Rules of insurance policy interpretation

Rule 1

Ejusdem Generis:

This means “of the same kind”. When particular words pertaining to a class or category are followed
by a generic word, the latter shall be construed narrowly to have similar meaning as the former.

See below clause:

“This insurance extends to cover loss or damage to property insured temporarily removed from the
insured premises for repairs, cleaning, renovation or other similar purposes for a period not
exceeding 60 days.”

Assume that a manufacturer of medical equipment sends some of them for demonstration purposes
to his customer premises where they are operated for sometime after which they are returned within
30 days to the manufacturer’s premises.

Now a demo equipment suffered a loss at the customer premises.

Is the loss covered?

Applying the rule, “other similar purpose” does not include demo purpose as it’s not the same as
repairs, cleaning or renovation.

The answer is no.

Rule 2

Noscitur A Sociis:

Latin for “it is known from its associates.” A word in an insurance policy whose meaning is unclear
can be resolved by its association with surrounding words and its context.

A policy covers loss, destruction or damage directly caused by Storm, Cyclone, Typhoon, Tempest,
Hurricane, Tornado, Flood or Inundation, Earthquake, Volcanic eruption or other convulsions of
nature.

Is Covid 19 covered under “other convulsions of nature”?

Natural hazards can include geophysical (earthquakes, landslides, tsunamis and volcanic activity),
hydrological (avalanches and floods), climatological (wildfires), meteorological (cyclones and
storms/wave surges) or biological (disease epidemics and insect/animal plagues).

All events other than biological cause visible, external physical damage for a relatively short time
duration. Covid 19, though a “convulsion of nature” is an odd man out. It doesn’t gel with others in
terms of event characteristics.

So “Noscitur A Sociis” says the answer is no.

Rule 3

Lex specialis derogat legi generali:

A specific rule prevails over a general rule.

See the following two conditions of a fire policy.

4. This insurance does not cover any loss or damage to property which, at the time of the happening
of such loss or damage, is insured by or would, but for the existence of this policy, be insured by any
marine policy or policies except in respect of any excess beyond the amount which would have been
payable under the marine policy or policies had this insurance not been effected.

11. If at the time of any loss or damage happening to any property hereby insured there be any
other subsisting insurance or insurances, whether effected by the Insured or by any other person or
persons covering the same property, this Company shall not be liable to pay or contribute more than
its rateable proportion of such loss or damage.

Whereas No 4 says that if the property is insured concurrently under marine and fire policies, the
former should act first and the latter will be on excess basis, but No 11 says there will be rateable
contribution.

Houston, we’ve a problem!

Which will prevail?

No. 4 is Lex Specialis (specific rule) and No. 11 is Lex Generalis, (general rule).

No. 4 is the answer.

Rule 4

Expressio unius est exclusio alterius:

Latin for “expression of one is exclusion of the other”. This means if something doesn’t figure in a list,
it shall mean that it has been deliberately left out.

Example:

The Memo 8 of a Contractors All Risks Policy mentions major perils/AOG as under for the purpose of
application of deductibles:

a) Earthquake - Fire & Shock

b) Landslide/Rockslide/Subsidence
c) Flood/Inundation
d)Storm/Tempest/Hurricane/Typhoon/Cyclone/Lightning or other atmospheric disturbances.
e) Collapse
f) Water damage for 'wet' risks i.e. contract involving works in rivers, canals, lakes or sea.

A building project being erected on land adjacent to sea is damaged by storm surge.

Does this loss qualify as a major peril/AOG claim and attract corresponding deductible?

Storm is mentioned in the list of perils, but storm surge is not. Though related to each other, the
former is airborne, but the latter is water borne.

So I would apply the rule to say that since the latter is left out of the list, has to be considered as
deliberate. So storm surge is a normal peril, not major peril/AOG.
Rule 5

Definitions vs Plain Ordinary Meaning:

Usually the insurance contract words are interpreted by their plain dictionary meaning, unless if a
definition of the term exists, in which case, the control shifts to the latter.

A civil construction is being done during which a worker accidentally punctures a water pipe causing
flooding of the site.

How will this loss be treated?

As per Indian Contractor’s All Risk policy, this is “flood” and treated as an Act of God (AOG) peril.

But as per Munich Re Comprehensive Project Insurance (CPI) wording, AOG is defined as under:

“an occurrence due to natural causes, directly and exclusively without human intervention and which
could not have been foreseen or if foreseen, could not have been resisted by any amount of human
care or skill.”

