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Debating Ambiguities in Insurance Contracts

Author: Chris Boggs

Debating coverage, as an academic exercise, is weirdly fun at least for geeks like me. But on the backside of the debate are real coverage situations and real expenses that may or may not be covered by the subject insurance policy. In short, lives and finances are at stake in the debate.

Insurance policies are contracts. Although this appears to be a Duh" statement, many insurance practitioners seem to forget this simple fact. As a contract, the insurance policy is subject to the law of contracts which requires the policy be interpreted in specific ways.

Many of not most insurance contract coverae debates revolve around the concept of ambiguity. Is the policy (contractual) provision ambiguous? A contractual provision is considered ambiguous if it is reasonably susceptible to more than one interpretation. Specific requirements apply when deciding if a particular provision is ambiguous. In short:

A contractual provision is ambiguous when the provision can be interpreted differently, is reasonably susceptible to more than one understanding, or may have two or more meanings. Contractual provisions are NOT ambiguous simply because the parties disagree on the meaning. To be ambiguous, the provision MUST be reasonably susceptible to more than one meaning with nothing in the contract to clarify which meaning is intended.

Deciding whether a contractual provision is subject to more than one reasonable interpretation or application is the next step. How is this "reasonableness" established by the courts? Courts use the "objective reader" standard to decide whether an interpretation is reasonable by asking this question:

Is the provision capable of more than one reasonable interpretation when viewed objectively by a reasonably intelligent person who reviewed the entire agreement and is knowledgeable of the customs, practices, usages and terminology as generally understood in the particular trade or business.

However, this gauge of ambiguity does not readily apply when an insurance policy is involved because the insured is not expected to be knowledgeable about the trade or business of insurance. When an insurance contract (policy) provision is reviewed, the court focuses on the reasonable expectations of the average insured. One court said it this way, "[A] contract of insurance, drawn by the insurer, must be read through the eyes of the average man on the street or the average housewife who purchases it." (Lacks v. Fidelity & Cas. Co. of New York, 306 N.Y. 357, 363 (N.Y.1954).)

Regardless what we, as insurance practitioners, think a term means (or understand it to mean from our training and experience), the court concerns itself with how the buyer understands the language. What would or should the insured reasonably expect when he or she reads the policy?

Notice, the condition considers what the insured should reasonably expect once the policy is read; not what the insured thinks it should say. Courts make a legal presumption that the insured read the policy; although we know this is likely not the case, this presumption dictates that the contract be interpreted as if the policy had been read and interpreted by a reasonably intelligent person.

Again, the insured is not expected to know the trade and customs of insurance, but they are expected to interpret the policy as a reasonable person in the same or similar situation would interpret the provision. If such interpretation is reasonable and differs from the insurance carrier's interpretation, the provision can be considered ambiguous. However, the courts hold that an interpretation is not reasonable if it strains or tortures the policy language beyond its reasonable or ordinary meaning. In other words, the insured's understanding can't be ridiculous. The court will not consider a policy provision ambiguous if the application of the insured's interpretation creates an illogical or stupid (my technical term) result.

Court review of supposed "ambiguous" terms or provisions is done on a case-by-case basis utilizing a holistic approach applying specific cannons of contract construction to judge ambiguity. Courts:

  • Read the contract as a whole to 1) determine if the intent can be discerned from the contract; and 2) assure that the meaning given to the provision in question is not taken out of context and does not control or alter the meaning of the entire contract;
  • Apply ejusdem generis and/or noscitur a sociis to the specific word or phrase. This means that when a word or phrase follows a list of specifics, the word or phrase is interpreted to include only items of the same type as those listed. Basically, the court believes that, "Text without context is a pretext for a prooftext." Essentially, the phrase in question can't be interpreted or made to mean one thing when the context points to something else;
  • Hold that specific language governs over or outweighs general language;
  • Hold that the same word used in multiple sections has the same meaning in each use; and
  • State that improper punctuation or the lack of punctuation does not create ambiguity or alter the clear meaning of a term or policy provision. In Viking Pump, Inc. v. Liberty Mut. Ins. Co., the court quoted, Punctuation is a most fallible standard by which to interpret a writing. The court will take the contract by its four corners, and having ascertainedwhat its meaning is, will construe it accordingly, without regard to punctuation marks, or the want of them. [T]he words control the punctuation marks, and not the punctuation marks the words."

Applying these guidelines, the trier of fact (the judge or the jury) declares a term or provision ambiguous or unambiguous. If the provision is unambiguous, the court interprets the contract as a matter of law, looking to the clear meaning of the text to determine intent (known as the "four corners" rule). However, if the provision is judged ambiguous, intent becomes a question of fact for the judge or jury to decide.

Most insurance practitioners know that because insurance contracts are contracts of adhesion (meaning the insured is "stuck" with it), when ambiguity is found, the decision goes against the party who drafted the contract (the insurance carrier). In Latin this is contra proferentem or "against the offeror or drafter."

In most coverage debates, the goal of all parties is to force the carrier to pay claims that are owed, but not pay when it doesn't owe anything. It's as simple as that. Insurance geeks engaged in debating insurance coverages are not trying to force any carrier to pay anything it doesn't owe; likewise, we don't want a carrier to fail to pay what is owed. Geeks want the contract followed.

Sometimes both sides of the debate have a reasonable argument, which means an ambiguity might exist. If so, a trier of fact must be engaged to decide if an ambiguity does, in fact, exist.

When the court date (or dates) arrive, the ultimate decision of ambiguity rests on whether the insurance carrier can make the insured's interpretation appear unreasonable; or whether the insured convinces the judge or jury that its interpretation is one that any other reasonable person would have. When the insured's view is deemed reasonable, the carrier loses.

Judging Ambiguity A Quick Review

Questions that must be answered to establish the possibility of ambiguity:

  1. Is the term or provision subject to two or more reasonable interpretations?
  2. Could or would an "objective reader" arrive at the same or a similar conclusion?
  3. Do the parties simply disagree on the meaning?
  4. Would either party's interpretation strain or torture the policy and result in an illogical or absurd application of coverage?

"Yes" answers to questions "1." and "2." point to the possibility of ambiguity. "Yes" answers to questions "3." and/or "4." hint that ambiguity likely does not exist.

If ambiguity is possible, courts (the trier of fact) make the final decision by:

  1. Reading and applying the contract as a whole;
  2. Applying the concept of Ejusdem Generis and/or Noscitur A Sociis to the specific word or phrase;
  3. Giving greater weight to specific language than is grated to general language;
  4. Applying the same meaning to terms throughout the contract;
  5. Ignoring punctuation relative to the weight of the policy language; and
  6. Applying Contra Proferentem.

Last Updated: July 19, 2019

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