JurisdictionUnited States


Construction of Insurance Contracts

A. Rules of Insurance Contract Interpretation

Insurance policies are contracts. The courts of the United States have established rules of construction of insurance contracts that are not the same as those applied to other contracts.

To understand insurance, insurance policies, and insurance claims, the lawyer, adjuster, insurer, insurance agent, insurance broker, 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 almost universally applied by courts with the intent to fulfill the desires of all parties to the contract.

The construction of insurance contracts should be, but are not always, governed by the same rules of construction applicable to all contracts.1The courts claim that when they construe an insurance contract, its terms are given their “ordinary and generally accepted meaning”2 and that the primary goal of the court “is to give effect to the written expression of the parties’ intent.”3

The United States 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 In re Binghamton Bridge, [70 U.S. 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, 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:

Ÿ “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 promise understood it.”5

Ÿ If “the language of a policy or contract is subject to two or more reasonable interpretations, it is ambiguous.”6

Ÿ 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. Cont’l Cas. Co. v. Phoenix Const. Co., 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:

Ÿ 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

Ÿ 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

Ÿ 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

Ÿ 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.

Ÿ As said in Insurance Co. of N. Am. v. Electronic Purification Co., 433 P.2d 174 (Cal. 1967), “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.’”11

These rules are all subject to the limitation that:

[A] 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.12

Basically, the construction of an insurance contract should always be controlled by the statement that “the courts will not indulge in a forced construction of an insurance policy so as to fasten a liability on the insurance company which it has not assumed.”13

This is a rule usually honored more in the breach than in the following and often forces litigants to the courts of appeal to obtain the benefit of the rule.

Interpretation of an insurance contract is a question of law, fully reviewable on appeal.14

The following case arose out of the unprovoked attack on the United States by terrorists. Consider how the court went about interpreting an insurance contract that had not, prior to the attack, been issued in concrete form. As you read the next decision remember that the decision of the court involved a dispute over $3.5 billion and had nothing to do with responsibility for the terrorist attack.

World Trade Center Props., L.L.C. v. Hartford Fire Ins. Co.
345 F.3d 154 (2d Cir. 2003)

The opinion of the court was delivered by: John M. Walker, Jr., Chief Judge.

This case arises out of the devastating tragedy that occurred at the World Trade Center (“WTC”) in lower Manhattan, New York, on the morning of September 11, 2001. At issue in this case is the amount of insurance that is recoverable for the total destruction of the WTC that occurred after the buildings were struck by two fuel-laden aircraft that had been hijacked by terrorists. The appellants are numerous entities that have varying property interests in the WTC, including the Port Authority of New York and New Jersey (the “Port Authority”), which owns the property in fee simple, and Silverstein Properties, Inc. and several related entities (“Silverstein Properties”). In the spring of 2001, Silverstein Properties was the successful bidder on a 99-year lease for the property from the Port Authority. In July 2001, Silverstein Properties obtained primary and excess insurance coverage for the WTC complex from about two dozen insurers (most of which constitute the appellees and other counter-defendants in this case) in the total amount of approximately $3.5 billion “per occurrence.” Because Silverstein Properties is the party that actually obtained the insurance coverage at issue in this case and was the primary insured, for ease of reference all appellants will hereafter be referred to collectively as the “Silverstein Parties.”

The parties do not dispute that the destruction of the WTC resulted in a loss that greatly exceeded $3.5 billion. The broad question presented in this case is whether the events of September 11, 2001 constituted one or two “occurrences.” The answer will determine whether the Silverstein Parties can recover once, up to $3.5 billion, or twice, up to $7 billion, under the insurance coverage. Complicating the resolution of this question is the fact that as of September 11, 2001, only one of the many insurers that bound coverage on the WTC had issued a final policy, necessitating an individualized inquiry to determine the terms of the insurance binders issued by each insurer.

This litigation began on October 22, 2001 when one of the WTC insurers, plaintiff-counter-defendant-intervenor SR International Business Insurance (“SR International”), filed suit against the Silverstein Parties “seek[ing] a judicial declaration of its rights and obligations to all of the insureds under the policy” and a “declaration that the damage to the World Trade Center is one insurance loss.” The Silverstein Parties subsequently filed counterclaims against the other WTC insurers, seeking a declaration “that the events of September 11th constituted more than one occurrence under the coverage that the counterclaim-defendant[s] agreed to provide to the Silverstein Parties.” After an initial assignment to another judge, the action was assigned to District Judge John S. Martin Jr. of the United States District Court for the Southern District of New York for all purposes. In the first of these related appeals, the Silverstein Parties appeal from three judgments, made final and appealable pursuant to Fed. R. Civ. P. 54(b), granting summary judgment in favor of appellees Hartford Fire Insurance Company (“Hartford”), Royal Indemnity Company (“Royal”), and St. Paul Fire & Marine Insurance Company (“St. Paul”), respectively, in which the district court held that (a) the binders they issued were governed by the insurance policy form circulated by Silverstein Properties’ insurance broker, and (b) under the definition of “occurrence” in that form, the destruction of the WTC was one occurrence as a matter of law. In the second appeal, the Silverstein Parties appeal an 1. On November 5, 2001, Silverstein...

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