A theory of insurance policy interpretation.

• Author: Abraham, Kenneth S.

The first principle of insurance law is captured by the maxim contra proferentem, which directs that ambiguities in a contract be interpreted "against the drafter,"(1) who is almost always the insurer.(2) Yet given the modern recognition that language is an inherently imperfect instrument for communicating meaning, insurance policy provisions are in a sense always ambiguous. Moreover, in addition to contra proferentem, policyholders may invoke such allied doctrines as waiver, estoppel, and the rule that the reasonable expectations of the insured should be honored even if those expectations are unambiguously contradicted by fine-print provisions in the policy.(3) Contra proferentem and these other doctrines are so frequently invoked by the courts in insurance cases(4) that the casual observer might well suppose that the true first principle of insurance law is that insurance disputes are generally resolved in favor of coverage. Indeed, in light of all these pro-coverage legal doctrines, it is surprising that insurers ever win disputes involving the meaning of policy provisions.

But of course insurers very often win coverage disputes, including those in which a policy provision is allegedly ambiguous. Contra proferentem is not merely a label for pro-coverage results reached for other reasons. Rather, the process of interpreting insurance policies cannot be adequately understood without recognizing the way in which contra proferentem helps to explain decisions both for and against policyholders. Similarly, by their own terms the doctrines of waiver and estoppel and the expectations principle have nothing to do with "interpretation" as it is normally understood. These doctrines direct that under specific circumstances the meaning of even clear policy language must be disregarded, not interpreted. But there remains a vague sense on the part of many observers of insurance law that these doctrines, which create rights "at variance" with policy provisions,(5) nevertheless have something to do with interpretation, though precisely what has always been difficult to articulate.

In this article I analyze and explain how the courts actually employ contra proferentem and its allied doctrines in interpreting insurance policies by uncovering the factors that I believe most influence the process of interpretation. This effort exposes some of the difficulties that the courts have encountered in employing contra proferentem as the doctrine has evolved. I suggest, further, that the rise of the allied doctrines creating rights at variance with policy provisions at least in part reflects the courts' effort to grapple directly with the problems that they have been able to address only incompletely and indirectly under the rubric of contra proferentem. So conceived the allied doctrines are not, strictly speaking, a feature of the interpretive process, but a consequence of that process.

To summarize my argument briefly, I contend that the misleadingly simple notion that ambiguous policy provisions should be interpreted in favor of coverage is comprised of two separate features: the linguistic standard against which the ambiguity of the disputed policy provision is judged, and the strength of policyholders' demand for the coverage that would be afforded by a pro-coverage interpretation of the policy provision in question. To complicate matters further, there are two ways to employ each of these two separate features. Consequently, what I call the "traditional" conception of contra proferentem is just one of four possible approaches to the interpretation of an arguably ambiguous policy provision. Although the courts typically talk as if they are applying the traditional conception, in fact they sometimes apply one of the other three.

Although my effort to understand how contra proferentem works is largely descriptive, it also has a normative component. The normative implication of my analysis is that courts are likely to get themselves into a variety of difficulties when they depart from the traditional conception of contra proferentem. Therefore, courts probably would do well to get back to basics and put out of the way many of the complicated considerations that have implicitly influenced their interpretation of insurance policies. At the same time, courts determined to depart from the traditional conception should be more candid about the scope and limits of their departures. I suggest a number of ways in which such courts could make their approaches more open and workable.

1. THE PURPOSE OF CONTRA PROFERENTEM

   To understand what the courts are actually doing when they interpret ambiguous policy provisions, it is useful to first consider the normative basis of the doctrine. After identifying the purpose (or purposes) of contra proferentem, we can then attempt to analyze the manner in which the doctrine functions.

   Why might the law require that ambiguous insurance policy provisions be interpreted in favor of coverage? The justification that the courts typically offer is that the drafter of an ambiguous policy provision should bear responsibility for ambiguity because the drafter has control over the language used in the policy.(6) The notion of control as the basis for responsibility, however, is itself ambiguous. On the one hand, the notion may imply that ambiguous policy provisions are the result of faulty behavior by the insurer and that contra proferentem imposes something like liability for negligent drafting. On this view, contra proferentem imposes liability on insurers for employing unreasonably unclear policy provisions--provisions which do not have an optimal degree of clarity.(7)

   On the other hand, the notion of control as the courts use it in their justifications for contra proferentem may imply responsibility without necessarily implying fault. This understanding of the connection between control and responsibility makes contra proferentem more closely resemble a version of strict liability. Like strict liability generally, imposing liability on insurers for including ambiguous provisions in their policies whether or not such provisions are unreasonably unclear might serve purposes that include, but extend beyond, those served by imposing liability only for unreasonably unclear policy provisions. For example, because of the difficulty and cost of determining the optimal degree of clarity in policy provisions, a strict liability standard may be superior to negligence in terms of both cost and accuracy. Furthermore, it seems likely that insurers in general rather than policyholders will be better bearers of the cost of the irreducible component of ambiguity that remains after optimal clarity is achieved.(8)

   Whether the notion that control warrants responsibility is understood as negligence or as strict liability, however, there is missing from this bare notion a connection between the "breach" of employing an ambiguous policy provision and the harm that results from that breach. There are a number of possible connections. In contract-law terms, the application of contra proferentem to an ambiguous policy provision might be understood as the awarding of expectation damages for breach of the "promise" of coverage afforded by the ambiguous provision.(9) This answer highlights the distinction between expectation and reliance damages. Why interpret an ambiguous policy provision against the drafter unless the policyholder would have behaved differently had he known that the loss in question was not insured? The same issue can be expressed in tort-law terms as a question of causation: Why is the policyholder not required to show that the coverage claimed could have (perhaps even would have) been purchased elsewhere?

   In contract law, the generic answer to this kind of question is that reliance is often difficult and costly to prove,(10) and that promisees are systematically undercompensated for the losses they suffer from breaches by promisors.(11) To encourage reliance, contract law typically dispenses with the requirement that it be proved. The same might be true of reliance by policyholders on the "promise" of coverage afforded by ambiguous policy provisions. If policyholders generally rely on these kinds of promises, it may be sensible to dispense with the requirement that reliance be proved--especially if such proof would be difficult and expensive.

   In tort law similar answers are given when proof of causation is not required, though the causation requirement is relaxed much less frequently than its contract analogue, reliance. When proof of individual causation is expensive and difficult, but it is clear that the defendant harmed an indeterminate group of victims, individual proof sometimes is not required.(12) Moreover, when the defendant is more likely to have access to evidence that could disprove causation than the plaintiff is to have access to evidence that could prove causation, the burden of proof may be shifted.(13) And it is increasingly recognized in tort-law theory that proof of causation, far from being a moral or logical imperative, is just one simple and useful way of adding up the costs that a system designed to promote optimal deterrence of loss should take into account in deciding when to impose liability.(14) The analogy to contra proferentem is that ambiguous policy provisions often harm policyholders even when pinpointing how is difficult. Requiring proof of causation therefore could be both expensive and counterproductive--if the losses of policyholders who would be denied coverage because they relied on ambiguous provisions but could not prove reliance would exceed the gains of those who at present receive coverage under contra proferentem even though they did not rely. By further analogy to tort law, it might follow that, when insurers have it within their power to disprove causation, they should be allowed to escape liability by doing so--perhaps by showing that the policyholder...