Insurance Law Center: Appleman Board Perspective: Jeff Thomas on Insurance Policy Interpretation and Ambiguity

Appleman Board Perspective

9/17/2007 1:54:30 PM EST

Jeff Thomas on Insurance Policy Interpretation and Ambiguity

Posted by Jeffrey E Thomas
Associate Dean for Academic Affairs, Professor of Law, University of Missouri, Kansas City

Everyone knows the rule that ambiguities are interpreted in favor of coverage, but not very many people have explored what the rule really means. At what point is something "ambiguous"?

The majority of courts apply a test that will find "ambiguity" if a provision is subject to two or more "reasonable" interpretations. A few courts, as well as secondary contracts literature, take a more conservative approach and find "ambiguity" only if two interpretations are equally reasonable. If, using the rules of construction, one interpretation is more reasonable than the other, the provision is not ambiguous.

Which approach is normatively better? I am currently working on a law review article exploring this question. My initial thoughts were sketched out in an article in the New Appleman on Insurance Current Critical Issues in Insurance Law monograph series.

My view is that the narrower, more conservative approach is normatively superior. It promotes more consistency, follows linguistic practices, and better tracks the parties' expectations.

The narrow rule promotes consistency by reducing the number of cases in which ambiguity is found. By limiting cases of ambiguity to those in which the proffered interpretations are equally likely, the unitiverse of possible ambiguities is reversed. While there will still be difficult cases at the margin, which can result in inconsistent outcomes, overall there will be fewer such cases.

The narrow rule follows lingusitc practices by allowing the court, which is similar to a reader or listener, to use rules of interpretation to "disambiguate" the provision. An ordinary reader or listern doesn't simply choose any reasonable interpretation when making an interpretive decision; he or she will choose the most reasonable interpretation. Thus, in most cases the ambiguity will be resolved through an interpretive device (context, body language, understanding the purpose, etc.) But there are instances when two interpretations seem equally likely, and in those instances it is sensible to use contra proferentum as the tie-breaker.

Finally, the narrow rule better tracks the parties expectations. The insurance policy governs the relationship between the parties, and the language of that policy creates certain expectations. While it is true that many policyholders, especially individual consumers, do not read their policies, they expect that the terms and conditions of the policy apply and should have some level of responsibility for their failure to read the policy. Moreover, the insurer has fairly well developed expectations of the scope and meaning of the policy that are used in the underwriting process. The narrow view is more likely to be consistent with these expecations by avoiding interpretations that, while reasonable, are less reasonable than another interpretation. Tracking expectations promotes fairness in interpretation, avoids possible cross-subsidies from insured to insured, and promotes consistency between claims adjusting and underwriting.

I am very interested in the thoughts and comments of others about these views, so I welcome posts or individual correspondence with me.

