Conflicts arise between businesses and their insurers. Sometimes these conflicts are the result of fraud or misrepresentation by the insurer or the business. But, by far, the most common dispute between the insurer and the business is: What does the insurance policy mean?
When such a conflict arises, the matter often ends up in court. Here we look at insurance law generally and explore some basic principles of policy interpretation.
The Declaratory Judgment Action
An insurance policy is really nothing more than a contract. It is a written contract that must follow state and federal law and be capable of being read. When parties to a contract disagree later over what the terms of the contract state, they can seek a court determination of the rights, obligations, and responsibilities of the parties to the contract. Such a legal action is generally called a declaratory action - that is the parties are asking for a "declaration" of the parties' rights under the contract. When insurers and insureds disagree on the terms of an insurance policy, the insured or insurer may bring an action for a declaration of the rights and obligations under the policy.
How Courts Interpret Insurance Policies
Once the dispute is in the court system, the court will typically demand both sides file written legal arguments - motions and briefs - about the dispute and the underlying policy. Generally, declaratory actions are not heard by juries because the issues are legal issues and not fact issues. Fact issues, such as accusations of fraud, bad faith, and non-payment of premiums, are heard by juries. But, issues of law, such as policy interpretation are legal issues decided by the court. In reaching a decision courts look at the following:
- Common Law Contract Principles- The "common law" is the body of general legal principles that govern American law. For example, a common law principle of contract law is there must be consideration for the contract - the parties exchanged value for the contract. The insured paid premiums in return for the value of protection in the event of a loss under the policy. There are many such principles (that law students spend years studying).
- Statutory and Administrative Laws and Rules- The federal government, states, and administrative agencies pass laws directly affecting how a policy can be written. Courts must adhere to these laws and rules. For example, in some states, insurers must offer uninsured motorist protection as a part of a commercial auto policy and cannot write such a policy without it being included. Each state is different and, based upon the law of the state, a decision may differ from one on the same issue in another state.
- Case Law and Prior Decisions- Courts have a hierarchy. The United States Supreme Court is at the top. Municipal and county courts will defer to the courts of appeals and state supreme courts. Courts will look at whether the same issue has been decided by another court, whether that court's decision is binding on the court, and will generally follow prior decisions. If a higher court has interpreted a policy provision in a particular way, it is likely a lower court will follow that decision.
- Plain and Ordinary Meaning of the Words- Courts will give words their plain and ordinary meaning. The words used in the policy have their ordinary meaning unless specifically defined to mean something. This is why business insurance policies always start with definitions of every word - including words like "we," "you," "accident," etcetera. Often millions of dollars are involved in the courts' interpretation of very simple words. For example, does "you" refer to corporate officers, employees, or contractors?
- Ambiguous Terms- Courts will look at whether a policy term is ambiguous. The general rule in insurance policy interpretation is that ambiguous terms are held against the drafter - that is, against the insurer. This is why insurance policies are so detailed, lengthy and sometimes ridiculous in the way it is written.
- Illusory Coverage- Courts will look at whether the exclusions and restrictions are so one sided as to create a situation where there is never any real coverage under the policy. Such coverage is deemed an illusion or "illusory."
- Equity and Fairness- Finally, courts will look at equity principles or fairness. If strict adherence to a provision in a policy would be so overwhelmingly unfair, then a court may decide a matter on equity or fairness. In most cases this will happen in the case where coverage is denied because a policy deadline is missed or a non-material (but, required) detail is reported incorrectly.
This is a basic summary. It is not state specific. Rather, it is to provide some insight into why your business insurance policy is written the way it is written. Insurance law is a complex subject and if you find your business in a dispute with an insurer find competent legal counsel in your state to assist.
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