As per the above definition, for an event be defined as AOG, there must be no human intervention.
Since that wasn’t the case here, the event though flooding, is not an AOG. It’s a normal peril in
operation.

The control of interpretation therefore shifted to the definition from plain ordinary meaning.
Rule 6

An insurance contract has to be interpreted as a whole.

Example:

“The insurer shall indemnify the insured for any sudden physical loss of or damage to the property
insured at any time during the period of insurance due to any cause not specifically excluded and
which results in property insured needing to be repaired or replaced.”

Due to heavy rains, there is release of water from a dam. The insured is notified of this by the
authorities, but eventually the property is flooded.

The insuring clause says “sudden” which means something which happens without warning. Since
the insured was forewarned, can we say the claim is not payable?

No.

The contract needs to be read holistically. All insurance contracts usually have a duty of care clause
as under:

“The insured shall take at its own expense all reasonable precautions and comply with all reasonable
recommendations made by the insurer, to prevent loss of or damage to the property insured or any
liability arising under this policy of insurance.”

If both the clauses are read together, the forewarning should be actionable for the insured to take
steps to prevent the loss as per duty of care clause. Else, loss has to be treated as sudden and
becomes payable.
Rule 7

Parol Evidence Rule (PER):

PER is a contract law doctrine that prevents parties to a written contract from presenting “extrinsic”
evidence of terms in a contract to contradict or alter the terms of a written agreement, when that
agreement is considered complete and finalized.

A building that is 10 years old insured under a fire policy is damaged in a storm. Among other
damages, its glass doors were shattered. The loss adjuster applies 30% depreciation on the glass. He
says the policy requires appropriate deduction for depreciation to be applied depending on usage of
the item.

The insured counter argues that for motor insurance policies, no depreciation is charged by the
insurer for windscreen glass irrespective of the age of the vehicle. So the door glass of the building
also shouldn’t attract any depreciation. After all, both are glass only.

Howsoever logical it might be, the argument of the insured becomes inadmissible as per PER. Since
fire policy and motor policy are two different contracts, the logic behind the terms and conditions of
one policy cannot be imputed to another.
Rule 8

Addressing lack of clarity in wording:

Lack of clarity or specificity alone does not render a clause invalid. A contract interpretation that has
the effect of rendering a clause superfluous or meaningless would be avoided as far as possible.

See the following warranty in a Jeweller’s Block Policy:

“Warranted that all items of jewellery kept on display at the store shall be removed and kept in
burglar proof safes after close of business hours”.

The warranty doesn’t define what is “burglar proof”. All safe manufacturers may claim their product
to be burglar proof. So which one really is?

The safe has to be certified by an agency such as Underwriters Laboratories (UL) to be burglar proof.
Else it has little meaning. The UL certificate reveals how long a safe will be able to withstand an
assault.

But does this lack of clarity mean the warranty becomes void and that the insured is free to avoid it?

No.

The insured has to store the jewellery in a secure safe under lock and key. That duty is not
discharged by the vagueness of the warranty.

However, the insurer can’t also decline the claim saying that the safe used wasn’t burglar proof, since
he hasn’t defined his expectation of burglar proofing required.
Rule 9

Dealing with gaps in insurance contracts:

Despite best intentions, there can be some gaps in the policy drafting. Contractual silence need not
necessarily create ambiguity, but often an omission as to a material aspect can create an ambiguity.

How will such situations be dealt with?

See below:

“It is agreed and understood that otherwise subject to the terms, exclusion, provisions and
conditions contained in the policy or endorsed thereon, this insurance shall be extended to cover
loss of or damage to the property insured whilst in storage within the territorial limits specified
herein.”

However, the policy doesn’t specify any “territorial limits”. The property is moved to a foreign
location. The insured claims that since the specification of territorial limit is missing in the Schedule,
the coverage is worldwide.

Is the insured right?

No.

One needs to determine the intent of the parties prior to their entering into the contract.

Here parol evidence (PE) or extrinsic evidence can be examined. Insured/broker may bring PE to
demonstrate there was a prior need to cover foreign locations. Insurer may bring PE that he didn’t
intend to cover them. Matter may then be decided on the relative merits of the PE presented.
Rule 10.

Dealing with punctuation mistakes:

Please see this exclusion in a policy wording:

“This Policy does not cover damage to the property insured caused by disappearance, unexplained
or inventory, shortage, misfiling or misplacing of information, shortage in supply, shortage due to
clerical or accounting errors.”

