Nowhere is the English language more important in the legal world than in insurance contracts. The policies are written in an archaic manner, using numerous terms that are specially defined in the contract. On top of that, insurers usually tack on numerous endorsements to the policy that alter the terms of the original contract. In some instances, a policyholder will even see one endorsement modify the terms of another. Finally, court opinions also play a significant role in how insurance terms in policies are to be understood.
A recent opinion from the appellate court in New Jersey confirms the point: Insurance policies must be carefully reviewed and understood.
In William B. Kessler Memorial Hospital v. North River Insurance Co., the court sets out general rules of insurance contract interpretation that are always worth reviewing.
In this case, the Internal Revenue Service (IRS) sought fines and payments from the trustees of the hospital for failure to pay employment taxes. The trustees sought a defense from North River Insurance with respect to the demand from the IRS. North River denied coverage and any duty to defend, which surely came as a surprise to these individuals and the hospital.
The trial court dismissed the case, and the appellate court agreed with the decision. Some pointers in interpreting insurance contracts are set forth in the court’s decision and are generally applicable as rules throughout courts in the United States. These rules are:
- The plain and clear language of an insurance policy are to be interpreted according to the plain and ordinary meaning.
- Insurance contracts should be interpreted in a manner to fulfill the expectations of the parties to the agreement.
- Courts will interpret the policy as written and not attempt to rewrite a better policy than the one purchased by the policyholder.
- The policy will be read as a whole and not by sections in isolation in a manner that renders another section meaningless.
In the Kessler Hospital case, the insureds were seeking a defense even though the policy clearly excluded any coverage for fines, penalties and taxes. They attempted to obtain a defense by violating the general rule of construction that sections cannot be read in isolation from other parts of the policy. In this instance, the trustees were attempting to convert the insurance policy into one for unlimited legal services regardless of the exclusions and duty to indemnify.
What the insurance policy protects in the coverage agreement is only the beginning of understanding your contract. What the policy provides initially is often times substantially reduced by exclusions. Exclusions may be found in the main document or added to it in endorsements. Often times, the endorsements will modify language in the main contract, so the policyholder must carefully reconcile endorsements with the portion of the policy document it modifies.
Finally, in the wake of a claim, insurance policies contain various terms and conditions to follow in seeking coverage from the insurer. It is critical that policyholders know these aspects of the policy since they are often conditions precedent to being given coverage for the claim. There are thousands of cases where an insured would have had a covered claim, except it violated a condition in policy. Some of the most important terms and conditions are:
- Providing the insurance timely notice of the claim or loss.
- Not incurring expenses or legal fees without the insurer’s prior permission.
- Settling a matter without the insurer’s permission.
- Discussing the case or making admissions related to the claim.
- Failing to cooperate with the insurer’s investigation into the loss.
- Prejudicing the insurer’s subrogation rights.
In some states, the insurer does not have to suffer prejudice as a result of the insured violating a condition imposed by the policy. This fight is the most critical in providing notice of the loss or claim. Policyholders want to address the problem and get it resolved as quickly as possible. Then, they will address insurance.
The problem is that courts interpret deadlines for giving notice to the insurer, which are not often spelled out in the policy, as fairly short. For example, many policies will call for the policyholder to provide notice “as soon as practicable” or “immediately.” Even if an insured does not think a problem is an insured loss will actionable yet (i.e. no lawsuit has been filed yet), most policies require notice of possible losses and claims. It is better to error on the side of caution and always provide the insurer with notice of the incident.
It is vital for business policyholders of all sizes to understand the true nature of their insurance coverage. Simply understanding that a business has liability insurance that should defend and indemnify it from lawsuits, for example, is not enough. The only method to truly comprehend the scope of insurance coverage is to wade into the language of the contract. Whatever the coverage grants in the policy extends to the insured the exclusions, definitions and conditions sprinkled throughout the rest of the contract surely will limit.