Interpreting an insurance policy typically follows general rules of contract construction, but there are insurance-specific nuances that often favor the insured. These nuances exist because insurers are seen as better positioned to prevent disputes regarding policy meanings from the outset. Three key rules discussed here include the doctrine of reasonable expectations, the principle of contra proferentem, and the narrow construction of exclusionary clauses.
The Doctrine of Reasonable Expectations
The doctrine of reasonable expectations is considered the most protective rule for the insured. This doctrine applies when policy language is confusing or the insurer engages in deceptive conduct. Many courts believe that exclusionary clauses, which the insurer must prove, should be construed narrowly in favor of coverage. Additionally, courts often resort to the doctrine of contra proferentem, which automatically construes ambiguities in the policy against the insurer. These rules may be applied once ambiguity is determined by the court.
Understanding Reasonable Expectations
In some jurisdictions, the controversial doctrine of reasonable expectations subjects policy terms to heightened scrutiny to meet the insured’s expectations. This doctrine can extend coverage even when policy language does not explicitly provide it. Given the potential for insurers to mislead or take advantage of insureds, insurance policies are scrutinized closely, obligating insurers to clearly convey any coverage-limiting provisions.
The reasonable expectations of the insured may override exclusionary policy language if a reasonable person would not understand that a particular scenario is not covered, or if the insurer has deceived the insured into believing otherwise. Even without technical ambiguity, courts may find limitations on coverage ambiguous from an ordinary reader’s perspective, rendering exclusionary provisions unenforceable.
Insurance policies often result from take-it-or-leave-it situations and are not typically read by insureds. This disparity in bargaining power and the likelihood that insureds are not sophisticated in reading insurance policies increase the risk of insurers exploiting insureds by burying exclusionary language in fine print.
Application of Reasonable Expectations
The doctrine manifests in various scenarios, sometimes creating confusion about its scope. In some jurisdictions, it is more than an interpretive tool for resolving ambiguities; it assists in determining whether ambiguities exist at all. Courts apply this doctrine to resolve questions of law, balancing insureds’ protection and insurers’ interests in defining and restricting policy coverage. Courts in reasonable-expectations jurisdictions enforce clearly drafted exclusions, provided they are understandable to an ordinary person and free from deceptive conduct.
The Doctrine of Contra Proferentem
The doctrine of contra proferentem is similar to the rule of reasonable expectations but narrower in application. It dictates that insurance policies should be construed against the insurer, as the insurer drafts the contract. Often triggered by ambiguity, this doctrine is widely applied to favor coverage for the insured, operating on the principle that the insurer is best positioned to ensure contract clarity. An ambiguous insurance policy provision is thus construed against the insurer, who provided the text.
Narrow Construction of Exclusions
Exclusions in insurance policies are construed narrowly in favor of coverage in most jurisdictions. This principle stems from the idea that the insurer, or an industry organization, chose the terms to limit coverage. Exclusions and exceptions to coverage are not favored and are strictly construed to provide the coverage otherwise afforded by the policy.
Courts recognize the unequal bargaining positions in standardized contracts like insurance policies. Therefore, any exceptions, limitations, or exclusions that vary from the original policy must be clearly, conspicuously, and unambiguously called to the insured’s attention. Specific notice is particularly crucial when there is a reduction in coverage.
