Royal Ins Co of Amer v. KSI Trading Corp

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit

4-16-2009

Royal Ins Co of Amer v. KSI Trading Corp
Precedential or Non-Precedential: Precedential

Docket No. 06-3447

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 PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 06-3447 and 07-3824

ROYAL INSURANCE COMPANY OF AMERICA

v.

KSI TRADING CORPORATION;
ASTRO AUTOMOTIVE, INC.

JAMES BARRETT; JEFFREY JOINER;
THE LIG INSURANCE AGENCIES,

Third-Party Defendants

KSI Trading Corporation; Astro Automotive, Inc.,
James Barrett, Jeffrey Joiner,
The LIG Insurance Agencies,

Appellants, No. 06-3447

KSI Trading Corporation; Astro Automotive, Inc.,
The LIG Insurance Agencies,

Appellants, No. 07-3824
 On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 04-cv-00867)
District Judge: Honorable Dennis M. Cavanaugh

Argued January 6, 2009
Before: FUENTES and FISHER, Circuit Judges,
and PADOVA,* District Judge

(Filed: April 16, 2009)

Kenneth R. Rothschild (Argued)
Golden, Rothschild, Spagnola,
Lundell, Levitt & Boylan
1011 Route 22 West, Suite 300
P.O. Box 6881
Bridgewater, NJ 08807
Attorney for Appellants

James F. Campise
David Y. Loh (Argued)
Cozen & O'Connor
45 Broadway Atrium, Suite 1600
New York, NY 10006
Attorneys for Appellee

*
Honorable John R. Padova, Senior United States District
Judge for the Eastern District of Pennsylvania, sitting by
designation.

2
 OPINION OF THE COURT

FISHER, Circuit Judge.

This appeal calls for the interpretation of a Marine Open
Cargo insurance policy (the Policy) entered into by KSI Trading
Corporation (KSI) and Royal Insurance Company of America
(Royal). A fire occurred at one of KSI’s warehouses, and KSI
filed a reimbursement claim with Royal for the full extent of its
loss pursuant to a Warehouse Storage Insurance section of the
Policy. Royal disclaimed coverage for a significant portion of
the loss, asserting that the Warehouse Storage Insurance section
did not cover KSI’s domestically acquired merchandise.
Thereafter, Royal sought a declaratory judgment in the District
Court that it was not obligated to indemnify KSI for all of its
loss. The District Court determined that the Warehouse Storage
Insurance section of the Policy only provided coverage for
KSI’s internationally acquired merchandise and granted
summary judgment in favor of Royal. We conclude that the
Policy is ambiguous with respect to the property that was
insured while stored in KSI’s warehouse, and because New
Jersey law, which governs the interpretation of the Policy,
requires ambiguities to be resolved in favor of the insured, we
will reverse the District Court and enter judgment in favor of
KSI.

3
 I.

KSI, a New Jersey corporation, is a wholesale distributor
of after-market auto body parts that purchases inventory from
both domestic and international suppliers, and stores its
inventory in warehouses located throughout the United States.
Royal, an Illinois corporation, is a marine cargo underwriter
which provides insurance for the hazards encountered in
maritime transportation. On May 19, 1999, Royal provided
quotations for insurance coverage to KSI’s broker, Jeffrey Joiner
of the LIG Insurance Agencies (LIG), and on July 1, 1999,
Royal and KSI entered into an insurance contract, with coverage
commencing at this time. Certain subsidiaries of KSI, including
Astro Automotive, Inc. (Astro), were also covered by the Policy.
Sometime after July 1, 1999, KSI received the actual Marine
Open Cargo Policy No. POC102991.

The Policy contained three sections, which are titled as
follows: (I) Ocean Cargo; (II) Domestic Transportation
Insurance; and (III) Warehouse Storage Insurance. The Ocean
Cargo section of the Policy is comprised of fifty-one paragraphs,
but in one particularly relevant paragraph, entitled “Property
Insured & Insurable Interest,” states:

“This Policy covers, for account of whom it may
concern, shipments of lawful goods and
merchandise consisting principally of:

MERCHANDISE INCIDENTAL
TO THE ASSURED’S

4
 BUSINESS, CONSISTING
PRINCIPALLY OF
AUTOMOBILE PARTS

Under or on deck, consigned to or shipped by
others for account or control of the Assured or in
which the Assured has the risk of loss, but
excluding shipments either sold or purchased by
the Assured subject to the terms of sale (or
purchase) whereby the Assured is not obligated to
furnish Ocean Marine insurance.
Notwithstanding the foregoing, this Policy also
covers all shipments of lawful goods and
merchandise for the account of others from whom
the Assured has received written instructions to
insure provided such instructions are received
prior to any known or reported loss, damage, or
accident and prior to sailing of the vessel.”

