Chapter One

• Jurisdiction: New York

Chapter one

Construing the Insurance Contract

Paul J. Callahan, Esq.*

* The author gratefully acknowledges the contribution of Eileen E. Buholtz, Esq., who prepared and updated previous editions of this chapter.

I. Identifying the Policy Being Construed: Identifying The terms at issue

Coverage. Most of the cases that construe contract language concern themselves with the coverage of the policy, that is, whether the policy covers the loss in question. Both conceptually and formally, an insurance policy of any type has two components to its coverage: (1) a description of the risk(s) of loss being insured against (typically called “coverage” in the policy) and (2) a separate description of items excluded from coverage (typically called “exclusions” in the policy).¹ Exclusions may also contain exceptions to their operation as exclusions, thereby restoring coverage. “Coverage” clauses are drafted more broadly than the intended coverage and are then restricted by exclusionary and limiting clauses.² Actual effective coverage, therefore, is the net total of policy inclusions minus exclusions.³

There are two situations where public policy overrides the freedom to contract and precludes enforcement of an insurance agreement:

1. punitive damages; and

2. intentional causation of injury.⁴

In J.P. Morgan Securities, for example, although there was no adjudication of wrongdoing within the meaning of the dishonest-acts exclusion in the subject professional liability policy (which made the exclusion inapplicable), the insurers nevertheless could pursue their affirmative defense invoking public policy against permitting insurance coverage for disgorgement payments that the insured brokerage firm paid to shareholders, to a stock exchange, and to the Securities and Exchange Commission after the brokerage firm was accused of facilitating late trading and deceptive market timing.⁵ But there is no statutory or public-policy requirement that an insurance policy provide a full panoply of coverages.⁶

To answer the question of what the policy covers, one needs the complete policy. In “individual” policies (i.e., policies issued to individual consumers as opposed to group policies and policies issued to commercial enterprises), the identification of coverage and exclusion provisions is relatively straightforward, as a review of one’s own automobile, homeowner’s, health or disability policy will demonstrate. The individual insurance policy is typically one document containing all of the relevant language, although one must nevertheless be alert for additional pages that can affect coverage such as “Endorsements Affecting Coverage in New York.”

Where commercial and group policies are involved, one must be even more diligent about identifying the complete terms of the coverage because the risks of loss are more diverse and the choices for coverage are more varied. The policy documents are correspondingly more complex. There typically will be the document formally designated the policy, which will contain sections denominated coverage and exclusions, but there usually will be additional pages entitled “Important Notice: Changes in Your General Coverage” or “This endorsement changes the policy. Please read it carefully” or “New York Changes.” These additional pages are critical in ascertaining the coverage afforded by the commercial or group insurance contract. Obtaining a certified copy of the policy from the issuing insurance company will remove any doubt about the completeness or accuracy of the policy in question.

One must watch for language in the coverage provisions that conditions coverage on the payment of a premium, such as “if the declaration shows a premium having been paid for this coverage.” This conditional language signals that coverage becomes effective only if the insured has paid the premium. Obtaining a copy of the declaration page from the insurance company will show the premiums charged for the types of coverage.⁷

Certificates of Insurance. With regard to automobile insurance (compulsory motor vehicle insurance), an owner of a motor vehicle must have proof of financial security in order to register the car in New York State.⁸ Proof of financial security includes, among other things, proof of an owner’s policy of automobile liability insurance.⁹ A certificate of insurance issued by an automobile insurer with the requisite information as to the policy in effect constitutes proof of financial security.¹⁰ An insurer who wishes to terminate an automobile policy as to which a certificate of insurance has been filed with the Commissioner of Motor Vehicles must take certain steps to terminate the policy effectively.¹¹

In contexts other than automobile insurance, a certificate of insurance is merely some evidence that a contract for insurance has been issued. It is not conclusive proof that the contract exists, and is not a contract of insurance.¹² Certificates of insurance in contexts other than automobile insurance typically contain disclaimer language stating that the certificate is issued as a matter of information only and transfers no rights to the certificate holder.¹³ Nor does the existence of a broker-issued certificate of insurance that names an entity as an additional insured create additional-insured status for the entity where the policy that issued did not name the entity as an additional insured.¹⁴ However, an insurer may be estopped from denying insured status to an entity listed as an additional insured on a certificate of insurance if the certificate was issued by the insurer or an agent for the insurer if the entity reasonably relies on the certificate to its detriment.¹⁵

Requiring a contracting party to purchase insurance or to supply a certificate of insurance does not create or confer additional-insured status. The underlying written contract between the parties must expressly require that the indemnitee be made an additional insured on the indemnitor’s policy.¹⁶ But where a lease between a school and the sponsor of a dance contest, for the use of an auditorium, required the lessee to provide to the school “a certificate of insurance freeing the school of all liability” but did not expressly require lessee to hold the school harmless of liability, the result was different. The subject clause referred directly to the school and required the lessee to include the school as an additional insured on the lessee’s policy, which would allow the lessee to provide the school with a certificate of insurance “freeing [school] of a liability).”¹⁷

With regard to a general liability policy, a certificate of insurance named a school district as an additional insured of an insured youth football league. The first football team to play on the school district’s property obtained a certificate of insurance that named the school district as an additional insured. Neither the policy nor the certificate specified or excluded any particular team. The league’s liability carrier was therefore bound by that designation to defend and indemnify the school district for an accident occurring during a game played by team #2. The school had requested but ultimately had not required team #2 to get a certificate of insurance because the school already had the certificate of insurance obtained by team #1. The school tendered the suit to the league’s insurer which disclaimed. Held: the school district was covered. The court also noted that the policy also covered the school via a blanket additional-insured endorsement that covered any owner of premises loaned to the league.¹⁸

In the workers’ compensation context, a certificate of insurance for a New Jersey workers’ compensation policy stated that “coverage was extended to New York,” but that language was overridden by the policy information page, which stated that the policy applied only in New Jersey.¹⁹

Binders. An insurance binder is a temporary or interim policy that provides interim insurance until a formal policy is issued, and is usually effective as of the date of application and terminates when a policy is either issued or refused.²⁰ A binder does not constitute part of an insurance policy nor does it create any rights for the insured other than during its effective period, and is limited in time until an assessment of risk is completed by the carrier.²¹ A binder of insurance and the subsequently issued policy constitute two distinct agreements, particularly when the policy contains an entire contract provision and the binder is not attached to the policy.²²

The terms of the policy control, therefore, over the terms of the binder. In Evanston Insurance Co. v. Po Wing Hong Food Market, Inc.,²³ for example, the insurer sued its insured for sums owed pursuant to a premium audit conducted after the expiration of the policy. The insured thought he had purchased coverage for sales estimated at $15,000,000 for a $38,000 premium, but the amount of sales on which the policy had been issued was only $9,100,000 and the policy provided for a premium audit to be conducted after the expiration of the policy. The post-expiration audit revealed actual sales of $17,350,000, which resulted in an additional premium due. The court granted the carrier’s motion for summary judgment for the additional premium due.

In the context of title insurance, a certificate and title report that had failed to limit coverage were rendered null and void by the issuance of the policy which unambiguously limited coverage.²⁴

Neither do conditions precedent from the binder carry over into the subsequent policy that does not contain them. In National Union Fire Insurance Co. of Pittsburgh, Pa. v. Xerox Corp.,²⁵ for example, the plaintiff excess carrier sought rescission of an excess directors’ and officers’ liability policy but was precluded from incorporating a condition precedent to coverage contained in the binder into the policy that was ultimately issued without that condition. The binder provided that as a...