Chapter 2 The Rules of Construction of a Policy of Commercial Property Insurance

• Library: The Commercial Property Insurance Policy Deskbook (ABA) (2018 Ed.)

CHAPTER 2 The Rules of Construction of a Policy of Commercial Property Insurance

Before even thinking about reading an insurance policy for comprehension it is necessary to understand the rules of construction of insurance policies created by the courts of the United States over the last two centuries.

Since a commercial property insurance policy is a contract, it is interpreted like most contracts, with special consideration given to the interpretation of an insurance policy. Because insurance is a special type of contract, the courts of the United States have established rules of construction of insurance contracts that are close to, but not the same as, those applied to other contracts.

The lawyer, adjuster, insurer, and insured must understand how all contracts, specifically insurance contracts, are interpreted by the courts. Rules of insurance contract interpretation have developed over the last 300 years and are applied by courts with the intent to fulfill the desires and reasonable expectations of all parties to the contract.

The construction of insurance contracts should be governed by the same rules of construction applicable to all contracts.¹ Sometimes that happens, but more often than not insurance contracts are interpreted more loosely to provide coverage—whether intended or not—to an insured who incurred a loss. The courts claim that when they construe an insurance contract its terms are given their ordinary and generally accepted meaning² and that the primary goal of the court is to give effect to the written expression of the party's intent.³

The U.S. Supreme Court, in a concurring opinion by Justice Breyer, stated:

Under ordinary principles of contract law, one would construe the contract in terms of the parties' intent, as revealed by language and circumstance. See The Binghamton Bridge, 3 Wall. 51, 74 (1866) ("All contracts are to be construed to accomplish the intention of the parties"); Restatement (Second) of Contracts Section(s) 202(1) (1979) ("Words and other conduct are interpreted in the light of all the circumstances, and if the principal purpose of the parties is ascertainable it is given great weight").⁴

However, regardless of the learned opinions of justices of the U.S. Supreme Court, the following rules govern the construction of contracts of insurance that do not necessarily apply to contracts like contracts of sale of real property or leases of equipment:

• If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed at the time of making it that the promisee understood it.⁵
• If the language of a policy or contract is subject to two or more reasonable interpretations, it is ambiguous.⁶ Where an ambiguity involves an exclusionary provision of an insurance policy, courts must adopt the construction urged by the insured as long as the construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties' intent.

As one court said:

In reaching the conclusion [that a policy exclusion was ambiguous, and the policy, therefore, provided coverage], we follow the settled rule that any ambiguity or uncertainty in an insurance policy is to be resolved against the insurer and that if semantically permissible, the contract will be given such construction as will fairly achieve its object of providing indemnity for the loss to which the insurance relates. Continental Cas. Co. v. Phoenix Construction Co., 46 Cal. 2d 423, 296 P. 2d 801 (1956). This rule deals with the maxim that a contract should be construed against its drafter and is sometimes referred to as the contra preferendum rule. Provisions excluding coverage are also strictly construed against the insurer.⁷

Some rules applied to insurance contract interpretation include:

• Ambiguities in insurance applications will usually be construed against the insurer to avoid denial of coverage because of alleged misrepresentations. For example, it was held that policy wording is usually construed in favor of the insured and against the insurer if any ambiguity exists in the contract wording.⁸
• The opposite is also true: if the language of the policy was drafted by the insured or his or her broker, ambiguous language is construed against the insured. When the language of an insurance contract is reasonably susceptible to two constructions, it should be construed in favor of the insured unless the insured is responsible for the ambiguity.⁹
• On the other hand, where the language of a contract is clear and unambiguous, it must be interpreted solely by reference to the four corners of that document.¹⁰
• When a policy is interpreted, the provisions of an endorsement control the interpretation over the body or declarations of a policy when the two are in conflict.¹¹
• As stated in Insurance Company of North America v. Electronic Purification Company,¹² "the insurance company gave the insured coverage in relatively simple language easily understood by the common man in the marketplace, but attempted to take away a portion of this same coverage in paragraphs and language which even a lawyer, be he from Philadelphia or Bungy, would find difficult to comprehend."¹³

These rules are all subject to the limitation that

court cannot and should not do violence to the plain terms of a contract by artificially creating ambiguity where none exists. In situations in which reasonable interpretation favors the insurer, and any other would be strained and tenuous, no compulsion exists to torture or twist the language of the contract. An insurance company has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected.¹⁴

Basically, the construction of an insurance contract should always be controlled by the...