In another particularly relevant paragraph, with the caption
“Geographical Limits,” the Ocean Cargo section also states:

“Always excepting adventures which are illegal
under the laws of the United States this Policy
covers Property Insured at and from ports and/or
places in the world to ports and/or places in the
world excluding shipments originating in the
United States (meaning the forty-eight (48)
contiguous states and the District of Columbia) or
Canada for shipment to destination[s] in the
Continental United States or Canada.”

5
 Turning to Sections II and III of the Policy, the Domestic
Transportation Insurance section states, in pertinent part:

“Effective as to all shipments made on or after
July 1, 1999 this Policy is hereby extended,
subject to its terms and conditions, to cover
shipments of the Property Insured while in due
course of transit only at the risk of the assured
WORLDWIDE excluding the former Soviet
Union and Russian Federation from the time the
property leaves the store, warehouse, or factory at
initial point of shipment and continuously
thereafter, including while on docks, wharves,
piers, bulkheads, depots, stations or platforms;
until delivered at store, warehouse or factory at
destination.”

Lastly, the Warehouse Storage Insurance section states, in
relevant part:

“It is understood and agreed that, subject to all
terms and conditions which do not conflict with
the provisions set forth herein, this Policy is
extended to cover property insured under Section
I which is the property of the Assured or the
property of others from whom the Assured has
written instructions to insure while temporarily

6
 stored in warehouses at locations listed in the
attached Schedule.”1

Additionally, Sections II and III both provide that “[n]othing
herein contained shall be held to vary, waive, alter or extend any
of the terms, conditions, declarations or agreements of the
Policy other than as expressly stated in this Coverage Section.”
The Policy renewed automatically on an annual basis.

On April 1, 2003, a fire occurred at KSI’s warehouse in
Franklin, Massachusetts resulting in a significant loss of KSI’s
inventory.2 At that time, Astro was a leasehold tenant of the
Franklin warehouse and was using it to store inventory. KSI
submitted a claim to Royal for its loss of inventory pursuant to
the Warehouse Storage Insurance section of the Policy. KSI
claimed that the inventory destroyed or ruined by the fire was in
excess of the $2.5 million limit scheduled for the Franklin
warehouse. On March 9, 2004, in a written notice, Royal
disclaimed coverage for the portion of the loss attributable to
KSI’s domestically acquired merchandise. Instead, Royal
agreed to reimburse KSI in the amount of $768,766.10 – which
was Royal’s estimate of the net value of the internationally

1
The Schedule listed eleven locations by name and also
provided coverage for unnamed locations within the continental
United States. Among the expressly named locations was a
warehouse in Franklin, Massachusetts. The amount of coverage
for this warehouse was limited to $2.5 million.
2
Subsequent to the fire, the parties cancelled the Policy,
effective July 1, 2003.

7
acquired merchandise that was lost in the fire – minus salvage
and a $5,000 deductible. KSI maintained that it was entitled to
reimbursement from Royal for the full extent of its loss, up to
the Policy’s $2.5 million limit.

On February 24, 2004, Royal filed a Complaint in the
District Court seeking a declaratory judgment against KSI and
Astro (collectively KSI) with respect to its indemnification
obligations. KSI filed an Answer in which it asserted
counterclaims against Royal for breach of contract, fraud, unjust
enrichment, and bad faith. KSI also filed a Third Party
Complaint against LIG, Joiner, and one other named individual
(collectively LIG). Subsequently, KSI filed an Amended
Answer and Amended Counterclaims, which included
counterclaims for breach of the implied covenant of good faith
and fair dealing, reformation based on fraud, and reformation
based upon mutual mistake.

On June 13, 2005, Royal filed a motion for summary
judgment against KSI seeking a declaration that the Warehouse
Storage Insurance section of the Policy only covered goods that
originated overseas and did not cover goods that originated
domestically. KSI cross-moved against Royal for summary
judgment on its counterclaim for breach of contract on the
ground that no genuine issue of material fact existed with
respect to Royal’s obligation to reimburse KSI for all of the loss
it incurred as a result of the warehouse fire (up to the Policy
limits).

