Episode 24. Insurance Contracts

In this week’s episode, Bob chats about how contracts principles are used to interpret insurance contracts. Learn how to spot ambiguities and build effective arguments for your interpretation.

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Transcript

Hello everyone. Today I'd like to talk about contract interpretation principles that

apply to insurance contracts.

Contract interpretation is about applying the terms of an agreement to a given set

of circumstances when the parties cannot agree. Disagreements may arise from mistakes

made by one or more of the contracting parties when creating the document, whether

by ambiguous language, or by the diverging interests of the parties. Whatever the

cause, if the parties cannot agree, they may need to file a lawsuit or seek

arbitration to resolve their dispute. The remedies available to the parties range from

reformation, to declaratory relief, to damages. The remedy will depend on the source

of the dispute and the stage of the claim at the time the dispute is presented to

the tribunal. 

So what remedies you seek depends on what stage of the case you're in, whether

people are trying to get their money back, whether the loss has been paid or the

damage has been paid, or there's a legal obligation to pay them. And those

situations, whether you pick reformation, declaratory relief or damages,

those all depend on the set of circumstances and we'll have to talk about those

later because today's podcast is just a general discussion of contract interpretation

principles.

What I'm trying to address here is the analytical process, the application of the

rules of interpretation that are available to the parties and the tribunal in

applying the contract.

The same basic rules of interpretation apply to all contracts, so this includes

insurance contracts. However, those rules are sometimes modified to reflect the unique

nature of the insurance industry and insurance transactions. 

There are general rules applicable to all contracts such as reading

the contract as a whole giving meaning to all terms and favoring endorsements or

amendments over standard form language. There are also some insurance contract specific

interpretation rules that

and lacks bargaining power may not apply because you have an insured,

especially in the commercial contract, context who is sophisticated,

who may have a risk manager, who may have a substantial risk management department,

and may have as much sophistication in insurance as the insurers and underwriters do.

You often see this in manuscript policies as opposed to the standard form policies.

Where the parties appear to have equal bargaining power, the majority of jurisdictions

conclude that there is no need to favor the insured over the insurer or apply the

presumption that one party has less bargaining power than the other to favor

coverage.

Here's another special rule of construction, contra -proferentum.

The doctrine of contra -proferentum requires that ambiguities are construed against the

drafter. For insurers, this frequently means that ambiguities are construed against

them and in favor of the insured. But this does not always apply,

again, in the context of manuscripted policies or where substantial communication and

bargaining can be shown during the underwriting process.

In that case, contra -proferentum will not be used in aid of construing the policy.

And now another set of rules that aid construction that may or may not apply.

These are usually treated as substantive rules in aid of construction.

These special rules may include issues of public policy, interpretation against

forfeiture, interpretation in favor of an independent covenant rather than a condition

precedent, and interpretation of a bilateral contract,

meaning the manuscript type of contract.

Even though I don't want to address in this podcast the role of public policy,

it is worth mentioning that public policy does have a role to play in many aspects

of insurance policy interpretation. This is because public policy favors providing a

remedy for injuries, and courts recognize the role that insurance plays in providing

such remedies. Under those circumstances, courts may interpret insurance agreements in

a way that promotes a sound insurance structure, and in choosing among the reasonable

meanings of a promise or agreement or a term of the contract,

the courts will choose a meaning that serves the public interest, which is generally

preferred. That means compensating the injured party.

Now the goal of contract interpretation is to ascertain the meaning of the expression

of the parties.

The more modern approach avoids the terminology of intention and looks for expressed

intent under an objective standard. The purpose of the rule of interpretation is to

ascertain the meanings of the words used in the contract. However,

if it is shown that the words were used to conceal rather than to express the

intent of the parties, the court may look past the form to give effect to the

substance.

The second restatement states that where the parties have attached different meanings

to an agreement or term, it is interpreted with the meaning attached by one of them

if at the time the agreement was made. That party did not know of any different

meaning attached by the others, and the other knew the meaning attached by the

party, or where the party had no reason to know of any different meaning attached

by the other, and the other had reason to know the meaning attached by the first

party.

That's sort of complex, and in many insurance situations, especially in the

underwriting situation, there is no communication between the insured and the

insurer where they express their intentions, where they talk about this is what I

think this term means. So in some respects, the narrower or more detailed terms that

may be at issue in a coverage dispute may never have been discussed by the parties.

There are some industry publications and of course prior court rulings that talk

about what certain terms mean and of course under Starry DeSysos or at least

persuasive authority concepts courts may tend to stick with what the first court

said. But the litigants always have an opportunity to talk about what it was that

they thought was important, what they thought the meaning was, and what they hoped

to accomplish by the expression in the contract itself. So the first principle in

contract interpretation is look at the language of the policy. We all know But

insurance contracts can be long and involved, and of course the structure is to have

broad language that gives coverage, and then narrow language, called exclusions,

that take away coverage. But one of the principles of contract interpretation is that

the whole of a contract is to be taken together. The contract should be construed,

if possible, to give effect to all of its provisions. Therefore,

whether you're representing an insurer or an insured, you need to test your

interpretation and that of your opponent against other portions of the contract to

see if it renders them meaningless or absurd. If so, the interpretation may not be

accepted by the court. The opposite is also true. If you are able to show how your

interpretation is internally consistent with other portions of the contract that are

relevant to the dispute, the court may be more inclined to accept your position.

In this connection, what you want to do is gather all evidence of the party's

communications and determine whether they support your proposed interpretation or that

of your opponent. Interpretations supported by the discussions of the parties are more

likely to be adopted by a court. In a later episode of Coverage Council is in,

I intend to talk about the use of extrinsic evidence in aid of policy

interpretation, but for purposes of this podcast, I just want to talk about general

rules and maybe the most important rule in all of this is that if the contract is

not ambiguous, there's no need for any kind of interpretation.

