Many changes have been made to the Liability Insurance project draft since the 2017 Annual Meeting. Sections 3 and 4, The Plain-Meaning Rule and Ambiguous Terms, have been substantially altered to reflect the adoption of a plain meaning rule.
Each Section is represented by a black letter.
Comments (with Illustrations) and Reporters’ Notes are included in the full draft.
(1) When applied to the facts of the claim at issue in the context of the complete insurance policy, the plain meaning of an insurance policy term is the only meaning to which the language of the term is reasonably susceptible.
(2) If an insurance policy phrase has a clear meaning when applied to the facts of the claim at hand, it is interpreted accordingly.
(3) A phrase in an insurance policy is ambiguous if the language of the term is reasonably susceptible to more than one meaning when applied to the circumstances of the claim at issue in the context of the complete insurance policy. When a phrase is unclear, it is interpreted as indicated in 4.
When a phrase in an insurance policy is ambiguous, as described in 3(3), it is interpreted against the party that supplied it, unless that party can convince the court that a reasonable person in the policyholder’s position would not give the term that reading.
What happens if an insurance policy is ambiguous?
The “first principle of insurance law” states that ambiguities in insurance policies must be interpreted in the policyholder’s benefit. In general, the policyholder wins if a policy provision is found to be ambiguous; if the provision is found to be clear, the insurer wins. The goal of this paper is to define and examine the function of ambiguity in the interpretation of insurance policies. It distinguishes between a “wide” version of the rule that is accepted by the majority of courts and a “narrow” version that is backed by a small number of judges. A provision is ambiguous if it can be interpreted in more than one acceptable way, according to the broad version. A provision is ambiguous only if the rules of interpretation fail to resolve the claimed ambiguity, according to the restricted version of the rule. To put it another way, a provision is ambiguous only if the two interpretations presented are equally likely based on the policy’s language and the circumstances. The narrow version of the rule, according to the monograph, is superior to the broad version because it produces more consistent judgments, is consistent with linguistic practices, and increases the likelihood that the policy will be interpreted in accordance with the policyholder’s and insurer’s expectations.
What does ambiguous mean in insurance?
The ambiguity principle states that the terms of a contract or an insurance policy must be explicit and without ambiguity when used in insurance contracts. Because the insured has no influence in the contract’s terms, the insurance company must perform a comprehensive analysis of the contract to verify that there are no ambiguities in the wording employed. When the meaning of a contract language is unclear, it’s usually due to one of four factors: ambiguity, vagueness, absurdity, or obscurity.
How will a court interpret an ambiguous provision in an insurance policy?
In a contract interpretation lawsuit, the goal of the court is to figure out what the parties intended. When the contents of a contract are explicit, a court will enforce the contract as written, without relying on evidence outside the contract, such as testimony about what the parties intended the clauses to mean.1
But how would courts understand a contract that is unclear? A basic norm is that a court will interpret unclear contract clauses against the agreement’s drafter. However, this rule only applies where one of the contracting parties has a stronger bargaining position, usually due to better expertise or legal assistance.2
Contracting parties with comparable bargaining power and equivalent degrees of understanding who are both represented by counsel are more prevalent. In this case, the basic rule described above will not apply. Instead, when interpreting unclear contract language, a court will look outside the contract’s four corners to discover the parties’ intent. In such a case, recent New York court judgments provide direction on where the court will focus its inquiry: the parties’ conduct during contract talks and the contract term.
It is helpful to utilize a hypothetical to comprehend a court’s thinking when there is a dispute regarding the meaning of ambiguous contract provisions in an arms-length transaction. Assume that Party A and Party B sign a contract in which Party B agrees to supply advertising services to Party A in exchange for a “annual fee.” Assume that both parties are sophisticated and that they have retained legal advice to draft or review their agreement.
Party B will be paid a “annual fee” of $100,000 per year for the work accomplished, according to the contract’s first provision. The “annual charge” is referred to as the “fixed fee” under this paragraph. The annual fee is also referred to as the “fixed fee” in Provision II of the contract, which stipulates that the fixed fee is subject to just the provisions set forth in Provision III. Provision II makes no mention of a possible reduction in the fixed fee. However, Provision III of the contract says that if the actual value of the services supplied exceeds or falls below the fixed price, the fixed charge would grow or drop. The allusion to a decline in Provision III is clearly at odds with the language in Provisions I and II.