On February 17, 2006, the District Court granted
summary judgment in favor of Royal and denied it as to KSI,
finding that the Policy only provided warehouse coverage for

8
internationally acquired merchandise. Consequently, the
District Court found that, under the plain language of the Policy,
Royal had no obligation to indemnify KSI for the loss of its
domestically acquired merchandise that resulted from the
warehouse fire. The District Court also dismissed KSI’s claims
for breach of contract.

As a result of clerical error, the case was listed as
“terminated” on the District Court’s docket; however, because
KSI’s counterclaims for reformation were not the subject of any
party’s motion for summary judgment, KSI and LIG filed a
motion to reinstate the counterclaims. On June 19, 2006, the
District Court amended its Decision and Order to clarify that the
reformation counterclaims remained viable. Subsequently,
Royal moved for summary judgment on these two remaining
counterclaims, and KSI filed an opposition to the motion. On
August 22, 2007, the District Court granted Royal’s motion for
summary judgment and entered its order the next day, thus
rendering a final judgment.

KSI timely appealed from the District Court’s Decision
and Order of February 17, 2006, as amended by the Decision
and Order of June 19, 2006, and from the District Court’s
Decision and Order entered August 23, 2007.3

II.

3
Although LIG joined in the Notice of Appeal, according
to KSI and LIG, on October 5, 2007, after the notice was filed,
they stipulated to a discontinuance of KSI’s third-party action
against LIG.

9
 The District Court had diversity jurisdiction over this
matter pursuant to 28 U.S.C. § 1332(a)(1). We have jurisdiction
over the appeal pursuant to 28 U.S.C. § 1291. Our review of a
district court’s grant of summary judgment is plenary. Pittston
Co. Ultramar Am. Ltd. v. Allianz Ins. Co., 124 F.3d 508, 515 (3d
Cir. 1997). Summary judgment is appropriate if “there is no
genuine issue as to any material fact and . . . the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c).
“In making this determination, we must consider the evidence
in the record in a light most favorable to the nonmoving party.”
Pittston Co. Ultramar Am. Ltd., 124 F.3d at 515 (citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). We
exercise “plenary review over a district court’s interpretation of
state law, as well as its conclusion as to the legal operation of an
insurance policy.” Id. (internal citation omitted). Determining
whether ambiguity exists in an insurance policy is a question of
law subject to plenary review. Id. at 520.

III.

The central issue on appeal is whether the Marine Open
Cargo insurance policy, issued to KSI by Royal, covered KSI’s
domestically acquired merchandise while it was stored in KSI’s
Franklin warehouse. As an initial matter, maritime contracts are
governed by federal admiralty law when there is an established
federal rule, but absent such a rule, state law applies. Wilburn
Boat Co. v. Fireman’s Fund Ins. Co., 348 U.S. 310, 313-14, 321
(1955); see also Pittston Co. v. Allianz Ins. Co., 795 F. Supp.
678, 689 n.10 (D.N.J. 1992) (“[I]n the absence of a controlling
federal statute or an established rule of general maritime law,
state law governs the scope and validity of contracts of marine
insurance.”). Because there is no applicable federal rule

10
governing the construction of the Policy at issue in the present
case, state law applies, and the parties do not dispute that New
Jersey law is the relevant body of law for this purpose.

Under New Jersey law, an insurance policy “‘is simply
a contract and its provisions should, of course, be construed as
in any other contract.’” Pennbarr Corp. v. Ins. Co. of N. Am.,
976 F.2d 145, 151 (3d Cir. 1992) (quoting Caruso v. John
Hancock Mut. Life Ins. Co., 57 A.2d 359, 360 (N.J. 1948)). As
is the case with other types of contracts, an insurance policy “is
to be governed by its own terms without recourse to other
documents unless its own language so requires.” Herbert L.
Farkas Co. v. N.Y. Fire Ins. Co., 76 A.2d 895, 897 (N.J. 1950).
In the absence of any ambiguity, the terms of an insurance
policy should “be given their plain, ordinary meaning.”
Zacarias v. Allstate Ins. Co., 775 A.2d 1262, 1264 (N.J. 2001);
see Bd. of Ed. of Florham Park v. Utica Mut. Ins. Co., 798 A.2d
605, 610 (N.J. 2002) (“In the absence of any ambiguity, courts
should not write for the insured a better policy of insurance than
the one purchased.” (internal quotation marks omitted)); Kampf
v. Franklin Life Ins. Co., 161 A.2d 717, 720 (N.J. 1960) (“When
the terms of an insurance contract are clear, it is the function of
a court to enforce it as written and not to make a better contract
for either of the parties.”).

