Policy Interpretation Principles
Insurance policies must be interpreted in accordance with the well-established rules of policy interpretation:
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contra proferentem - ambiguities in insurance contracts are to be construed against the insurer;
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coverage provisions should be interpreted broadly and exclusion clauses should be interpreted narrowly; and
- at least where the policy wording is ambiguous, effect should be given to the reasonable expectations of the parties.
Reid Crowther & Partners v. Simcoe & Erie General Insurance, [1993] 1 S.C.R. 252 at paras. 37 and 42 (S.C.C.)
These rules give the court leeway to find the "just" result from the perspective of the insured. Underwriters and adjusters must therefore read their policies with a discerning eye.
Be Aware of Industry Jargon
Consider the insurance industry phrase "follow form" in the below endorsement to a "claims made" umbrella policy.
| FOLLOW FORM EMPLOYERS LIABILITY
It is agreed that this policy shall not apply to loss arising out of Personal Injury to any employee unless at the time of injury there is underlying Employer’s Liability Insurance as set out in the schedule of Underlying Insurance, and then only for such hazards for which coverage is afforded under said underlying insurance.
All other terms and conditions of this policy remain unchanged.
Nothing herein shall vary, alter or extend any provision or condition of the Policy other than as above stated.
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The insurer might argue that "follow form" means its umbrella policy picks up all the terms of the underlying policy, including its "occurrence"-based temporal trigger of coverage (i.e. the endorsement changes the "claims made" umbrella into an "occurrence" policy).
The insured could counter that "follow form" means nothing to him. The meat of the endorsement is its wording, which picks up the underlying policy’s "hazards" (like accident, fire, etc.), but not its temporal trigger. Apart from "hazards", "all other terms and conditions of this policy remain unchanged".
The lesson:
- When reading a policy, note the inclusion of industry jargon.
- When responding to a claim, think about what you are relying on to deny the claim.
If it is an undefined industry term, you might owe coverage.
Note "Fancy" Grammar
Consider this phrase from a boiler and machinery policy:
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ACTION AGAINST THE INSURER
No action shall be laid against the Insurer unless, as a condition thereto, the Insured shall have fully complied with all the terms of this Policy, nor unless commenced within fourteen (14) months from the date of the ACCIDENT.
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The insurer meant to say "the insured cannot sue unless: (1) it has complied with all the policy terms; and (2) it sues within fourteen months".
By choosing more complicated grammar (i.e. the phrase "nor unless"), the clause is open to some debate. In grammar, "nor" means "and not". However, many people think it means the same as "or". Hence, an insured could argue that it only need comply with one of the conditions. [The phrase becomes even more complicated if "and not" is substituted for "nor" (i.e. "no action lies… and not unless").]
The lesson:
- When responding to a claim, be aware of awkward phrasing that could create ambiguities in the eyes of the court.
Maintain Consistency
Consider the basis on which the insurer agrees to pay a claim in this property policy:
Replacement Cost basis:
If you repair or replace the damaged or destroyed building on the same location with a building of the same occupancy and constructed with materials of similar quality within a reasonable time after the damage we will pay [a lesser amount].
Guaranteed Replacement Cost basis:
[We will pay a greater amount if] the repair or replacement is effected within a reasonable time after the loss or damage with a building of the same occupancy as prior to the loss and with materials of similar quality. |
Notice that in the Guaranteed Replacement Cost section, the insurer has not included the phrase "on the same location". The insurer likely intended the second definition to build on the first and adopt the "same location" requirement. Unfortunately, an insured could argue that purchasing a new house on an entirely different location should entitle it to the more expensive Guaranteed Replacement Cost coverage.
The lesson:
- When responding to a claim, remember that the absence of certain words can be just as important to the court as their presence.
Define Broad "Everyday" Terms
Consider this definition in a CGL policy:
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The term "Advertising Liability" means:
- Libel, slander or defamation;
- Any infringement of copyright or of title or of slogan;
- Piracy or unfair competition or idea misappropriation under an implied contract;
- Any invasion of right of privacy;
committed or alleged to have been committed in any advertisement, publicity article, broadcast or telecast and arising out of the Named Insured’s advertising activities. |
The policy neglected to define the term "advertisement". The insurer intended it to mean traditional advertisements, like newspaper and television ads. However, the insured could argue that "advertisement" is much broader today (e.g. a logo on a watch, or the shape of a pill).
The lesson:
- When responding to a claim, remember to look beyond what the insurer meant to say, and consider what broader implications the words might convey.
Conclusion
Simple to state, but difficult to do: Carefully read policies from the perspective of the insured.
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