Assume that the set fee paid over the life of the ten-year contract was never less than $100,000 per year. However, in a number of those years, conditions were such that, under the contract’s Provision III, Party A may have contended that the fixed price should have been reduced below $100,000 since the value of the services actually performed during those years was less than $100,000. Assume that Party A had workers monitoring its contract, that it got annual documents from Party B detailing the nature and value of services provided, and that it reviewed these statements before paying the fixed amount.
Party A did not complain to the fixed fee paid until the eleventh year of the contract, despite all of this readily available information. At this point, Party A decided to sue Party B, claiming that it is entitled to a refund of the alleged overcharges it paid throughout the contract’s years when the actual value of services supplied was less than $100,000.
When interpreting confusing contract terms in a case like the hypothetical dispute between Party A and Party B outlined above, a court will look to the parties’ agreements, course of action, and the customs and practices of the relevant industry. However, recent case law highlights that if the meaning of the contract’s words is disputed, the parties’ course of performance within the contract period will be deemed the most essential proof of the parties’ agreed intention. 3
These recent decisions show that courts will dismiss a party’s proposed reading of an unclear contract term if that interpretation is contradicted by that party’s behavior during the contract’s life. According to this principle, Party A in our hypothetical would be barred from recovering since its actions during the contract term contradicted its representation that the fixed fee might be reduced to less than $100,000 per year if the value of the services given was less than $100,000.
For individuals involved in contract negotiations and writing, recent case law is informative. Should litigation arise, the parties’ course of conduct during the drafting process, as well as the parties’ conduct in the years to come under the contract, could be crucial. Both before and after the contract is signed, records of the conversations and communications between the parties should be retained. Contract drafts are valuable documentation of the parties’ intentions and should be kept. Prior drafts of the agreement may, in fact, expressly deny a claim or viewpoint stated by one of the parties subsequently.
Litigation may be unavoidable, even with the strongest preventative measures in place. In that case, the first question to ask is if the contract conditions are unclear. If they are, the parties’ conduct during the contract period become a key factor in determining how the contract should be interpreted. As a result, conducting a comprehensive factual inquiry into the parties’ activity during the contract term is critical in determining the parties’ chances of success on their claims or defenses. Recent case law suggests that a party’s reading of confusing contract language is unlikely to succeed if its actions are inconsistent with that understanding.
Where the parties did not engage in any course of activity during the contract term that is relevant to the proposed or current litigation, the court’s consideration will be guided by the parties’ conduct during contract negotiations and the customs of the relevant industry. As previously indicated in relation to the parties’ course of conduct, a thorough study into the negotiation process and the customs of the relevant line of business is also required in order to assess the merits of the litigation. 1 98 N.Y.2D 29, 744 N.Y.S.2d 358 (2002) (“Unless the court finds ambiguity, the standards controlling the interpretation of ambiguous contracts do not come into play”); ABS Partnership v. AirTran Airway, Inc., 765 N.Y.S.2d 616 (1st Dep’t 2003).
2 Herbil Holding Co. v. Commonwealth Land Title Ins., 183 A.D.2D 219, 590 N.Y.S.2d 512 (2d Dep’t 1992); Herbil Holding Co. v. Commonwealth Land Title Ins., 183 A.D.2D 219, 590 N.Y.S.2d 512 (2d Dep’t 1992); Herbil Holding Co. v. Commonwealth (“A contract must be construed most harshly against the party who drafted it and most favorably toward a party who had no say in the language’s selection”).
3 See, for example, Soberman v. Groff Studius Corp., 99 Civ. 1005 (DLC), 2000 US Dist LEXIS 3958, *22-24 (S.D.N.Y. March 27, 2000); Simon & Son Upholstery Inc. v. 601 West Assocs., LLC, 702 N.Y.S.2d 256, 257 (1st Dep’t 2000); Federal Ins. Co. v. American
What is policy ambiguity?
A deliberate ambiguity policy (also known as strategic ambiguity or strategic uncertainty) is when a government purposely leaves key parts of its foreign policy unclear. It could be effective if a country’s international and domestic policy aims are at odds, or if it seeks to employ risk aversion to aid a deterrence campaign. Such a policy can be extremely dangerous since it might lead to a misconception of a state’s objectives, resulting in acts that are contrary to that state’s wishes.
Why do insurance companies reinsure?
Insurance for insurance firms is referred to as reinsurance. Individuals and corporations are covered by insurance providers. For insurance firms, reinsurance covers the risk of excessive claims owing to a variety of factors.
