Policy Construction Against Insurer

Insurance policies are contracts drafted by insurers, but the terms are not always clear and unambiguous. When a dispute arises between an insured and an insurer as to the meaning of a policy, courts sometimes become involved to provide a construction of the ambiguous term, as they do with other types of contracts. Disputes usually involve which risks are included in coverage, exclusions from coverage, conditions that must be fulfilled before coverage applies, and forfeitures of the policy.

Contra proferentem

If an insurance policy contains an ambiguous term or condition, it will be construed by courts against the insurer as the drafter of the policy. This concept is known as "contra proferentem."

Exception: Some courts do not employ the doctrine of contra proferentem. Instead, they construe insurance policies by determining the intent of the parties in view of the purpose of the contract and public policy.

What constitutes ambiguity?

Courts use an objective test to determine whether a policy is ambiguous before applying the doctrine of contra proferentem. They must interpret the provision at issue in light of the entire policy. They may find ambiguity if the contract is susceptible to more than one reasonable interpretation. Other evidence of ambiguity is the fact that different courts reached conflicting conclusions when interpreting provisions similar to the provision at issue.

An ambiguity does not arise solely under the following circumstances:

    • the policy provides coverage in one portion of the form and elsewhere excludes such coverage under a certain set of circumstances
    • a term is defined on one page but is used in an exclusion elsewhere
    • the parties disagree as to the meaning of a policy provision
    • the policy is complex or requires reference to various sections within the policy
  • the policy does not formally define a term

Effect of contra proferentem

When a policy is construed against the insurer, the insured receives the benefit of a liberal construction in his favor. Thus, if it is possible to adopt either of two reasonable interpretations, the construction that permits the insured to recover will be adopted. To avoid such a result, the insurer must establish that the policy is susceptible only of its construction.

Nonapplicability of contra proferentem

The doctrine of contra proferentem will not be employed if:

    • the policy is unambiguous
    • the application of the doctrine would cause a strained interpretation of the policy
    • the application of the doctrine would impose liability on the insurer when such liability was clearly not contemplated by the policy
    • the application of the doctrine would lead to an absurd conclusion
    • the application of the doctrine would reject the objective reasonable expectations of the parties
  • the disputed language is prescribed by statute