Almost everybody has insurance for something. Drivers generally need car insurance. Health insurance becomes mandatory next year. Homeowners are usually required by their lender to carry insurance.
Monty Python once joked about the “never-pay” insurance policy, which excluded everything from coverage. That isn’t allowed, but sometimes careful reading of the policy is necessary to understand what is covered.
Reading and understanding an insurance policy requires an understanding on three levels: What documents are in the policy, how insurance policies are structured, and how they are interpreted.
Insurance policies generally include three sets of documents: the declarations, the basic contract language, and endorsements.
The declarations identify the insurer and insured, the basic subject matter of the insurance (such as a particular car), the premiums charged, the various categories of coverage and coverage limits, deductibles and co-pays, and a list of the other documents included in the policy (usually by a series of code numbers). Basically, they say, “This is what we are agreeing to, and how much you’re covered for.”
The basic contract language sets out the detailed coverage terms. The endorsements, however, include all of the amendments to the coverage terms. That means that the reader has to compare the endorsements to the basic language and make any necessary substitutions on their own. It’s a messy way to do things, but the insurance industry prefers this approach because it makes it easier to standardize their forms.
In addition, most states have statutory or regulatory requirements that certain terms be included or excluded. Usually, these are brought into the policy by an endorsement. Sometimes, this doesn’t happen, or a term in the policy violates the requirements. When this happens, a court can correct the policy to include the required term or exclude the prohibited term. (In Oregon, the law requires the correction.)
The language of an insurance policy breaks down into four parts: definitions, coverage, exclusions, and conditions. A policy may cover several different categories, which may have different language for each category. Liability coverage, for example, usually requires different language than property coverage.
Definitions are what it sounds like: the specialized meaning of terms. In many policies, these are the terms that are printed in bold face or italics. Be aware that often some words that appear to have common meanings may be defined to mean something slightly different.
Coverage language is the “we will cover” language under a particular set of coverage. Exclusions are “we don’t cover” language that cuts away from coverage.
Conditions state situations that may affect coverage or procedures to invoke coverage.
Interpreting the Policy
The basic premise of interpreting an insurance policy is that it is a contract between the insurer and the insured, but the insurer writes it. This means that in most states, if a policy term is ambiguous, the ambiguity is resolved in favor of the insured, and courts in some states are willing look very closely for an ambiguity.
In addition, most insurance language is standardized across the industry. That means that a court decision in one state interpreting a particular term may have some value in predicting how a court in another state may read the policy, on the theory that the insurer knew what the term meant when it sold the policy under the same language.
Coverage language is interpreted broadly. If a policy says “We will cover X,” and X is broad enough to include a particular claim (after definitions and common interpretations are applied), then the claim is likely to be covered. For example, in Oregon, the phrase “any aircraft” has been read to include hang gliders.
On the other hand, exclusions are interpreted narrowly. If a policy says “We will not cover Y,” and a particular claim arguably falls outside Y, the courts are likely to say that the claim in not excluded. (Of course, it does need to be covered first.) This principle of narrow construction is one of the reasons standard policy language may be rewritten every few years. In commercial general liability policies, for example, the exclusion for environmental damage has been expanded several times as courts found it did not exclude claims that the insurers had expected it to exclude.
In deciding whether a term in a policy is ambiguous, the courts usually try to decide if it reasonably has more than one meaning. The courts may also try to determine if the language is capable of any meaning. In one case from Oregon, for example, an exclusion limited coverage to the maximum limits of the Financial Responsibility Law. The Financial Responsibility Law, however, sets forth only minimum requirements of insurance that drivers must carry. The court ruled that the exclusion was meaningless.
In general, if you have questions about whether a particular claim is included in a policy, submitting the claim is often advisable; if the insurer covers it, they’ll accept the claim. If the insurer disagrees, however, you may need to consult a lawyer for advice or to pursue the claim.