Ambiguous Is As Ambiguous Does
Insurance Policy Language
THE RHA REVIEW
Volume 3, No. 2, First Quarter 1997
By Robert N. Hughes, CPCU, ARM
"No man means all he says, and yet very few say all they mean, for words are slippery and thought is viscous." – Henry B. Adams
Apologies to Forrest Gump’s mother for the slight alteration of her famous quote, but it fits. Ambiguous … interesting word. Before I give you Webster’s version, pause a moment to ask yourself what your understanding of the word is. Now here’s what Webster says: "Ambiguous — 1: doubtful or uncertain esp. from obscurity or indistinctness; 2: capable of being understood in two or more possible senses." Now I’ll bet you that you thought only of the first one … that it meant something that was vague or difficult for you to understand. I certainly know that was my belief before I became familiar with the legal application of the principle as it applies in the interpretation of insurance policies.
Speaking of "legal," Black’s Law Dictionary has a great deal to say on the subject, mostly quoting from benchmark cases. One of the more interesting ones is a quote from Logue v. Von Almen, 379 Ill. 208, 40 N.E.2D 73, 82. The court said in that case, "Ambiguity of language is to be distinguished from unintelligibility and inaccuracy, for words cannot be said to be ambiguous unless their signification seems doubtful and uncertain to persons of competent skill and knowledge to understand them. It does not include uncertainty arising from the use of peculiar words, or of common words in a peculiar sense. It is latent where the language employed is clear and intelligible and suggests but a single meaning, but some extrinsic fact or extraneous evidence creates a necessity for interpretation or a choice among two or more possible meanings, as where a description apparently plain and unambiguous is shown to fit different pieces of property." Finally, the definition, also appearing in Black’s that seems to now be the law in most states is, "Language in [a] contract is ‘ambiguous’ when it is reasonably capable of being understood in more than one sense."
So are insurance contracts ambiguous? Of course they are. It is almost impossible to write a document as detailed and lengthy as most insurance contracts are and not have words and phrases contained therein which are "… reasonably capable of being understood in more than one sense." For instance, what about the work sudden (as in the "sudden and accidental" pollution exclusion?) Insurance companies maintain it can have only one meaning — "instantaneous, abrupt, temporal in nature." Policyholders, on the other hand, are saying, "Wait a minute! When you filed this wording with the state regulators, you told them and us that you were excluding coverage for pollution that was ‘expected and intended,’ and we think the word means ‘unexpected.’" Who’s right? Well, that is the subject of intensive and expensive debate. Webster defines the word as 1a: happening or coming unexpectedly b: changing angle or character all at once; 2: marked by or manifesting abruptness or haste; 3: made or brought about in a short time." Could it be that all interpretations have merit? If so, how will that "ambiguity" be resolved?
Let’s look at another example. Before the publication of the "sudden and accidental" pollution exclusion by the IRB and MIRB in 1970, some companies occasionally used an endorsement which stated that there would be no coverage for "injury to or destruction of property caused by the pollution of streams, rivers or bodies of water, unless caused by accident." Now this was before Love Canal and Times Beach and almost every other famous pollution case. By my recollection, the term groundwater was virtually never used in the insurance industry prior to the early 1980s, and people referred either to underground water or underground resources if they wanted to talk about water beneath the surface of the earth. The term bodies of water meant, at least to me and my clients, other types of surface water, such as lakes, ponds and oceans. Many insurance company lawyers are now taking the position, however, that the term bodies of water means groundwater which in many cases is nothing more than molecules of H2O resident in the soil. Both sides produce experts who are supposedly reasonable and knowledgeable persons to support their respective positions. Ambiguity? Probably.
Space prohibits the citing of the hundreds of other examples of ambiguity in insurance contracts, so these two will have to suffice. It brings us, however, to the principal purpose of this treatise, which is a brief discussion of the resolution of ambiguity in insurance contracts. Policyholders say, "Wait a minute. We never understood the contract in that manner and, what’s more, if we had, we would never have bought the coverage." Insurers say, in some cases, "That’s tough. The policy is interpreted not on what you knew but on what you, as a prudent person, should have known." Now there is no denying that one of the best ways to resolve ambiguity is to find out what each party understood at the time the bargain was struck. Unfortunately, most of these disputes finally find their way into the courts decades after the fact, and most of the people originally involved are dead or lost.
At the end of the day, most of these issues come down to the fact that the words and/or phrases in dispute are simply "ambiguous." What most policyholders do not understand, however, is that there is a doctrine of law called contra preferentem, which holds, in simple terms, that a contract is to be construed against the person preparing the terms thereof. In other words, any ambiguity in an insurance contract which is written by the insurance company or its representatives (the ISO, for example) must be construed in favor of the policyholder; i.e., in favor of coverage.
So when you have a claim and the insurance company denies it on the basis of an interpretation of the policy which is inconsistent with your understanding (assuming that your understanding is a reasonable interpretation of the words and phrases), does your interpretation have merit? You damn betcha, as we say in Texas. As a matter of fact, since you didn’t write that policy but simply took and paid for what was handed you, your interpretation of the meaning of the words and phrases can very well be the basis upon which a court of law determines how the contract is to be applied.
One final thought, I know you are all extremely bright, so you have all probably already thought, "So if that is the case, then it is probably to my advantage to have my insurance policy be deemed totally ambiguous." Believe me, you should resist the temptation. I recently saw a case in which the policyholder and insurers spent a total of $27 million trying to resolve the ambiguities in a $10 million policy. Insurance works a lot better when both parties have a clear understanding of the interpretation and application of the contract from the very beginning. Unfortunately, policyholders tend not to read their policies and ask questions. Even more unfortunately, the persons dealing with claims on behalf of the insurance companies tend to be lawyers who were not involved in the original underwriting or sale and who have probably never been active in the insurance industry per se. They have simply been handed a claim and have been told, essentially, "Figure out any way you can to keep us from having to pay this claim." This often makes for ingenious interpretations of insurance contracts. Sometimes, however, the interpretations are outright insulting.
In a word, try to avoid ambiguity, but when it eventually shows its Hydra-like self, take some heart in the fact that the doctrine of contra preferentem is on your side.