How Are Insurance Contracts Interpreted

Insurance lawyers need to know how insurance contracts are interpreted by the Courts.

The 1984, Texas Supreme Court opinion styled, Puckett v. U.S. Fire Ins. Co., says that the rule for insurance policies is that they are strictly construed in favor of the insured to avoid excluding coverage.  Exceptions or limitations on liability are strictly construed against the insurer and liberally in favor or the insured.  This is made clear in the 1991, Texas Supreme Court opinion, National Union Fire Ins. Co. v. Hudson Energy Co., and in the 1987, Texas Supreme Court opinion styled, Barnett v. Aetna Life Ins. Co., and the 1987, Texas Supreme Court opinion styled, Blaylock v. American Guar. Bank Liab. Ins. Co., and the 1977, Texas Supreme Court opinion styled, Glover v. National Ins. Underwriters, and as far back as the 1896, Texas Supreme Court opinion styled, Brown v. Palatine Ins. Co.

Stated another way in the 1993, Texas Supreme Court opinion styled, State Farm Fire & Cas. Co. v. Reed, “an intent to exclude coverage must be expressed in clear and unambiguous language.”

This rule does not apply when a term in question is susceptible of only one reasonable construction.

This rule is related to the ambiguity rules.  Once an exclusion that the insurer relies on is narrowly construed, a court is more likely to consider an alternative interpretation that provides coverage to be reasonable.

As an example, looking at the 1991, National Union opinion, an airplane had crashed.  It was unclear who was piloting the plane – the instructor, the student, or both.  The policy excluded the student, covered the instructor, and was unclear if they were both piloting.  The court found the policy was ambiguous and covered the loss if they were simultaneously piloting.  The court reasoned that an intent to exclude joint piloting must be expressed in clear and unambiguous language.  The insurer knew the plane had duel controls.  If the insurer wanted to exclude simultaneous piloting, it was incumbent on the insurer to state the exclusion expressly and clearly.

As another example, in the 1982, Blaylock opinion, the homeowner’s policy excluded losses “caused by electricity.”  The insured’s loss resulted when a lack of electricity shut off her swimming pool pump and let the pipes freeze.  The court would not extend the exclusion to the loss.

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