Unenforceable “Policy Interpretation” Provision

Frank M. Kaplan

There are certain immutable truths. For example, we know that the sun will rise in the east tomorrow, that the earth is not flat, that coverage grants in an insurance policy are to be interpreted broadly consistent with the insured’s reasonable expectations, and that policy exclusions are to be interpreted narrowly. The latter two, which together with others, are long-held canons of insurance policy interpretation protecting insureds that appear in thousands of court decisions and are not subject to reasonable dispute by lawyers on either side of the insurance coverage bar.

So what happens when an insurer attempts to alter these and other fundamental, bedrock principles of policy interpretation by unilaterally altering them in a form, non-manuscript insurance policy? Must a court abandon decades of settled jurisprudence in favor of policy language that seeks just that result? The answer should be “no.”

At least one insurer, however, has attempted to do just that by including an “interpretation” paragraph in the conditions section of a pre-printed professional liability policy that upends and materially changes a number of entrenched and important interpretive guideposts. This paragraph reads as follows:

“The terms and conditions of this Policy shall be interpreted and construed in an evenhanded fashion as between the parties. If the language of this Policy is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant terms and conditions of this Policy, without regard to the authorship of the language, without any presumption or arbitrary interpretation or construction in favor of either any Insured or the Company and without reference to the reasonable expectations of either the Insured or the Company.”

This paragraph, aside from its diversion from the everyday construction of insurance policies, is full of uncertainties. It refers to language that is deemed ambiguous “or otherwise unclear.” What does “otherwise unclear” mean and how is it different than “ambiguous?” To be “ambiguous,” language must be reasonably susceptible to more than one interpretation.[1] Does “otherwise unclear” require that the insurer advance a reasonable alternative interpretation?

The paragraph then says that if the language is ambiguous or otherwise unclear, the issue must be resolved in the manner most consistent with the relevant terms and conditions of the policy, and, in addition, contrary to a number of well-settled interpretive aids. Again, this language appears to abandon the requirement that language is “ambiguous” only if there are two reasonable interpretations.

And interpreting the language “consistent with” the “relevant terms and conditions” is nothing more than legal mush, inevitably leading to countless disputes. What if both the insured and insurer construct arguments “consistent” with “relevant terms?” Who wins?

Limiting the interpretive tools to “consistency with relevant terms” may also eliminate the use of things like extrinsic evidence, statutory and regulatory definitions, and course of performance to determine the meaning of a policy.[2]

These uncertainties, however, merely compound the fundamental alteration of insurance policy interpretation attempted by this paragraph. The first sentence requires that the policy’s terms and conditions be construed in an “evenhanded fashion.” Judges, of course, are required to be fair when dealing with the litigants that appear before them. But this language does not address judicial bias.

Instead, it seeks to eliminate decades-old tenets such as coverage provisions are to be interpreted broadly in favor of the insured, exclusions should be interpreted narrowly against the insurer, and ambiguous terms are to be resolved in the insured’s favor, consistent with the insured’s reasonable expectations.[3]

The paragraph then does away with the role that authorship of the policy plays in resolving ambiguities—contra proferentem.[4] So, in this insurance policy, it doesn’t matter if the insurer is the one responsible for creating an unintelligible provision.

Similarly, pejoratively referring to long-held interpretive guides as “arbitrary,” the paragraph eliminates presumptions and other traditional interpretive devices that favor either party, and instructs that the reasonable expectations of both the insured and the insurer should be ignored. This language creates the false and misleading impression that the insurer is also giving up something, when it really is not. What “presumptions” in favor of the insurer or insurer “reasonable expectations” is the insurer so generously relinquishing? The answer, of course, is none.

The paragraph creates this ruse in order to falsely comfort an uninformed insured into thinking that the insurer is bending over backwards to simply be fair, when in truth the paragraph emasculates long-standing protections for the insured that judges and coverage lawyers can recite in their sleep.

