Contract Interpretation

Insurance Contract Interpretation

Interpreting the insurance Contract arises in several different context. Perhaps you had a fire on your property. If it was caused by lightening, usually the coverage is there by your own insurance policy, although the amount to be paid may be in issue. Do you have full replacement coverage or a depreciation coverage?  The amount to be paid may vary greatly. If however the fire damage was caused by a negligent act of a family member, an insured, a person living in your home, an owner of the property, then the entire coverage may be at risk, if the carrier believes the cause was deliberate or intentional. The difference between an intentional act (not covered) and a negligent act (covered) is fact based and the evidence that can be found. If your child is an adult but moved back home for a short period of time, that person may or may not be considered an insured. Being an insured can make a big difference in an insurance policy coverage issue. 

Contract Interpretation also arise when there are more than one policy that may be in effect. For example on an automobile driver - owner policy. The owner of the policy may have coverage. The driver may have coverage. The employer of the driver may have coverage. There may be a dispute between people as to whether the  driver had had authority to drive, or was "on the job" when the accident occurred.. There may be a limit of coverage on one policy , but a high limit on an other policy. Determine prime and secondary responsibility is fact intense and needs a thorough investigation 

The facts of each case is very important, because the intent of the parties is critical in any contract interpretation matter . The court case state that the parties' intent is the polestar to the contract interpretation. However over the year the Supreme Court have found commonly used language in insurance contract to have a particular meaning. Getting an experienced attorney in in this area therefore is very important. If a contract is not ambiguous then the meaning of the words as used in side the document itself is key. If the wording of the contract or if the circumstance of the contract is ambiguous, then evidence of the parties intent from sources out side of the four  corners of the document may be used to understand the parties intent. 

Rules of Construction or "Principles" of Construction

Insurance litigation requires a lot of legal and factual analysis.  To assist the Courts, there are "rules of construction" to help in the evaluation of the interpretation.  These rules of construction can be quite helpful in the right case.  Below are several that insurance practitioners should not forget:

  • Insurance contracts, being subject to the same rules of construction as contracts generally, should be interpreted and enforced as written.  Absent fraud or mistake, the terms of a contract should be given their plain and ordinary meaning, for the primary rule of contract interpretation is to ascertain and give effect to the intent of the parties.  
  • The parties' respective rights and obligations are governed by their contract of insurance whose terms are embodied in the policy. As with any other contract, the court's responsibility is to give effect to the expressed intention of the parties, by construing the policy fairly and reasonably, and by giving the policy's language its common and ordinary meaning.  The Court is  not at liberty to rewrite an insurance policy simply because we do not favor its terms or because its provisions produce harsh results. In the absence of fraud, overreaching, or unconscionable, the courts must give effect to an insurance policy if its language is clear and its intent certain.
  • Exclusionary clauses are to be strictly construed against the insurer when drafted by the insurer. 
  • The language of the policy must be taken and understood in its plain, ordinary and popular sense.  Where language is susceptible to more than one reasonable interpretation, the language is ambiguous.  If such ambiguous language limits the coverage of the insurance policy, that language must be construed in favor of the insured.  In determining the “plain, ordinary and popular” meaning of language, courts may refer to dictionary definitions. 
  • Language in a policy is ambiguous if it is capable of more than one reasonable interpretation. A contract is ambiguous only if it is of uncertain meaning and may fairly be understood in more ways than one. 
  • All provisions in the contract should be construed in harmony with each other to promote consistency and to avoid repugnancy between the various provisions, when it is possible to do so. 
  • In Iowa, exceptions, exclusions, and limitations in insurance policies must be construed against the insurance company and in favor of the insured. The entire policy, however, including insuring clauses and exceptions thereto, must be read as a whole.  Exceptions should not be construed so narrowly as to defeat their evident purpose. 
  • The paramount rule of construction in insurance law is to ascertain the intent of the parties. 
  • The insuring agreement defines the outer limits of an insurance company's contractual liability. The courts are not at liberty to rewrite an insurance policy solely because they do not favor its terms, and must avoid forced constructions that render a provision ineffective or extend a provision beyond its intended scope.  As long as a policy's terms are unambiguous, it will be enforced as written, and courts cannot rewrite an unambiguous policy simply to avoid harsh results. Therefore, the insured cannot simply focus on the declarations/summary portion of a contract in isolation; the policy must be read as a whole.  
  • The insuring agreement sets the outer limits of an insurer's contractual liability. If coverage cannot be found in the insuring agreement, it will not be found elsewhere in the policy. Exclusions help define and shape the scope of coverage, but they must be read in terms of the insuring agreement to which they apply. Exclusions can only decrease coverage; they cannot increase it.  Each exclusion reduces coverage and operates independently with reference to the insuring agreement. Exclusions should not be construed broadly in favor of the insurer, nor should they be construed so narrowly as to defeat their intended purpose.  Once an insurer has established that an exclusion applies, the burden shifts to the insured to demonstrate that its claim fits within an exception to the exclusion. 
  • An insurance contract should be construed in a reasonable and logical manner. When coverage questions arise, the components of a policy should be construed in the following order: 1) the declarations; 2) the insuring agreements and definitions; 3) the exclusions; 4) the conditions; and 5) the endorsements. 

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