Plain Meaning, Extrinsic Evidence, and Ambiguity: Myth and Reality in Insurance Policy Interpretation

Abstract

Insurance coverage disputes are mostly about the correct interpretation of an insurance policy provision. But three myths confuse and confound thinking about the interpretation of insurance policies. The first myth is that an unambiguous insurance policy provision -- a provision with a “plain” meaning -- carries that meaning on its face. The second myth is that, if a policy provision has a plain meaning, then under the plain-meaning “rule,” sources of meaning outside the four corners of the insurance policy -- sources “extrinsic” to the policy -- are not admissible to aid in interpreting the provision. The third myth is that ambiguous policy provisions are necessarily construed against the drafter, which in insurance is almost always the insurer. In reality, all three myths seriously oversimplify how interpretation takes place. The problem, however, is not that, in acting in ways that are inconsistent with the simplifying myths, the courts are undermining desirable rules by quietly following other, undesirable rules. On the contrary, we do not need to change the rules or practices that govern insurance policy interpretation. Rather, we need more clarity and a deeper understanding of the sophisticated, complex rules and practices that are actually in force and are actually applied in practice. This Article aims to provide both.

Keywords: Insurance law, Insurance, Contract Interpretation

JEL Classification: K12, K13