Ambiguity In Insurance Contracts

Bad faith insurance lawyers always want to see the policy a potential client has when a claim is denied.  The words in the policy compared with the facts of the case will often determine whether or not the attorney can be helpful.

When a policy has words or wording that is difficult to understand, then the rules of “ambiguity” apply.

These rules apply to ambiguities in insurance policies:

-whether a policy is ambiguous is a legal question to be decided by examining the entire contract in light of the circumstances present when the parties entered into the contract

-if a contract is worded so that it can be given a definite or certain legal meaning, then it is not ambiguous

-an ambiguity does not arise merely because the parties offer different interpretations

-if after applying general rules of construction the policy is still subject to two or more reasonable interpretations, it is ambiuous

-when a policy is subject to more than one reasonable interpretation, the court must adopt the construction most favorable to the insured

-a court must adopt the construction urged by insured, as long as that construction is not unreasonable

-the court must adopt the insured’s reasonable interpretation, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent

-these rules are an outgrowth of the general principle that uncertain contractual language is construed against the drafter

-these rules are justified by the special relationship between the insurer and insured arising from their unequal bargaining power

As an example, in the 1993, Texas Supreme Court opinion styled, State Farm Fire & Cas. Co. v. Reed, a child died after crawling through a fence and falling into a swimming pool.  The issue was whether liability was excluded by the “business pursuits” exclusion in the home day-care center’s policy.  The court found the phrase ambiguous because it could broadly  exclude any loss associated with the activities of the for-profit day care, or it could be read narrowly to cover a loss that arose from an activity not ordinarily associated with the business.  Maintaining a fence was not an activity normally incidental to the day care business.  The court resolved the uncertainty in favor of the insured.

In another example, a 1976, Texas Supreme Court opinion styled, Ramsay v. Maryland Am. Gen. Ins. Co., an insured died in a wreck while driving an air-conditioning repair truck for the Navy.  The policy excluded use of a “commercial” automobile.  The insured relied on the dictionary definition of “commercial” as “for profit” to argue that the loss was not excluded.  The insurer argued that the type of use controlled.  The use of the vehicle was the same as if it were being used by a private, “commercial” repair service.  The court found both interpretations were reasonable, so the policy was ambiguous and had to be construed in favor of coverage.



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