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Insurance Law
Rutgers University, Camden School of Law
Feinman, Jay M.



FALL 2014



-Process by which one determines the meaning the parties gave the language they chose to put in their contract

I) Contract Interpretation

A)Interpretation = the process by which a court determines the meaning that it will give the language

used by the parties in a contract.

B)Insurance policies have special characteristics from the normal insurance policy and therefore must

be construed with reference to special and unique standards, and therefore often times has a separate

law which applies

à Kings and causes of imprecision in contracts

· -imprecise language


– Ambiguity of Term

-Ambiguity of Syntax

· ambiguous organization

-Fails to inform the insured about the nature of the coverage

· -ambiguity created by extrinsic information

-sometimes this extrinsic information (example: explanations of forms and coverage) is inconsistent with or contradicts the written terms of the policy, thereby creating an ambiguity that must be resolved through techniques of interpretation

à In any case which a dispute arises over imprecision in an insurance policy, the problem probably could have been avoided if the organization, the terms, the syntax, or the extrinsic information had been more carefully prepared.

(B) General Principles of Contract Interpretation

– The principal rule of contract interpretation, it is often said, is to determine the intention of the parties.

à Two irreconcilable views of contract interpretation

– Interpretative approach (Professor Williston and 1st restatement of Contracts)- evidence extrinsic to the writing can be examined for the purpose of determining a document’s meaning only if the language in the writing is unclear

-Four Corners approach- emphasis on language of the policy

State Farm Insurance Co. v Gibbs (Ariz Ct App)

à Based on its review of the four corners of the agreement that the insurer and insured clearly expressed an intent that the autombile liability policy exclude from coverage all claims the named insured or his relatives might make against any permissive driver covered under the omnibus clause of the policy

Arizona Supreme Ct criticized Gibbs in Darner Motor Sales, Inc. v Universal Underwriters Insurance Co.

à We can assume that Mr. Gibbs, a lay person, had any idea that the policy contained such a clause or had he understood the ramifications would have intended the premium dollars would be used to protect entire world except members of his family. His intention would probably have been contrary

à Not unanimous support for cases like Darner Motor Sales

à Second Restatement of Contracts departs from narrow interpretive approach in 1st restatement and observes insurance contracts are almost always standardized and acknowledges customers are not expected to and don’t desire to understand or even read the standard terms.

à Not bound to unknown terms that are beyond reasonable expectation.


à traditionally interpretation has been function of the court, not the jury.

à In resolving an ambiguity a court must initially assess the 2 competing interpretations offered buy the parties for the term or phrase in question and decide which is to be preferred. As a general rule a court will prefer the meaning of the party who has less reason to know or less knowledge about what the other party understood the term to mean.

(c) Interpretation of Insurance Contracts

– Some courts have said that insurance K’s are to be construed like any other contract and nothing else is required. Most decisions, though, are fairly read as putting insurance Ks in a different category, and applying some kind of heightened review or alternative interpretative principles.

Vlstos v Sumitomo Marine And Fire Insurance Co.- 1983 3rd circuit decision

– Issue is meaning of warranty under which the insured promised that the 3rd floor of her building was occupied as Janitor’s residence. The court held that the warranty meant only that a janitor resided on the 3rd floor not that there be no other occupancy of that floor.

– One way to view holding is that the insured had a reasonable understanding of the ambiguous clause and no reason to know the insurer’s narrower understanding while the insurer had reason to know that the insured wouldn’t share the insurer’s understanding

– Under these circumstances the court was correct in favoring the understanding of the insured.


Insurance Policies as Adhesion Contracts

A) Adhesion contract = a description of the manner by which the contract is formed: one party having

superior bargaining power imposes its choice of terms on the other party- only a “take it or leave it”

option for the insured.

B) G/R: Policies are construed with a lay person’s understanding.

C) An exclusion in an adhesion contract of insurance must be expressed in words which are ‘plain and


25D Doctrine of Reasonable Expectations

VI) Doctrine of Reasonable Expectations (G/R: if a K is not ambiguous, doctrine of reasonable

expectation does not apply)

A) Reasonable expectations doctrine = when two interpretations exist as to what an insured might

expect a policy to mean, and one is inapt or absurd while the other is reasonable, the reasonable one

if selected.

1) Valstos v. Sumitomo Marine – court held the insured had a reasonable understanding of the ambiguous clause and no reason to know the insurer’s narrower understanding, while the insurer had reason to know that the insured would not appreciate the insurer’s understanding, i.e. court favored the understanding of the insured.

2) Kievit v. Lloyd Protection Life Ins.- court endorse the premise that insurance policies should be enforced in accordance with the insured’s reasonable expectation.

à AFTER KIEVIT many courts endorsed the premise that insurance policies should be enforced in accordance with the insured’s reasonable expectations

B) First must determine if language is ambiguous- is not, go with what is stated

d as if it were supplied by the insurer, without regard to which party actually supplied the term, unless the parties agreed in writing to the contrary.




Chubb Custom Ins. Co. v. Prudential Ins. Co. of Am., 195 N.J. 231, 238-39, 948 A.2d 1285, 1289-90 (2008)

We briefly detail the rules governing insurance contract interpretation. In attempting to discern the meaning of a provision in an insurance contract, the plain language is ordinarily the most direct route. Zacarias v. Allstate Ins. Co., 168 N.J. 590, 594–95, 775 A.2d 1262 (2001). If the language is clear, that is the end of the inquiry. Ibid. Indeed, in the absence of an ambiguity, a court should not “engage in a strained construction to support the imposition of liability” or write a better policy for the insured than the one purchased. Progressive Cas. Ins. Co. v. Hurley, 166 N.J. 260, 272–73, 765 A.2d 195 (2001) (citing Brynildsen v. Ambassador Ins. Co., 113 N.J.Super. 514, 518, 274 A.2d 327 (Law Div.1971)).

If the terms of the contract are susceptible to at least two reasonable alternative interpretations, an ambiguity exists. Nester v. O’Donnell, 301 N.J.Super. 198, 210, 693 A.2d 1214 (App.Div.1997). In that case, a court may look to extrinsic evidence as an aid to interpretation. Ibid. Where a word or phrase is ambiguous, a court generally will adopt the meaning that is most favorable to the non-drafting party if the contract was the result of negotiations between parties of unequal bargaining power. Pacifico v. Pacifico, 190 N.J. 258, 268, 920 A.2d 73 (2007) (citing RCI Ne. Servs. Div. v. Boston Edison Co., 822 F.2d 199, 203 n.3 (1st Cir.1987)).

Although not a canon of construction, courts frequently look to how other courts have interpreted the same or similar language in standardized contracts to determine what the parties intended, especially where rules in aid of interpretation fail to offer a clear result. Cf. Weedo v. Stone–E–Brick, Inc., 81 N.J. 233, 247, 405 A.2d 788 (1979) (accepting interpretations of provision of insurance contract by other jurisdictions as “thoroughly *239 persuasive” because of factual similarity and uniform wording of clauses); see also Calamari & Perillo on Contracts § 3.13 (5th ed. 2003) (“Where the rules in aid of interpretation and standards of preference fail to satisfy, courts frequently look to how other courts have interpreted the same or similar language.”). Those are the rules that will guide our analysis.