Are There Special Rules For Interpreting An Insurance Contract?

An Insurance Policy Can Be Difficult to Read. Also, Buyers of An Insurance Policy Are Usually Without An Opportunity to Negotiate the Specific Words Used Within. Accordingly, the Law Provides That An Ordinary Person Meaning Is Used When Interpreting the Words Within An Insurance Policy Document.

Understanding the Ordinary Person Meaning Requirement When Interpreting Special Terms Within An Insurance Policy

Insurance Claim Document Insurance documents are often extensive consisting of dozens of pages that also contain significant legalese that may be difficult for the ordinary person to understand. Additionally, insurance policies are typically known as a contract of adhesion where there is little, if any, opportunity to negotiate the specific words within the contract.

The Law
General Interpretation Principles

The interpretation of an insurance policy is straightforward when the terms within are unambiguous, being clear and concise, when the context and meaning of the terms are readily understood upon fully reading the policy for complete context.  Where terms are ambiguous, the same principles for interpreting common contracts should be used to address the ambiguity; however, if the ambiguity remains despite the applying of the general rules of contract construction, then the principle of contra proferentem may be applied.  The general interpretation principles were well described within the case of Emond v. Trillium Mutual Insurance Company, 2022 ONSC 5519, wherein it was said:

[21]  The general principles for interpreting insurance policies are well-established. In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.,[3] the Supreme Court of Canada set out the applicable principles as follows:

The primary interpretive principle is that where the language of the insurance policy is unambiguous, effect should be given to that clear language, reading the contract as a whole. ... Where, however, the policy’s language is ambiguous, the general rules of contract construction must be employed to resolve that ambiguity. These rules include that the interpretation should be consistent with the reasonable expectations of the parties, as long as that interpretation is supported by the language of the policy; it should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted, and it should be consistent with the interpretations of similar insurance policies. … Only if ambiguity still remains after the above principles are applied can the contra proferentem rule be employed to construe the policy against the insurer.[4]

[22]  Insurance policies must be interpreted as they would be understood by the average consumer and not as they might be perceived by persons versed in insurance law: National Bank of Greece (Canada) v. Katsikonouris, at p. 1043.[5]

[23]  In interpreting insurance polices, the policy should be interpreted to promote a reasonable commercial result. Provisions granting coverage ought to be construed broadly, provisions excluding coverage ought to be construed narrowly, and in the case of ambiguity, the interpretation most favourable to the insured should be adopted. Even a clear and unambiguous clause should not be given effect if to do so would nullify the coverage provided by the policy: Sam’s Auto Wrecking Co. Ltd. v. Lombard General Insurance Company of Canada, at para. 37.[6]

[24]  When interpreting an endorsement to an insurance policy, the endorsement and the policy must be read together. This is because “an endorsement is generally not understood to be a self-contained policy”: Pilot Insurance Co. v. Sutherland, at para. 21.[7] As the Court of Appeal for Ontario stated in Pilot,

An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence.[8]

[25]  In Ledcor, the Supreme Court reaffirmed its guidance on the “generally advisable” order in which to interpret insurance policies: the insured has the onus of first establishing that the damage or loss claimed falls within the initial grant of coverage. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies: Ledcor, at para. 52.

Ordinary Person Meaning

To protect the insurance buyer, who is often unsophisticated in legal language and insurance terms, the courts have developed special rules of interpretation for insurance policies.  One such rule is the ordinary person meaning for interpreting special words and terms that may have a certain meaning to laypeople and yet another meaning in law.

The rule of interpretation based upon the ordinary person meaning was stated by the Supreme Court within the case of Co-operators Life Insurance Co. v. Gibbens, [2009] 3 S.C.R. 605 wherein it was stated:

[20]  The courts have developed a number of general interpretative principles that reflect a concern that customers not suffer from the imbalance of power that often exists between insurers and the insured but, on the other hand, that customers obtain no greater coverage than they are prepared to pay for.  The exercise of interpretation should avoid “an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted”:  Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, per Estey J., at p. 901.

[21]  In Mutual of Omaha Insurance Co. v. Stats, 1978 CanLII 38 (SCC), [1978] 2 S.C.R. 1153, Spence J. stated that the word “accident” is “an ordinary word to be interpreted in the ordinary language of the people” (p. 1164).  Such terms should be construed “as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law”:  National Bank of Greece  (Canada) v. Katsikonouris, 1990 CanLII 92 (SCC), [1990] 2 S.C.R. 1029, at p. 1043.  This approach was affirmed by McLachlin C.J. in Martin, at para. 19.

... terms should be construed “as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law”.
~ Supreme Court of Canada

Summary Comment

The terms within an insurance policy can be confusing to the ordinary person without the special knowledge of insurance experts or lawyers, paralegals, among other professionals with legal training.  To protect the ordinary person as an insurance broker, the law imposes special rules of interpretation for insurance policies by requiring that any special terms be interpreted using the meaning that would, generally, be understood by an ordinary person.

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