Interpreting California Insurance Contracts

Ken Kan and I were debating how a California judge should interpret an insurance contract covering a fire loss in Modesto, California. Interpreting insurance contracts is not as easy as many think. Heck, most people cannot even read through an entire policy without falling asleep. Interpreting insurance contracts is a dry legal exercise, at which many can improve with experience and knowledge of the insurance market.

We noted in Eastern District Court Rulings show that California Courts Strictly Interpret Insurance Policies the following:

Reading an insurance policy can be extremely cumbersome to almost anyone. Many times it feels like the language is muddled and the policy is written in a foreign language. It may be even more disconcerting to an insured to find out that the courts do their best to strictly interpret insurance policies when a breach of contract claim arises between an insured and the insurance company. After all, what did the policy say in the first place? In California, we are fortunate because the law is clear. The law says that when the language of a contract (in this case the policy) is ambiguous, the ambiguous language must be construed against the insurer in favor of applying coverage to the claim. Two recent Eastern District Cases..show that the courts are doing their best to strictly interpret the insurance policies that apply to coverage.

For those involved with trying to decipher meanings of California insurance contracts, I suggest an article written by a colleague of mine, Kirk Pasich. In Policy Interpretation: Looking Beyond The Words he correctly made the following observations:

A frequent argument about insurance policies is what evidence is admissible to interpret those policies. Insurers often contend that policies should be interpreted based upon their “plain meaning,” citing the parole evidence rule.

They urge that unless an ambiguity is found based solely on the policy language, there can be no reference to extrinsic evidence or the parties’ negotiations of or performance under the policies. Insurers also often challenge the parties’ interpretation of the other insurance policies and contracts to argue, as a stranger to those contracts, that they somehow are not bound by how the contracting parties interpreted them.

None of these arguments should be readily accepted.

...

Given the decades of California law, those seeking to interpret an insurance policy should recall the words of the Pacific court: “The fact that the terms of an instrument appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. That possibility . . . exists whenever the parties’ understanding of the words used may have differed from the judge’s understanding.” Therefore, extrinsic evidence must be at least provisionally considered in interpreting an insurance policy. See, e.g., Morey v. Vannucci, 64 Cal. App. 4th 904, 912 (1998) (“it is reversible error for a trial court to refuse to consider such extrinsic evidence on the basis of the trial court’s own conclusion that the language of the contract appears to be clear and unambiguous on its face”).

The point for California policyholders is not to give up right away just because insurance contract language appears to be unfavorable at first glance.

California is a beautiful state in so many different ways. I wish I did not have to take a red-eye flight back to Tampa tonight. Unlike my recent visits to New York and New Jersey for Hurricane Sandy insurance matters, where the temperatures were just above freezing, the winter temperatures here have been in the 70's. Similar to New York and New Jersey, the culinary experience is fantastic. Here is a photo from Saturday night with Bret Hansen, my legal assistant, Rena Hansen, Wolfgang Puck, and myself at the Hotel Belair.

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Comments (3) Read through and enter the discussion with the form at the end
SHIRLEY HEFLIN - February 5, 2013 10:42 AM

Dear Chip:

Guess I was wrong cuz I always thought that whenever the language of an insurance contract is ambiguous, that it's construed to the benefit of the insured. Is that not correct?

SHIRLEY HEFLIN
(Tampa, FL)

SHIRLEY HEFLIN - February 5, 2013 10:44 AM

P.S. Guess what I was trying to say is that my assumption - while true for FLA - is not true in every state in the U.S., right?

SHIRLEY HEFLIN
(Tampa, FL)

Chip Merlin - February 5, 2013 3:27 PM

Shirley,

Ambiguities are construed against the insurer. And if an exclusion is ambiquious, it is generally strictly construed against the insurer.

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