Insurance Policy Construction Principles: Your Defense Against Purposeful Ambiguities

This article was originally published in the March/April 2014 issue of Anderson Kill's Policyholder Advisor Newsletter

Insurance policies contain both defined and undefined terms. As the drafter of your insurance policy, your insurance company has likely defined a term when it finds it advantageous to do so, and may leave other terms undefined and purposefully vague. Policy construction principles have evolved to protect the policyholder from the insurance company's maneuverings in this regard. Understanding these principles will prove critical when your insurance company attempts to benefit from an undefined term, especially if that term appears in an exclusion.

How Do I Know if a Policy Term is Ambiguous?

Generally, a policy term is ambiguous if it is susceptible to two or more reasonable interpretations. Ambiguities can arise in insurance policies for a number of reasons. Some courts have held that an undefined term is necessarily ambiguous. Other courts have held that undefined terms are not automatically, but can be, or are more likely to be, ambiguous. Even policy terms that have a clear meaning may become ambiguous in certain factual contexts.

How Do Courts Interpret Ambiguous Policy Terms in My Favor?

Abiding by the principle of contra proferentum, courts construe ambiguous terms in an insurance policy against the insurance company and in favor of the policyholder. This rule derives from the fact that insurance policies almost always constitute adhesion contracts comprised of prewritten forms with non-negotiable language imposed by the insurance company.

Contra proferentum applies with even greater force when an insurance company leaves a term undefined. As one court stated, "[W]hen an insurer fails to define a term in a policy,...the insurer cannot take the position that there should be 'a narrow, restrictive interpretation of the coverage provided.'" State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So.2d 1072, 1076 (Fla. 1998). This rule proves especially true where an insurance company leaves a term undefined in an exclusionary clause. See Krombach v. Mayflower Ins. Co., 827 S.W.2d 208, 210 (Mo. 1992) ("[a]mbiguous provisions of a policy designed to cut down, restrict, or limit insurance coverage already granted, or introducing exceptions or exemptions must be strictly construed against the insurer"); Wojtunik v. Kealy, No. CV-03-2161-PHX-PGR, 2011 U.S. Dist. LEXIS 36229, at *23 (D. Ariz. Mar. 31, 2011) (rule of strict...