Ambiguity exists “where the phrasing of the policy is so
confusing that the average policyholder cannot make out the
boundaries of coverage.” Weedo v. Stone-E-Brick, Inc., 405
A.2d 788, 795 (N.J. 1979). New Jersey caselaw “does not
require that we credit every conceivable deconstruction of
contractual language,” but rather instructs that “the ‘doctrine of
ambiguity’ should be invoked only to resolve ‘genuine’

11
ambiguities, not ‘artificial’ ambiguities created by ‘semantical
ingenuity.’” A & S Fuel Oil Co. v. Royal Indem. Co., 652 A.2d
1236, 1237-38 (N.J. Super. Ct. App. Div. 1995) (quoting Weedo,
405 A.2d at 795). Determining whether genuine ambiguity is
present in an insurance policy requires interpreting the policy
“as a whole, by giving a reasonable meaning to its form and
cast.” Arrow Indus. Carriers, Inc. v. Continental Ins. Co. of
N.J., 556 A.2d 1310, 1314 (N.J. Super. Ct. App. Div. 1989).

Where genuine ambiguity exists, such that “the
controlling language will support two meanings, one favorable
to the insurer, and the other favorable to the insured, the
interpretation sustaining coverage must be applied.” Mazzilli v.
Accident & Cas. Ins. Co. of Winterthur, Switz., 170 A.2d 800,
803 (N.J. 1961); see Customized Distribution Servs. v. Zurich
Ins. Co., 862 A.2d 560, 564 (N.J. Super. Ct. App. Div. 2004)
(“[I]f an insurance policy’s terms are capable of supporting two
distinct outcomes as to whether there is coverage, the subject
language must be interpreted in favor of the insured.”). In an
effort to avoid subjecting insureds “to technical encumbrances
or to hidden pitfalls . . . policies should be construed liberally in
their favor to the end that coverage is afforded to the full extent
that any fair interpretation will allow.” Meier v. N.J. Life Ins.
Co., 503 A.2d 862, 870 (N.J. 1986) (internal quotation marks
omitted). Moreover, when the issue of ambiguity arises from an
“exclusion or exception, designed to limit the protection, a strict
interpretation is applied.” Mazzilli, 170 A.2d at 804.

Therefore, if the insurance policy’s language is
“insufficiently clear to justify depriving the insured of her
reasonable expectation that coverage would be provided,” the
policy must be interpreted in favor of the insured. Sparks v. St.

12
Paul Ins. Co., 495 A.2d 406, 413 (N.J. 1985); see Zacarias, 775
A.2d at 1264 (“When there is ambiguity in an insurance
contract, courts interpret the contract to comport with the
reasonable expectations of the insured.”). The rationale
underlying the principle (referred to as contra proferentem) that
ambiguities in insurance contracts should be resolved in favor
of the insured “is that because most insurance agreements are
drafted by the insurance industry, they are essentially contracts
of adhesion.” Pittston Co. Ultramar Am. Ltd., 124 F.3d at 520
(citing Meier, 503 A.2d at 869). This rationale has less force
when it is applied to “a sophisticated insured” who has
participated in the drafting process. Id. at 521 (citing Owens-
Illinois, Inc. v. United Ins. Co., 650 A.2d 974, 991 (N.J. 1994)).

Against this backdrop, KSI argues that the Policy
provided warehouse coverage for “property insured,” which, as
defined in Section I of the Policy, means “merchandise
incidental to the assured’s business, consisting principally of
automobile parts,” and by its terms included all of KSI’s
merchandise, regardless of its origin. In the alternative, KSI
contends that the Policy should be reformed under equitable
principles. In contrast, Royal argues that Section I of the Policy
only provided coverage for the transportation of international
cargo because, in addition to the language cited by KSI, Section
I contains a paragraph on geographical limitations which
excludes from coverage any merchandise that originated and
remained in the United States or Canada. Confronted with these
conflicting interpretations, we begin our own analysis with the
plain language of the Policy’s terms to determine if a genuine
ambiguity exists. See A & S Fuel Oil Co., 652 A.2d at 1237.

