Insurance 101: Interpretation of Insurance Policy in the Eyes of the Courts

By Amy Elizabeth Stewart

With annual global insurance premiums totaling nearly $5 trillion,[1] policyholders are focused on making sure they receive the benefit of their bargains with the insurance industry. Add to that the fact that insurance policies aren’t the easiest documents to read and understand, and it’s not surprising that courts and practitioners alike wrestle with issues of policy interpretation in jurisdictions across the country. The basic interpretive guidelines are widely recognized by courts in most states. But when a dispute arises as the result of plausible competing interpretations, the analysis begins to unravel as courts seek to reach the “right” outcome in each case. 

General rules apply. The determination that the policy is unambiguous and the interpretation of that policy are questions of law for the court.[2] Most courts apply the general rules of contract interpretation to ascertain the intent of the parties to an insurance agreement.[3] Clear and unambiguous policy language must then be enforced as written.[4] Below are common guideposts for insurance contract interpretation.

The parties’ intent. The primary goal of the court in construing insurance policies is, as with other contracts, to ascertain the intention of the parties.[5] The court’s “chief aim in constructing an insurance policy is giving effect to parties’ intent as expressed in the policy terms.”[6] Some courts emphasize that the policy must be construed based on written expression of the parties’ intent without reference to parol evidence.[7]

Plain and ordinary meaning. To ascertain the parties’ intent as expressed in the written agreement, the words used in the policy, when unambiguous, must be given their plain and ordinary meaning.[8]

• The words of an insurance policy are given their “general, ordinary, plain, and proper meaning... unless [they] have acquired a technical meaning.”[9]

Technical terms may be given their technical meaning when the policy evidences that the parties intended the terms to be used in their technical sense.[10] This may be the case for professional liability or errors and omissions policies that relate specifically to exposures associated with the insured’s professional services.

Reasonableness. An insurance policy is ambiguous only when it may “fairly and reasonably” be understood in more ways than one.[11] “Common sense and good faith are the leading touchstones of the inquiry.”[12]

• When the words of the contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties’ intent.[13]

Read as a whole, meaning to all parts. All parts of a contract must be read together, in context, giving meaning to each part. Insurance policies are no different. An insurance policy “must be read as a whole in order to give a reasonable and harmonious meaning and effect to all of its provisions.”[14] Similarly, an insurance policy “should be construed as a whole such that every provision has a purpose.”[15]

• Whether a contract is ambiguous must be determined from the entire contract and not from isolated portions of the contract.[16]

“Since the objective of construing an insurance policy is to ascertain the intent of the parties, the courts should resist piecemeal constructions and should, instead, examine each provision in the context of the policy as a whole.”[17]

How these principles impact the policy analysis differs in each dispute, leaving room for wide-ranging outcomes. In addition, many jurisdictions apply insurance-specific rules to issues of policy interpretation. An understanding of existing law regarding the interpretation of particular provisions and familiarity with the interpretive process are valuable tools in such disputes. 

 

