Language in insurance policies is often vague, leading to more than one reasonable interpretation. In many cases, insurance companies intentionally use ambiguous language so they can manipulate the meaning to deny coverage for unsuspecting insureds. The inherent imbalance of power between insurance companies and insureds led to the development of the Contra-Insurer Rule, which holds that where a policy is worded in a way that leaves room for two constructions, the wording should be interpreted most strongly against the insurer, who drafted the policy. However, the Contra-Insurer Rule’s protections are often limited for business insurance customers.
How the Contra-Insurer Rule Is Applied
The Contra-Insurer Rule (also known as Contra Proferentum) is based on the concept that drafters of insurance policies and other contracts are responsible for making their intentions clear. When a policy has ambiguous phrasing that can have more than one reasonable interpretation, most courts will interpret the ambiguity strictly in favor of the insured and against the insurer, who wrote the policy. The Contra-Insurer Rule is applied particularly in cases where there is confusing language surrounding exclusionary clauses in a policy. However, overall, courts will generally use the Contra-Insurer Rule as a last resort, after first applying other evidence and aids to interpret the contract to try to resolve the ambiguity.
How the Contra-Insurer Rule Developed
The Contra-Insurer Rule was developed more than a century ago to protect insurance customers, who typically had unequal bargaining power with insurance companies, particularly for personal policies. The language in policies was written to meet the needs of insurance companies, who usually sold the policies on a “take it or leave it” basis. In applying the Contra-Insurer Rule in an 1897 case, the New York Court of Appeals stated, “the policy…was prepared by insurers, who are presumed to have had their own interests primarily in view; and hence, when the meaning is doubtful, it should be construed most favorably to the insured, who had nothing to do with the preparation thereof.”1
The Contra-Insurer Rule and Business Policies
While the imbalance of power between insurance companies and individual insurance customers is undeniable, it is less clear in the case of business insurance customers. Businesses are often represented by legal counsel and sophisticated insurance brokers when negotiating their insurance policies. In some cases, the insurance broker or other professionals draft or provide input to the policy language on behalf of the business. As a result, many courts have held that the Contra-Insurer Rule should not automatically apply to business insurance disputes. When deciding whether to apply the rule, courts have looked at a variety of factors to evaluate the balance of bargaining power. These include the size of the business; who was involved in negotiating the policy; and the sophistication of the insured as an insurance customer.
Size and Sophistication
Many courts have declined to apply the Contra-Insurer Rule in disputes involving large businesses who are represented by sophisticated counsel at the time of insurance contract negotiation. As one court stated, “When the insured is a corporation…represented by counsel on the same professional level as the counsel for the insurers, then ambiguous provisions should not be construed strictly against the insurer, but should be construed in favor of what reason and probability dictate was intended by the parties with respect to coverage.”2 Similarly, courts are more apt to deem the rule inapplicable when companies purchase their policies through independent insurance brokerage firms. One court stated, “This is a policy covering commercial risks procured through a broker, and thus involved parties on both sides of the bargaining table who were sophisticated with regard to insurance.”3 When the broker supplies the policy language in question, another court observed, “the reasons behind the rule of construction favoring the insured completely disappear.”4 Many businesses negotiate customized policies, known as “manuscript policies,” that are individualized based on their specialized risks. Courts are more likely to reject the Contra-Insurer Rule in disputes involving this type of policy. And when disputes are between two insurance companies, courts have generally held the Contra-Insurer Rule has no place since the parties’ sophisticated knowledge of the insurance market puts their bargaining power on a relatively even keel.
If you are involved in a dispute with your insurance company, contact us. We have the expertise, experience, and tenacity to make insurance companies keep their promises to you and your businesses.
- Matthews v. American Central Ins. Co., 154 N.Y. 449, 456-59, 48 N.E. 751, 752 (1897)
- Insurance Co. of North America v. John J. Bordlee Contractors, 543 F. Supp. 597, 602 (E.D. La. 1982)
- Werner Industries, Inc. v. First State Insurance Co., 112 N.J. 30, 548 A.2d 188 (1988)
- Halpern v. Lexington Insurance Co., 715 F.2d 191, 193 (5th Cir. 1983)