But assuming that the language in this paragraph is clear and provides an unambiguous roadmap as to how to interpret insurance policies, why isn’t it enforceable? After all, insurers can exclude all sorts of things in their policies as long as the exclusion is clear. So why can’t insurers also alter the rules of the road when it comes to defining how to read a policy? There are several reasons.

First, any provision that takes away or limits coverage reasonably expected by an insured must be conspicuous, plain, and clear.[5] This paragraph miserably fails that test. An insured should be entitled to reasonably expect that decades-old insurance policy interpretative rules will continue to be applied for the insured’s protection. The stealth removal of those protections by this garbled paragraph is neither conspicuous, plain, nor clear and is a trap for the unwary.

Second, an insurer’s interpretation of a policy is unenforceable when it is against public policy or inconsistent with a statute.[6] California Civil Code section 1654, for example, directs that contracts should be interpreted against the party causing the uncertainty. The paragraph unlawfully attempts an end run around that statutory directive and is unenforceable.

Third, a provision such as this one that seeks to alter basic interpretative rules may be deemed unconscionable, as allocating risk in an objectively unreasonable or unexpected manner.[7]

Finally, unusual or unfair language in a policy may not bind the insured unless brought to the insured’s attention and explained.[8]

California Civil Code Section 1635 mandates that all contracts are to be interpreted according to the same rules. The paragraph here violates that basic notion, disregards long-settled authority, and should be ignored as contrary to that authority.

Courts have long recognized that insureds who enter into adhesive, form insurance contracts have little or no bargaining power and therefore require various protections in the interpretation of those contracts. Cynical efforts by insurers to strip away those judicial protections by inserting language in their form contracts that purport to mandate interpretative rules contrary to well-settled law are simply unenforceable.

[1] State of Calif. v. Continental Ins. Co., 55 Cal. 4th 186, 195 (2012).

[2] See e.g. Haynes v. Farmers Ins. Exch., 32 Cal. 4th 1198, 1210-2011 (2004) (extrinsic evidence may be offered to show special meaning); Garcia v. Truck Ins. Exch., 36 Cal. 3d 426, 436 (1985) (parol evidence admissible to determine if terms are ambiguous); Garamendi v. Golden Eagle Ins. Co., 127 Cal. App. 4th 480, 486 (2005) (statutory and regulatory definitions may help define policy terms); Employers Reins. Co. v. Sup. Ct. (Thorpe Insulation Co.), 161 Cal. App. 4th 906, 921 (2008) (course of performance by insurer and insured admissible in interpreting policy terms).

[3] MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003) (insurance coverage interpreted broadly to afford greatest possible protection to insured; exclusionary clauses interpreted narrowly against insurer); California Civil Code Section 1649 (interpret ambiguous terms according to promisee’s reasonable expectations).

[4] Palp, Inc. v. Williamsburg Nat’l Ins. Co., 200 Cal. App. 4th 282, 290 (2011) (construe uncertain policy term against party that caused uncertainty to exist in order to protect insured’s reasonable expectations).

[5] Haynes, 32 Cal. 4th at 1204.

[6] See e.g. Central-National Ins. Co. v. Garcia, 51 Cal. 4th 564, 573 (2011) (policy exclusion that seeks to override statutory requirements may be invalidated as contrary to public policy); Julian v. Hartford Underwriters Ins. Co., 35 Cal. 4th 747, 756 (2005) (same).

[7] See California Civil Code Section 1670.5 (a) (court may refuse to enforce unconscionable contract); A&M Produce Co. v. FMC Corp., 135 Cal. App. 3d 473, 486 (1982) (non-insurance case); Boghos v. Certain Underwriters at Lloyds of London, 36 Cal. 4th 495, 508-509 (2005) (unconscionability may be basis for challenging unfair arbitration clause in insurance policy).

[8] Haynes, 32 Cal. 4th at 1210-1211.