An Introductory Guide to Interpreting Property Insurance Policies

One would think that understanding property insurance policies would be a refined and standardized procedure since modern property insurance dates from the Great Fire of London of 1666. However, insurance occupies a constantly developing regulatory, contractual, and judicial landscape. Thousands of court decisions interpret insurance policies. A recent decision by the federal Court of Appeals for the Third Circuit required interpreting the language of a flood insurance policy (Torre v. Liberty Mutual Fire Insurance Company). Always consult an experienced attorney in insurance related situations.

The Standard Flood Insurance Policy (SFIP) in question contained the following language:

"[w]e will pay the expense to remove non-owned debris that is on the insured property and debris of insured property anywhere."

Does this provision cover the expense of removing debris not owned by the insured that was deposited by Hurricane Sandy on their land outside of their house? The policy did not interpret or define the term "insured property." However, provisions in the insurance policy did specify in detail what structures were covered and that a variety of items such as lawns and driveways were not covered. Based upon this language the Court concluded that the only reasonable interpretation was that land was not covered by the policy. Consequently, the insurance company did not have to pay for the debris removal.

The Third Circuit did note in passing that when an insurance policy is ambiguous and capable of two interpretations, an interpretation in favor of the insured will be applied. This rule comes from the idea that a contractual ambiguity should be interpreted against the party who wrote the language. However, the Court did not believe that this policy was ambiguous. When an insurance policy is ambiguous, courts will often allow extrinsic evidence (evidence external to the policy's language) to be presented to determine the meaning of the policy's language.

While an unambiguous policy is interpreted according to the general rules that apply to all contracts, such as the plain meaning rule, some courts place insurance policies in a separate category from typical contracts. The parties to an insurance contract, insurance company and policy holder, may have unequal degrees of sophistication and resources. Insurance policies may be presented on a take-it-or-leave-it basis with no real bargaining over the language. The policy holder may be reliant upon summary statements and representations by insurance professionals. Additionally, a few courts impose a duty of good faith and fair dealing upon insurance companies. Have an experienced insurance law professional determine the legal status of these concepts in your jurisdiction.

What if an insurance agent or adjuster had told the insured in the Third Circuit case that they had coverage for the debris removal? Would the insurance carrier have been bound to this representation? Typically, in our current environment, an insurance company is not liable for representations of coverage, although some decisions hold otherwise. It is said that an insurance agent represents the insurance company while a broker represents the insured. Being an agent would seem to grant authority to bind the insurance company. However, insurance applications typically state that no agent has authority to alter or modify the language of a policy. Courts tend to interpret this application language in a manner that broadly favors the insurance company. However, fraud or intentional misrepresentation by an insurance company employee or representative may create an independent basis for recovery. A detailed analysis of the facts and law is necessary.

Two additional insurance company defenses are contributory negligence by the insured (the insured was in some manner careless and helped cause the loss now complained of) and preemption (federal requirements override attempts to sue in state court). Insurance adjusters are frequently said to have limited responsibilities and none owed to the insured. There are decisions contrary to these general agent and adjuster rules so the insured must have an experienced insurance legal professional conduct a detailed analysis of the specific facts of a situation and the law of the jurisdiction.

An insured must also carefully review the precise language contained in the insurance policy's exclusions from coverage. Much hurricane insurance coverage litigation, for example, hinges upon a factual determination of what events caused the damage, for example, wind or water, and in what sequence. The factual causation analysis when combined with an insurance policy language analysis is highly technical, again requiring professional expertise.

Another basic consideration is that the insured must comply with the "conditions" section of the insurance policy. A significant condition frequently found in insurance policies is that the insured provide a prompt and timely written notice of loss to the insurance company. This means that the insured should always follow a telephone notice of loss with an appropriate written notice. Also, even if it appears at first glance that no damage or trivial damage has occurred, timely file a written notice so there will be no questions concerning when the notice of loss should have been provided.

Some insurance policies contain "occurrence" language meaning that an event that occurs within the time duration of the policy is covered, even if not discovered until after the policy expires. Other policies may only cover "claims made" during the time duration of the policy. Save old expired insurance policies since an insurance legal professional may need to examine them.

This comment provides a brief educational overview of a complex legal topic and is not intended to provide legal advice. Always consult an experienced attorney in specific situations.