An insurance policy is a contract between two parties in which one undertakes to compensate the other in the event of a specified loss or harm. The benefits of term life insurance are paid out after the policyholder dies. The sum assured is paid out when the stated loss or damage happens in other general insurance policies such as crop insurance, motor insurance, travel insurance, and fire insurance.
The concept of pooled risk is used by insurance companies. It collects premiums from a variety of sources, based on the expectation that only a small fraction of the population will file claims in any given year. These are based on actuarial calculations that define the level of risk that the company is willing to accept.
In some circumstances, the insurance company calculates a higher-than-average payout and uses a portion of the premium to obtain reinsurance.
Reinsurance is similar to insurance, however it is just for insurance firms. It is a sort of insurance that an insurance company purchases to mitigate and reduce their risk exposure. If a general insurance business acquires reinsurance against losses caused by monsoon floods in India and makes claims on that account, the reinsurance firm can reimburse it.
The party sharing the loss is referred to as the ceding party in reinsurance. The reinsurer is the party responsible for covering the loss.
- Treaty reinsurance: In this type of reinsurance, the reinsurer commits to cover the insurance company’s whole risk for a set length of time. These guidelines apply to both written and unwritten policies. Treaty reinsurance can be risky for the reinsurer, particularly if the risks have not been thoroughly analyzed.
- Facultative reinsurance: The reinsurer underwrites the risk for each policy as a single transaction in facultative reinsurance. The policies are not organized in any way. This benefits the reinsurer since they may assess the risk for each policy separately and subsequently insure a portion or the entire policy.
Treaty and facultative reinsurance might be proportionate or non-proportional in nature.
The reinsurer agrees to receive a percentage of the premium paid for the policies whose risk it absorbs under proportional reinsurance. If the percentage is 60%, it means that 60% of the premiums received by the ceding party must be paid to the reinsurer in order to insure the risk. Proportional reinsurance policies make up the majority of treaty reinsurance coverage.
Non-proportional reinsurance, often known as “excess of loss” insurance, is a type of insurance that is not proportional to the risk. This is triggered when the losses from a certain policy, or a specific loss or damage, exceed a certain threshold.
Reinsurance aids insurance firms in limiting losses to their balance sheets, so assisting them in remaining solvent. Insurance firms assure that they can honor all claims relating to a certain risk by sharing the risk with a reinsurer. Because reinsurers can choose facultative reinsurance and cherry select insurance policies, reinsurance helps insurers manage their risks and improve their underwriting processes.
The primary objective for using reinsurance is to keep the financial impact on the insurance company’s balance sheet as low as possible when claims are filed. This is especially significant if the insurance firm is exposed to natural disaster claims, as a large number of claims will often come in at the same time. A big disaster, such as a hurricane, an earthquake, or a flood, can result in a huge number of claims from a specific location. If the insurance company has a reinsurance contract, it will be reimbursed for a portion of the claim by the reinsurance firm, avoiding significant losses.
Choosing a decent term plan can help your family be financially secure in the same manner that reinsurers help an insurance business maintain their financial standing and limit their losses. Choosing a flexible term plan, such as Aegon Life’s iTerm Insurance Plan, will allow you to get a lot of coverage at a low cost. The iTerm plan includes an accidental death rider as well as other riders that provide aid with terminal illnesses and prolonged critical illness coverage. The plan is adaptable, and based on your life stage, you may easily increase the sum assured during the policy. The option to purchase the plan online contributes to the plan’s low cost.
A thriving reinsurance market aids insurance companies in maintaining their financial stability, allowing them to continue providing reliable service to their consumers.
When a provision in a policy for insurance is ambiguous quizlet?
If a clause in an insurance policy is unclear, it is read in the insurer’s favor because the insured may have refused the coverage.
Who does ambiguity Favour in a contract?
The contra proferentem rule is a contract law doctrine that asserts that any ambiguous clause should be interpreted against the interests of the party who produced, introduced, or requested the inclusion of the clause. When a contract is contested in court, the contra proferentem rule is used to govern the legal interpretation of the contract.
How are ambiguous terms of a contract interpreted?
If a contract is fairly subject to more than one interpretation, it is deemed ambiguous. Â This can often suggest that it’s unclear what the parties intended in the first place. An ambiguous contract, on the other hand, usually indicates that a certain term, word, phrase, or definition is vague or unclear.
If a contract is unclear, the parties may be able to rectify it by further conversation.
If this is not the case, the document may need to be evaluated in court to settle the difficulties.