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Comments
Andrew Kennedy Last Post: 2/22/2008 8:39:22 AM	Subject: Jeff Thomas on Insurance Policy Interpretation and Ambiguity Date Posted: 2/22/2008 8:39:22 AM
Andrew Kennedy Last Post: 2/22/2008 8:39:22 AM	I think the minority, conservative rule, that you advocate, is nothing but intellectual folly. I do not see this as being helpful. One cannot balance whether two interpretations are "equally reasonable." It is difficult enough to determine whether there are two reasonable interpretations. That calculation itself is infused with its own balancing act, i.e. whether an interpretation is rationale but does not rise to the level of reasonable, etc. Additionally, I think it is an enormous leap to say that this narrower standard is in better keeping with the reasonable expectations of the insured. It might arguably be in better keeping with the expectations of the carrier, but that is not the touchstone in most jurisdictions. Create an account or login to post comments.
Jeffrey E Thomas 2/22/2008 11:33:46 PM subject: response to Andrew Kennedy The suggestion of "intellectual folly" lacks support or explanation. Mr. Kennedy''s primary argument is that it is too difficult to determine whether interpretations are equally reasonable, with the implication that easier to determine whether there are two reasonable interpretations. I don''t see why that should be so. To only require that an interpretation be reasonable to govern is to take the intellectually "easy way out." And the problem with that is that it allows judges to use ambiguity as a justification for whatever outcome they prefer: if they want the insurer to win, they find the provision unambiguous; if they favor the policyholder they find the provision ambiguous. I know that determining whether two interpretations are equally reasonable will not be easy, but it will be more disciplined and I think in the long run reduce the wide variation in outcomes. I think that Mr. Kennedy misunderstood my point about expectations. I did not invoke the "reasonable expectations" as that phrase is often used as support for my position. Actually, I believe that most insureds do not have particularized expectations about coverage. But I think they do expect that the language of the policy will govern their losses. In addition, my point about the insurer''s expectation is not to invoke a "touchstone" (or any other talisman), but instead is to suggest that claims adjusting should have some relationship to underwriting. Underwriters use more generalized understandings of coverage, and I think that using the most reasonable interpretation is more likely to be consistent with the way that underwriters interpret coverage in setting premiums. KarenYotis 4/18/2008 4:38:18 PM subject: response to Jeffrey E Thomas Andrew Kennedy emailed the following response to Professor Thomas''s reply, which is repeated here with permission from both parties. Kennedy writes: "I''d like to respond to points you made in your Reply. Perhaps I can break my responses down better in an email. I have several. 1) The "rule" of construction at issue here is more akin to a standard (like the reasonable person standard) than a rule, because the Court is called upon to infuse its own judgment. Standards can never be mechanically applied, unlike rules. In other words, standards are not precise and the outcome from using them are difficult to predict. It seems to me that increased precision is one of the motives for advocating the change to this conservative approach. However, as long as a Court will be determining reasonability, (whatever test we use), they can never be too precise. 2) One of the fundamental flaws with an rule which says that there is no ambiguity unless a Policyholder proves that its interpretation is equally as reasonable as the Insurer''s interpretation is that there is no way to do this. Analytically speaking, the rule still leaves it up to the Court to weigh reasonability, but there is really no proverbial scale for balancing competing interpretations--at least it is no different than what the Courts do now. Thus the Rule has the appearance of forcing the Court to make a fine distinction, but without any guideposts, the proffered precision is illusory. Therefore, the rule to me promises a precision that it cannot deliver. That is why the current rule is better. 3) The Rule appears to me to conflate two different doctrines, a point that is highlighted by the end of your reply. If I understand you correctly, this new rule is designed to promote the "most reasonable" interpretation of a Policy provision, and the most reasonable interpretation comes directly from the Insurer and its underwriters. This is exactly the opposite of the approach of those jurisdictions that provide that the guiding principle is the reasonable expectations of the insured. Your response suggests (I think) this is so because you do not believe that most Policyholder have such expectations, and that this rule of construction ought to be abandoned as well. 4) One of your justifications for arguing that the new rule is normatively better is that it better tracks the "parties" expectations. Given the discussion above, this appears to really mean the Insurer''s expectations. The Rule probably does that. However, I think one can only advocate for that Rule if one is ready to jettison the reasonable expectations of the insured doctrine and its affiliates. I am not ready to do that quite yet." Barry Zalma 5/5/2008 12:42:09 PM subject: response to KarenYotis Professor Thomas: I admire your effort to set a rule that can be followed by the courts and hope you have some effect. The problem with the contra preferendum rule is that "ambiguity" is a subjective term determined by a judge or court of appeal that applies the terms of the contract to a factual claims situation. As a result, finding a rule -- whether narrow or wide -- will not work because what is clear and unambiguous when there is no claim may become ambiguous when applied to the facts of a particular claim. An insurance contract is, when all is said and done, a garden variety contract that should be interpreted like all other contracts. If the unequal bargaining power requires use of the contra preferedum rule then it is necessary that ambiguities be resolved. Some rule for such interpretation is necessary that is fair to both parties involved in the contract. Any lawyer with a modicum of creativity can imagine an ambiguity in a policy. Simply stated, all contracts are interpreted equally except insurance contracts, which are interpreted to favor the insured. I agree with the court that stated: "A court cannot and should not do violence to the plain terms of a contract by artificially creating ambiguity where none exists. In situations in which reasonable interpretation favors the insurer, and any other would be strained and tenuous, no compulsion exists to torture or twist the language of the contract. An insurance company has the right to limit the coverage of a policy issued by it and when it has done so, the plain language of the limitation must be respected." [Matsuo Yoshida v. Liberty Mutual Insurance Co., 240 F. 2d 824 (9th Cir 1957); Continental Casualty Co. v. Phoenix Construction Co., 46 Cal. 2d. 423, 296 P. 2d. 801 (1956); Adjuster 19s Market Co. v. American Home Assurance Co., 4 Cal. 3d. 309, 93 Cal. Rptr. 449 (1971).] In my opinion ambiguities, to cause a court to rule in a manner that interprets the words adverse to the insurer, must be truly ambiguous so that there are, at least, two or more competing interpretations that can legitimately be given to the words. However, because an exclusion takes away coverage given by an insuring agreement does not create an ambiguity. The language of the entire policy must be read and if the language is clear a court should not create an ambiguity. As the court in INA v. Home & Auto Ins. Co., 628 N.E.2d 643, 195 Ill. Dec. 179, (1993) said: 1CThis appeal draws us deep into the catacombs of insurance policy English, a dimly lit underworld where many have lost their way." It is such a fear of insurance contracts that are now written in Sesame Street English, that cause unnecessary findings of ambiguity when a simple reading, applying common sense rather than the prejudice that believes insurance policies are written in a dimly lit underworld, that has caused unusual and wild interpretations of insurance policies. The issue or creating an ambiguity where none exist was shown by the California Supreme Court when it decided E.M.M.I. Inc. v. Zurich American Insurance Co., 32 Cal.4th 465, in a 4-3 vote amazingly found the phrase 1Cactually in or upon 1D ambiguous in light of the facts in question. In E.M.M.I. a jeweler had his merchandise stolen from his car when he was walking close, but not in, on or upon, his car. The policy had an exclusion for theft losses from a vehicle 14 unchanged for more than 50 years 14 that provided coverage only if the jeweler is actually 1Cin, on or upon 1D the vehicle. The Supreme Court refused to enforce the exclusion and concluded that the phrase 1Cdoes not clearly and plainly apprise the insured the coverage would be lost by merely stepping out of the car. 1D In other words, the Court determined that 1Can insured would have a reasonable expectation that coverage would be provided in this context 14 when the insured is in close proximity to the vehicle. 1D The wording of the policy was modified by the Supreme Court who -- by use of the creative finding of an ambiguity -- changed the term "in, on or upon" to "in close proximity."

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