. App. 3d 807, 817 (1987) (reversible error not to permit plaintiffs to submit extrinsic evidence in support of their interpretation); Aragon-Haas v. Family Sec. Ins. Servs., 231 Cal. App. 3d 232, 238 (1992) (reversible error to interpret contract without allowing plaintiff to introduce extrinsic evidence of her interpretation); So. Pac. Transp. Co. v. Santa Fe Pac. Pipelines, Inc., 74 Cal. App. 4th 1232, 1235 n.2 (1999) (trial court erred in refusing to consider extrinsic evidence). The court may reject the provisionally accepted extrinsic evidence only if it is offered to prove a meaning to which the contractual language is not reasonably susceptible. Bionghi v. Metro. Water Dist., 70 Cal. App. 4th 1358, 1369 (1999) (after preliminary consideration, trial court properly excluded proffered evidence that did not support reasonable interpretation).

The California Supreme Court has continued to recognize the importance of allowing a party to develop and offer extrinsic evidence to support its interpretation of a policy. See, e.g., Another Planet Ent., LLC v. Vigilant Ins. Co., 15 Cal. 5th 1106, 1117 (2024) ("The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to provide a meaning to which the language of the instrument is reasonably susceptible."); Yahoo Inc. v. Nat'l Union Fire Ins. Co., 14 Cal. 5th 58, 72-73 (2022) (because manuscript endorsement's "disputed coverage language under review is standard form language adopted verbatim from insurer-drafted policies," "the insured ... cannot be charged with creating the ambiguity that led to the dispute, and therefore it is appropriate for courts to interpret any unresolvable ambiguities in [its] favor").

The 9th Circuit has now revisited the use of extrinsic evidence in interpreting insurance policies. In County of San Bernardino v. Insurance Co. of Pennsylvania, 174 F.4th 597 (9th Cir. 2026), the county and the insurer disagreed over what limits applied to costs incurred in remediating environmental damage at an airport. "The County claims that ICSOP is liable for all property damage up to $9 million per occurrence, while ICSOP argues that it is liable only for damages up to $9 million per year in the aggregate." The court concluded that the policies "do not specify an aggregate limit for property damage. In doing so, it characterized the language as "'not just ambiguous, but nearly incoherent.'" Given the ambiguity, the court applied the principles governing the interpretation of ambiguous language. It started with the notion that extrinsic evidence is to be provisionally considered, relying on PG&E's instruction that "[t]he test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the instrument is reasonably susceptible."

The court then emphasized that "it is reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court's own conclusion that the language of the contract appears to be clear and unambiguous on its face. Even if a contract appears unambiguous on its face, a latent ambiguity may be exposed by extrinsic evidence which reveals more than one possible meaning to which the language of the contract is yet reasonably susceptible.'" (quoting Morey v. Vannucci, 64 Cal. App. 4th 904, 912 (1998)).

The 9th Circuit also rejected the insurer's argument that once policy language has been interpreted by a court, it is no longer ambiguous. "[A] provision that is ambiguous does not become unambiguous once a court construes it, except as to those policies entered into after the decision."  Because "the most important question of intent is 'at the time the contract is formed,' a post-contract judicial decision 'could not have informed the parties' understanding' of the policy." (citation omitted).

It also said that before a court concludes that a prior judicial construction renders an ambiguous provision unambiguous as a matter of law, it must "determine whether the context in which the construed term appears is analogous to the context of the term before it."

The court then considered extrinsic evidence, including the insurance industry's drafting of general liability policies and secondary authorities. It also considered the insurer's understanding of the policies, as reflected in internal documents showing how the insurer's employees interpreted the policies. It said: "These documents provide an interesting window into the internal workings at ICSOP. We need not explore the weight of this evidence. At the very least, what they demonstrate is that reasonable people--including employees at ICSOP--could read these policies as the County has." It cited two California cases in support. See Glenfed Dev. Corp. v. Superior Court, 53 Cal. App. 4th 1113, 1118 (1997) (considering insurer's claims manual); North Counties Eng'g, Inc. v. State Farm Gen. Ins. Co., 224 Cal. App. 4th 902, 922-23 (2014) (considering claims adjuster's opinions).

Thus, the 9th Circuit confirmed that if parties offer extrinsic evidence to support their interpretation of an insurance policy, a court must at least provisionally consider that evidence. Equally important, the court confirmed that the drafting history of insurance policies, secondary commentary and the opinions of an insurer's employees can be considered.