Interpreting the Rules of Insurance Contract Interpretation

Abstract

The rules for interpreting insurance policies — the doctrine of contra proferentem for ambiguous policy language, and the doctrine of reasonable expectations for unambiguous language — are surprisingly difficult to define. The rules themselves are ambiguous and subject to differing interpretations, and yet courts have not been clear about which form they have adopted or are otherwise applying in a particular case. In light of this case law, the Restatement of the Law: Liability Insurance faces a daunting problem. Without widespread agreement about the appropriate method for interpreting insurance policies, how can the case law be restated in a manner that yields reasonably coherent rules of insurance contract interpretation?

Recognizing that a purely textual approach is a nonstarter for interpreting insurance policies, the Restatement adopts the contextual or purposive approach while also trying to retain the value of the written text, resulting in a set of rules that strive to balance these two interpretive methods. Throughout the Restatement, the balance depends on whether the plain meaning of the policy language is “reasonably susceptible” to an alternative interpretation based on extrinsic evidence of purpose and the like. To apply the Restatement’s interpretive rules, courts will have to interpret the meaning of the “reasonably susceptible” requirement.

By relying on a rigorous specification of the ordinary policyholder’s reasonable expectations of coverage, courts can resolve the ambiguities in the Restatement’s rules, yielding an appealing method for interpreting insurance contracts. The plain meaning of a policy term can be the product of insurer practices that exploit policyholders who do not read or otherwise adequately understand the contract. Departing from the plain meaning of a term, therefore, yields interpretations that can provide the amount of coverage that would be expected by policyholders if they were well informed — the principle of reasonable expectations. Interpretations that depart from the policy language, however, run the risk of being erroneous, yielding coverage decisions that can ultimately harm the ordinary policyholder. For this reason, the reasonable policyholder values the plain meaning of the policy language insofar as it reduces the risk of legal error and the associated costs of uncertainty that insurers impound into the premium that they charge for the policy. Once the value of plain meaning has been incorporated into the ordinary policyholder’s reasonable expectations of coverage, the expectations principle entails a structured interpretive inquiry that maps into the interpretive rules adopted by the Restatement, making it possible for courts to determine whether the plain meaning of the policy language is “reasonably susceptible” to an alternative interpretation based on extrinsic evidence of purpose and the like. So interpreted, the Restatement has the potential for implementing the expectations principle in a manner that requires courts to clearly specify the substantive reasons for their decisions of how to interpret insurance contracts.