[1] http://www.plunkettresearch.com/insurance-risk-management-market-research/industry-statistics ($4,957.0 billion)
[2] Whitlock v. Stewart Title Guar. Co., 2011 U.S. Dist. LEXIS 114006 (D.S.C. 2011), citing Beaufort Cnty. Sch. Dist. v. United Nat’l Ins. Co., 709 S.E.2d 85, 95 (S.C. Ct. App. 2011) (interpretation of an unambiguous policy or a policy with a patent ambiguity is for the court).See Alta Vista Prods., LLC v. St. Paul Fire & Marine Ins. Co., 796 F. Supp. 2d 782 (E.D. La. 2011) (under Louisiana law, the interpretation of an insurance contract is a question of law);Jarvis Christian Coll. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 197 F.3d 742, 746 (5th Cir. 2000); Alliant Credit Union v. Cumis Ins. Soc’y, Inc., 2011 U.S. Dist. LEXIS 27153 (N.D. Ill. Mar. 10, 2011), citing Am. Econ. Ins. Co. v. DePaul Univ., 890 N.E.2d 582, 587 (Ill. App. Ct. 2008) (“The construction of an insurance policy and a determination of the rights and obligations thereunder are questions of law for the court.”).
[3] Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154, 157 (Tex. 2003) (“[W]e interpret insurance policies in Texas according to the rules of contract construction.”); Nat’l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (same).
[4] Alta Vista Prods., LLC v. St. Paul Fire & Marine Ins. Co., 796 F. Supp. 2d 782 (E.D. La. 2011), citing Reynolds v. Select Props. Ltd., 634 So. 2d 1180, 1183 (La. 1994).
[5] Whitlock, 2011 U.S. Dist. LEXIS 114006. See also Alta Vista Prods., LLC, 796 F. Supp. 2d at 785, citing La. Ins. Guar. Ass’n v. Interstate Fire & Cas. Co., 630 So. 2d 759, 763 (La. 1994).
[6] Alliant Credit Union v. Cumis Ins. Soc’y, Inc., No. 10 C 0737 , 2011 U.S. Dist. LEXIS 27153, at *6 (N.D. Ill. Mar. 10, 2011), citing Valley Forge Ins. Co. v. Swiderski Elecs., Inc.,860 N.E.2d 307, 314 (Ill. 2006).
[7] Lott v. Scottsdale Ins. Co., 827 F. Supp. 2d 626, 630–31 (E.D. Va. 2011), citing P’ship Umbrella, Inc. v. Fed. Ins. Co., 530 S.E.2d 154, 160 (Va. 2000); Hill v. State Farm Mut. Auto. Ins. Co., 375 S.E.2d 727, 729 (Va. 1989).
[8] Lott, 827 F. Supp. 2d at 630–31, citing P’ship Umbrella, Inc., 530 S.E.2d at 160Shepardize ; , 375 S.E.2d at 729. See Alta Vista Prods., LLC, 796 F. Supp. 2d 782, citingValley Forge Ins. Co., 860 N.E.2d at 314 (unambiguous policy language must be applied as written, using words’ plain, ordinary meanings). 
[9] Alta Vista Prods., LLC, 796 F. Supp. 2d at 785, citing La. Ins. Guar. Ass’n v. Interstate Fire & Cas. Co., 630 So. 2d 759, 763 (La. 1994).
[10] Am. States Ins. Co. v. Hanson Indus., 873 F. Supp. 17, 22 (S.D. Tex. 1995); Sec. Cas. Co. v. Johnson, 584 S.W.2d 703, 704 (Tex. 1979).
[11] Whitlock v. Stewart Title Guar. Co., 2011 U.S. Dist. LEXIS 114006 (D.S.C. 2011), citingFarr v. Duke Power Co., 218 S.E.2d 431 (S.C. 1975).
[12] Whitlock, 2011 U.S. Dist. LEXIS 114006, citing Farr, 218 S.E.2d 431.
[13] Alta Vista Prods., LLC, 796 F. Supp. 2d 782; La. Civ. Code art. 2046.
[14] City of Glendale v. Nat’l Union Fire Ins. Co., 2013 U.S. Dist. LEXIS 45468 (D. Ariz. Mar. 28, 2013), quoting Nichols v. State Farm Fire & Cas., 175 Ariz. 354, 857 P.2d 406, 408 (Ariz. Ct. App. 1993).
[15] Alta Vista Prods., LLC, 796 F. Supp. 2d 782, citing Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 860 N.E.2d 307, 314 (Ill. 2006).
[16] Whitlock, 2011 U.S. Dist. LEXIS 114006, citing Farr, 218 S.E.2d 431. See also State Farm Life Ins. Co. v. Beastin, 907 S.W.2d 430, 433 (Tex. 1995) (“courts must be particularly wary of isolating from its surroundings or considering