13
 Paragraph 1 of the Warehouse Storage Insurance section
states:

“It is understood and agreed that, subject to all
terms and conditions which do not conflict with
the provisions set forth herein, this Policy is
extended to cover property insured under Section
I . . . while temporarily stored in warehouses at
locations listed in the attached Schedule.”

This section of the Policy does not independently identify the
property to which it extends insurance coverage, but it does
provide a cross-reference to Section I. Thus, in order to
understand which property is insured while temporarily stored
in KSI warehouses, we are directed to look to the Ocean Cargo
section of the Policy.

Turning to this section, although the term “property
insured” is never clearly defined, paragraph 3, which is
captioned “Property Insured & Insurable Interest,” certainly
suggests a definition for this term when it states:

“This Policy covers, for account of whom it may
concern, shipments of lawful goods and
merchandise consisting principally of:

MERCHANDISE INCIDENTAL
TO THE ASSURED’S
BUSINESS, CONSISTING
PRINCIPALLY OF
AUTOMOBILE PARTS

14
 Under or on deck, consigned to or shipped by
others for account or control of the Assured in
which the Assured has the risk of loss, but
excluding shipments either sold or purchased by
the Assured subject to the terms of sale (or
purchase) whereby the Assured is not obligated to
furnish Ocean Marine insurance. . . .”

Notwithstanding the fact that the words “property insured” are
never used in this passage, the use of all capital letters and
offsetting text, coupled with the caption “Property Insured and
Insurable Interest,” is a strong indication that “property insured”
is best understood to mean “merchandise incidental to the
assured’s business, consisting principally of automobile parts.”

Accepting this as the most plausible definition of
“property insured” and applying it to Section III would result in
finding that any and all of KSI’s merchandise (consisting
principally of automobile parts) was insured while temporarily
stored in one of KSI’s warehouses, regardless of whether this
property originated in the United States or overseas. Under this
interpretation, the losses to domestic inventory which KSI
incurred during the Franklin warehouse fire would have been
covered by the Policy and Royal would be obligated to
indemnify KSI (up to the limits set forth in the Policy) for these
losses.

However, the wording of the Warehouse Storage
Insurance section does not clearly indicate whether we are
looking for a definition of “property insured” in Section I or
whether we are looking to determine the scope of the property
that is insured under Section I. If the latter is the proper inquiry,

15
our analysis is quite different, because even within paragraph 3
of Section I, which contains the purported definition of
“property insured,” we are able to locate language that narrows
the scope of the property covered by this section. For example,
paragraph 3 begins by stating that the “Policy covers . . .
shipments of lawful goods and merchandise,” and thereby
suggests that only property in transit is insured under the Policy.
Paragraph 3 also refers to merchandise that is “[u]nder or on
deck,” suggesting that the property insured under Section I of
the Policy is further limited to marine cargo transported by sea.

Moreover, paragraph 5 of Section I suggests additional
limitations on the scope of the property that is insured.
Specifically, it states: “[T]his Policy covers Property Insured at
and from ports and/or places in the world to ports and/or places
in the world excluding shipments originating in the
[Continental] United States . . . or Canada for shipment to
destination[s] in the Continental United States or Canada.” By
its terms, this paragraph indicates that the property covered
under Section I of the Policy is limited to merchandise that
traveled overseas. Transferring this understanding of the
property that is insured under Section I into Section III suggests
that coverage does not extend to domestically acquired
merchandise that is temporarily stored in a KSI warehouse.
Consequently, Royal would not be obligated to reimburse KSI
for the losses it suffered to its domestic inventory.

As this analysis of the plain language demonstrates, the
Policy is “capable of supporting two distinct outcomes as to
whether there is coverage,” Customized Distribution Servs., 862
A.2d at 564, and therefore indicates that a genuine ambiguity
exists. Nonetheless, because we are instructed to “give effect to

16
the whole policy, not just one part of it,” Arrow Indus. Carriers,
Inc., 556 A.2d at 1315, we will also consider the Domestic
Transportation Insurance section, which constitutes the
remainder of the Policy. Although this section refers to
“Property Insured,” it does not contain a definition for this term,
thus suggesting that the meaning must be located elsewhere in
the Policy. But if “property insured” is limited to imported
inventory by operation of paragraph 5 of Section I, this would
severely undermine Section II of the Policy, which expressly
provides coverage to KSI’s inventory during domestic transport.
Although not inconceivable that the Domestic Transportation
Insurance section only covered international merchandise, this
more limited definition of “property insured” produces an odd
result in the context of this section and seems unlikely to
accurately reflect the intended scope of coverage. At the very
least, a review of Section II does not help to clarify what
“property insured” means or whether domestic merchandise was
covered while temporarily stored in KSI’s warehouses.