The exclusion says among other things, “shortage” is not covered. Does this mean shortage caused
by theft is not covered?

No.

Actually, the correct punctuation should have been “unexplained or inventory shortage”. It means
both unexplained shortage and inventory shortage are not covered.

The phrase “unexplained or inventory” doesn’t have any meaning by itself in the context of the
exclusion. So it can be established that it is not the intent to exclude all types of shortages.
Mispunctuation doesn’t result in a different meaning altogether.

Bad punctuation is not allowed to hijack, undermine or defeat otherwise clear meaning of the policy.
Punctuation is subordinate to the policy text and the parties cannot misuse it to absolve themselves
from their contractual performance obligations.
Rule 11.

Priority of policy exclusions:

Let’s take the following exclusions of a policy:

“This Policy does not cover loss or damage caused by:

1. Wind, rainwater or hail to property in the open air unless such property comprises or forms part of
a permanent structure designed to function without the protection of the walls or roof

2. Smog or extremes or changes of temperature or humidity, condensation, excessive moisture,

dampness of atmosphere, seepage, disease, deterioration, decay, mildew, mould, fungus, wet or dry
rot, insect larvae or vermin of any kind, infestation.”

An open air equipment got damaged due to ingress of water following heavy rains. As per exclusion
no.1, loss is not excluded, but as per exclusion 2, water seepage is excluded.

There is a clash between the two exclusions.

Is the loss covered?

Each exclusion of a policy is meant to be read with the insuring clause, independently of every other
exclusion. The exclusions should be read seriatim, not cumulatively. One exclusion can’t be regarded
as inconsistent with another exclusion, since they bear no relationship with one another.

Carve backs to an exclusion only limit its scope. They do not create coverage.

So the answer is no.

Rule 12

Interpretation of Endorsements to Policies:

An endorsement is an amendment or modification to the policy. Insurance policies may be amplified,

extended or modified by any endorsement.

An endorsement becomes a part of the insurance contract even if the result is a new and different
contract. As endorsements are later in time, they control over other terms or conditions in a policy.

If there are more than one endorsements, the one which is issued later prevails over the one which
was issued earlier.

Example: A policy may define burglary or housebreaking as involuntary dispossession of the

insured’s property following an actual, forcible and violent entry of and/or exit from the premises.

If the policy is extended to cover theft, the endorsement may remove the requirement of violent
entry/exit for covering losses so that all involuntary dispossessions of insured property gets covered.

The control of event definition covered shifts from the main policy to the endorsement.
Rule 13

Contemporaneous insurance policies:

Insurance contracts should be construed together, when they have been executed, for the same
purpose and in the course of the same transaction by the contracting parties.

Eg: Marine and Storage Cum Erection Policies

Marine and SCE are contemporaneous policies since they are executed at the same time for the same
project by the contracting parties. Once the marine policy terminates, the SCE Policy takes over. An
extension of duration clause is inserted under marine, to the effect that marine continues to remain
in force until the consignment reaches the site of erection.

A consignment that arrives at site and remains unopened. After several weeks, it is opened for
erection when damages are noticed. Causation of loss is not clear as to whether it is during transit or
the storage at site.

Can both Marine and SCE policies reject the claim?

The loss has to fall under one of the policies if it is proven to be fortuitous, otherwise not falling
within the exclusions of either of the two policies.

Usually a 50:50 clause is attached whereby the loss is equally shared between the marine and SCE
insurers in such an eventuality where causation is not clear.
Rule. 14

The rule of last resort - Contra Proferentem (CP)

The rule of contra proferentem is that any ambiguous provision should be construed against the
party who drafted the contract.

Insurance contracts are contracts of adhesion. So, based on a public policy argument they're usually
interpreted against insurers. The logic being insureds are not well informed and need protection
from one sided insurance contracts drafted by the insurer.

CP is applied after exhausting all other rules of interpretation to resolve an ambiguity in the policy. If
there is no ambiguity, CP can’t be used to upend the contract or achieve a different result.

Courts can also apply a differentiated approach to application of CP.

A commercial insurance policy obtained by a “sophisticated” corporate insured, having aid and
advice of a broker, may not get the benefit of CP compared to an “unsophisticated” insured who
buys a policy without such aid or advice.

The insurance policies in respect of former is more customised and the parties have more
contracting freedom than the latter.