Mon, 19 Feb 2018 12:37:29 +0000

By Chungu Katotobwe

Prior to beginning any discussion of what are best insurance contracts drafting practices let us first address the question: what is an insurance policy? While policies are indeed contracts, they are a particular kind of contract unique unto themselves. Insurance policies are “contracts of adhesion,” where the insurer drafts the contract and the insured/customer has little or no ability to make changes to it.

An insurance contract is an agreement where the insured agrees to pay premiums to the insurer/insurance company in exchange for the insurer agreeing to cover claims that are within the terms and provisions of the insurance policy. A fundamental tenet of insurance contract law is that any losses covered under any insurance policy must be fortuitous (unexpected), unknown and contingent, at the time that the policy is entered into by the parties.

The insurer’s obligation to perform (i.e., cover claims) is dependent on the occurrence of a fortuitous loss event. The act of purchasing coverage for an unknown risk is the vehicle through which that risk is transferred from the insured to the insurance company that is being paid premium to assume the risk.

There is a significant body of case law that has developed over the years setting forth various rules that govern policy interpretation. In the majority of countries of the world, the courts of law indicate that the terms and provisions of any policy must be given their ordinary and popular meaning.

When interpreting provisions of a policy, courts generally look to dictionary definitions to establish meaning. Unless there is some technical meaning attributable to the policy provision at issue, most often just an ordinary, non technical or non legal dictionary definition will suffice to guide a fact finder in interpretation of the provision at issue.

Courts generally also give all policy provisions effect so even if the court is charged with looking at only one provision or clause in the policy, the way a court (or fact finder) would look at this provision or clause is in the context of the contract as a whole. This means that the language in a policy is always read in context, where each policy term and provision can be used to help interpret any other.

As a result, if an insurance company writes any particular clause or provision in a certain way, that clause or provision can and should be interpreted in all similar policies it writes in exactly the same way.

Identical policy terms can not be malleable (compliant) from claim to claim. The proper  interpretation of a policy provision in the context of one claim is quite often also the proper interpretation of the same provision in another. In the end, it is the individual facts and circumstances that determine whether or not a policy responds to a loss.

Another fundamental principle of policy interpretation that is widely recognized in  insurance case law is that because insurance policies are “contracts of adhesion,” ambiguities in policy language are strictly construed in favour of the insured because the insured is presumed to have little to no expertise in insurance or insurance contract law. That said, the rule of strict constructionCis not typically applied in insurer versus insurer disputes relative to policy interpretation.

So, how is policy ambiguity evaluated? There are many different case law tests of whether policy language is ambiguous. In general, however, most courts would agree that a policy is not considered ambiguous simply because the parties to it disagree as to the meaning of any term or provision.

Moreover, in most cases, Courts will apply an “objective” test in determining policy ambiguity so that a court will find an ambiguity if the language at issue is subject to two or more fair and reasonable interpretations.

Policy ambiguity may also be evaluated by an analysis of the premium. While it is true that the end result will be that if a policy ambiguity is found, the policy gets construed in favor of the insured’s/policyholders reasonable expectation of coverage, the goal of any exercise in policy interpretation is to determine the initial or original parties’ mutual intent in contracting for the coverage.

In this regard, policy interpretation is like any other type of contract interpretation, where the insurance contract is examined in its entirety to arrive at the parties’ intent and the terms and provisions of the contract are considered as the most objective source of evidence of that intent.

The key features of any insurance policy that make it different from any other contract are generally: (1) that there is an insurable interest by the insured in whatever is being insured under the policy (2) that there is a possibility of fortuitous (unintended) loss associated with a claim (3) that the insurer has been transferred the risk, and that it assumes that risk as defined by the policy contract and (4) the consideration for the policy contract is premium payment.

All four elements of a policy contract must be present for the contract to be valid. The insured must have an insurable interest in whatever is being insured. An insurable interest is basically a lawful interest, which means that the insured has some form of a substantial interest in seeking to protect the subject of insurance from loss, harm, damage or destruction.

The insured’s substantial interest need not be an ownership interest per se. Interest can be manifest through the insured receiving or being entitled to any kind of benefit or gain relative to the subject of the insurance (the property, location, business or whatever is being insured).

Insurable interest is related to the idea of risk transfer. The insured needs to have an insurable interest in the subject of insurance so it can transfer risk to the captive. From a captive best practices standpoint, any captive policy should adequately describe the risk transferred in a way that insurable interest could be substantiated in the contract terms itself.

There are many different types of risk that qualify for coverage under a policy and there are many different policy types. For instance property and general liability policies. Policies are all different and the differences between the policies necessarily depend on the type of the coverage offered.

Prolific use of over generalized policy language where the policy contract does not follow the flow of a traditional insurance policy format could be suggestive of a problematic policy contract.

In general, all “real” insurance contracts contain the following: The policy starts with a declarations page which identifies the policy number, named insured, the insurer, the type of policy, the policy limit, any applicable deductible or self-insured retention, the period of the coverage, whether or not there is any retroactive date, and the premium. A key component to any insurance policy is the insuring agreement.  Look out for Part II.

 Note: In this column I offer general insurance information. Do not completely rely on this column in making insurance decisions. For specific guidelines email;

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