The Role of Ambiguity in Insurance Policy Interpretation

Abstract

The "first principle of insurance law" is that ambiguities in an insurance policy must be construed in favor of the policyholder. In general, if a policy provision is found to be ambiguous, the policyholder prevails; if the provision is found to be unambiguous, the insurer prevails. The purpose of this monograph is to describe and analyze the role of ambiguity in insurance policy interpretation. It identifies a "broad" version of the rule supported in the majority of courts, and a "narrow" version that is a minority rule. The broad version generally provides that a provision is ambiguous when it is susceptible to more than one reasonable interpretation. The narrow version of the rule provides that a provision is ambiguous only if the rules of interpretation cannot resolve the purported ambiguity. In other words, a provision is ambiguous only if the two proffered interpretations are equally likely based on the language of the policy and the applicable circumstances. The monograph argues that the narrow version of the rule is superior to the broad version because it will result in more consistent judgments, is consistent with linguistic practices, and improves the likelihood the policy will be interpreted consistently with the expectations of the policyholder and the insurer.

Keywords: insurance policy, insurance contract, ambiguous, ambiguity, unambiguous, interpretation, policyholder, rules of construction, contra proferentum, insurers, adhesion, coverage, contractual language, exclusions, sudden, accidental, consistency, expectations

JEL Classification: K10, K12, L8