Now, ambiguity means that the contract language is legitimately susceptible of two

reasonable meanings.

I stress the word legitimately because often we get strained interpretations or

something that is an illegitimate interpretation.

people overreaching or reaching too far. Insureds particularly do this because they're

trying to get coverage, but insurers also do it in terms of applying exclusions that

are obtuse and not really intended to apply to the particular situation.

So you need to watch out and of course the argument to the court will be that the

other side's interpretation is not a legitimate or reasonable meaning and if the

court finds that there is not a reasonable dispute or ambiguity it's not going to

interpret the contract but is going to apply it based on the words of the contract

itself. So a starting point for you is to try to figure out

how you can make your interpretation seem more legitimate and the parties,

the opposite parties' interpretation, more absurd.

Whether a contract is ambiguous or not is a question of law.

And so the court has to determine, really, the legitimacy of the arguments being

made by the parties. So whether a question is presented as a matter of law,

or a matter of fact, may affect your ability to resolve the dispute on summary

judgment or summary adjudication. It could affect your right to a jury.

It could affect the standard of review should there be an appeal. So interpretation

questions handled as a matter of law at the trial level are usually amenable to

summary judgment and no jury, but those face de novo review on unappeal.

Questions handled as a matter of fact generally preclude summary adjudication,

may give rise to a jury right and are generally reviewed under the deferential,

substantial evidence test or similar rules which afford deference to determinations of

the fact finder. So whether you want to claim ambiguity, whether You want to argue

that the ambiguity exists as a matter of law or as a matter of fact.

You need to consider the ramifications of each of these steps in determining your

strategy. There are very few insurance contracts that have a choice of law provision.

Some give the choice of law or at least choice of forum to the insured,

but this is a rarity, especially in the CGL context. In the absence of a

successfully incorporated or expressly stated choice of law provision, a court has to

determine which law to apply to the dispute. In making this determination,

the first question is whether the issue forcing the choice of law is substantive or

procedural. If the issue is procedural, it is typically governed by the law of the

jurisdiction in which the contractual dispute is being resolved,

where the

choice of law is

not procedural but it actually deals with the substantive law of the case.

Many jurisdictions apply the "most significant relationship" and "test" stated in the

restatement second of conflict of laws. Jurisdictions that do not explicitly follow

the restatement, still consider many of the same factors, though.

So it's going to be the most significant relationship, usually where the injured

party is, where the underlying dispute took place, where the claimant resides,

which state has the greatest interest in having its law apply to the resolution of

the case.

Factors considered under the most significant relationship test include the place of

contracting, the place of negotiation, the place of performance,

the location of the subject matter of the contract, and the domicile residence,

nationality, place of incorporation, and places of business of the parties.

This analysis requires that each jurisdiction's contacts be carefully evaluated

according to their relative importance to the particular issue. But this isn't simply

tallying the number of factors that may point to one jurisdiction or another. That's

not a proper analysis. You have to really talk about the relative interests and the

substantive interest in having particular law applied.

To summarize, insurance contracts are interpreted like any other contract,

though there may be some special rules because of the relative bargaining position of

the parties and also because the insurance industry tends to use standardized forms

as opposed to manuscript or specially written policies. Nevertheless,

look first at the general rules of construction. The first rule of Instruction or

interpretation is to look at the language of the policy Read the words on the page

When you read the words on the page, then you want to say what do they mean and

If it can be determined without ambiguity that they mean what they mean That's the

what the court is likely to do Absence some influence of public policy or other

external influence that will be discussed in a later podcast Remember that ambiguity

is not

Established by creatively straining the language of the policy and twisting it into

some sort of shape that that Supports your position,

rather it has to be a legitimate, reasonable interpretation and keep in mind that it

has to be consistent with the other terms of the policy. That means you want to

test your ambiguity or your interpretation that may be allegedly a reasonable

interpretation against the other side's interpretation and then find other language in

the policy that shows it is consistent or inconsistent with each of those

interpretations. Then you wanna argue to the court as a matter of law that there is

no ambiguity and no need for interpretation.

Once you get into the interpretation aspect though, because the matter has been

deemed ambiguous, now what you're gonna wanna do is gather all the discussion of the

parties, which in most cases isn't very much, to try to figure out whether the

policy, or whether the policy holder and the insurer gave special meaning to terms

that were not communicated. Look at the definitions section of the policy. Look at

the emails back and forth between the broker and the insurer between the agent and

the broker and between the agent and the insured. And there may also be

communications directly between the insured and the insurer. You need to find these

out. When you amass all that ad, you figure out how the parties wanted to interpret

these provisions if they even discussed it, and if they didn't discuss it,

is it ambiguous? Is it legitimately susceptible to alternative meanings?

And if so, then we start to work on the principles of interpretation,

such as contra -proferentum, construed against the drafter,

and also the other rules in aid of public policy, which are to favor coverage.

Now, it has to be a legitimate dispute. You have to look at the reasonable

expectations of an objective insured, not the subjective,

uncommunicated expectations, and in those cases the courts can decide,

as a matter of law, how the policy applies, and you can do that on summary

judgment. If you're concerned about summary judgment, make it a question of fact,

and try to go that route, in the case to preserve your right to a jury trial and

to lessen the standard, or I should say heighten the standard on appeal because a

court of appeal won't generally disturb a factual finding where there's substantial

evidence to support it. So that's all for this episode of Coverage Counsel is in.

I hope you found it helpful and as always if there are any topics that you would