Therefore, after reviewing the plain language of the entire
Policy, our confusion regarding the boundaries of coverage
remains, and we are compelled to conclude that the Policy
contains a genuine ambiguity as to whether domestically
acquired merchandise was insured while temporarily stored in
KSI’s warehouses. See Weedo, 405 A.2d at 795 (“We conceive
a genuine ambiguity to arise where the phrasing of the policy is
so confusing that the average policyholder cannot make out the
boundaries of coverage.”). As a result of this genuine
ambiguity, we must construe the Policy “liberally in [the
insured’s] favor to the end that coverage is afforded to the full
extent that any fair interpretation will allow.” Meier, 503 A.2d
at 870 (internal quotation marks omitted). Our analysis of the

17
Policy resulted in two plausible interpretations of the scope of
warehouse coverage – either all of KSI’s merchandise,
regardless of geographical origin, was insured while temporarily
stored in warehouses based on the unrestricted definition of
“property insured” located in paragraph 3 of Section I, or only
KSI’s merchandise which was transported overseas, as opposed
to solely within the United States and Canada, was insured while
temporarily stored in warehouses based on the geographical
limitations contained in paragraph 5 of Section I and other
limiting language within the section.

Because both of these interpretations represent a fair
reading of the terms of the Policy, New Jersey law requires that
we adopt the more liberal construction and err in favor of
finding coverage for the insured. See Mazzilli, 170 A.2d at 803;
Meier, 503 A.2d at 870. Although the rationale for applying the
principle of contra proferentem and construing ambiguities in
favor of the insured may be less persuasive because KSI is a
corporate entity and was represented by an insurance broker
who made arrangements with Royal for the insurance coverage,
neither KSI nor LIG actually participated in drafting the Policy,
and therefore New Jersey law still calls for us to interpret the
Policy so as to resolve ambiguities in favor of the insured. See
Pittston Co. Ultramar Am. Ltd., 124 F.3d at 521. Accordingly,
we conclude that the Policy should be construed to provide
coverage to KSI for all of its inventory, whether of domestic or
international origin, while it was temporarily stored in KSI’s
Franklin warehouse.

Our decision to adopt this more liberal reading of the
Policy is further reinforced by KSI’s reasonable expectations of
coverage. When genuine ambiguity exists, New Jersey law

18
permits courts to consider objective indicia of the insured’s
reasonable expectations in order to resolve the ambiguity in
favor of the insured. See Zacarias, 775 A.2d at 1264 (“When
there is ambiguity in an insurance contract, courts interpret the
contract to comport with the reasonable expectations of the
insured . . . .”); see also Pittston Co. Ultramar Am. Ltd., 124
F.3d at 523 (explaining that consideration of extrinsic evidence
is appropriate to the extent that it “provides objective indicia” of
the meaning of the terms of the insurance policy “from the
linguistic reference point of the parties” (internal quotation
marks omitted)).

We find that the method for calculating KSI’s premium
– which was based on KSI’s total annual sales, as opposed to
being derived from sales of its international merchandise alone
– is a strong, objective indication that KSI understood the terms
of the Policy to cover all of its merchandise and reasonably
expected this coverage. Additionally, the initial quotation of
warehouse coverage that Royal provided to KSI, which did not
contain any restricting language regarding the origins of the
property that would be insured, is another objective indication
that KSI reasonably expected the Policy’s coverage to extend to
both its domestic and internationally acquired merchandise.

Because we conclude that the Policy is ambiguous and
that a fair interpretation of its terms, when construed in favor of
the insured, warrants finding that all of KSI’s merchandise,
regardless of its origin, was insured while temporarily stored in
KSI’s Franklin warehouse, we need not reach KSI’s alternative
reformation of contract arguments.

19
 IV.

In light of the ambiguity created by the express terms
of the Policy, we must adopt an interpretation that provides
coverage to KSI to the full extent that a fair reading will
allow. In doing so, we conclude that the Warehouse Storage
Insurance section of the Policy covers all of KSI’s inventory,
regardless of where that property originated, and we hold that
KSI is entitled to indemnification for all of the loss it suffered
in the Franklin warehouse fire, up to the monetary limits set
forth in the Policy. Therefore, we will reverse the District
Court’s orders and enter judgment in favor of KSI.

20