Resolving Claim Disputes: Step 3 Research and Document the Interpretation – Part 1 of 3

This article introduces a three-part series covering over a dozen largely legal and contractual principles, many of which are used by attorneys to resolve contract disputes. Most of them can also be used by agents and consultants to resolve insurance policy disputes without resorting to litigation.

The first article in this series is devoted to a single principle that plays a role in a majority of claim disputes — ambiguity.

While this entire 12-part series is presented largely from the perspectives of the agent and policyholder, many of the principles and practices can be applied from the carrier side. Undoubtedly, any adjuster can provide dozens of examples of where a claim is clearly not covered, but the adjuster is frustratingly unable to convince the agent and/or policyholder. Many of these principles may be just as effective in demonstrating that a claim is not covered as it is in arguing that a claim is covered.

The doctrine, based on contra proferentem (“against the offerer”) that insurance policies are, for the most part, contracts of adhesion was explained in last month’s column. If a policyholder can demonstrate that policy language on which a claim denial is conditioned is ambiguous, then a court will often reverse the denial. The logic for this, in large part, is that the insured did not draft the insurance contract, and any ambiguity should be interpreted in favor of the policyholder.

Creating and editing insurance policies and drafting insurance contract language is incredibly difficult. The challenge is to meet state regulatory readability tests and create a legal contract that is understandable to the layman, while using language and structure that is precise enough to meet the legal clarity standards imposed by attorneys and courts. As a result, sometimes the chosen form language might not be able to meet all of these goals.

For example, most dwelling policies and some homeowners policies only cover personal property “usual to the occupancy as a dwelling.” So, would snow skis be considered covered property in such policies? Snow skis in a dwelling in Vail, Colo., are probably quite common, but perhaps not in Phoenix. So, what constitutes covered property under the same policy might depend on the location of the dwelling or on other unique facts and circumstances of the exposure or claim.

To quote Supreme Court Justice Oliver Wendell Holmes Jr., “A word is not a crystal, transparent and unchanged; it is the skin of a living thought and may vary greatly in color and content according to the circumstances and time in which it is used.” The same can be said of insurance policy language.

Most commercial general liability (CGL) policies have a coverage territory, although some coverage might extend on an international basis to an employee who resides in the territory “but is away for a short time on your business,” as the ISO CGL policy says.

So, what constitutes a “short time”? A week? Two weeks? A month? Three months?

Why would a policy use such a broad, vague term?

Some policyholder attorneys might refer to this as tergiversation, which is the use of an intentional ambiguity to avoid a clear action or answer. In the vernacular of some plaintiffs’ attorneys, the phrase “weasel words,” is used, meaning their vagueness enables insurers to weasel” out of claims.

Knowing that most insurers generally abhor ambiguity (see the “vermin” example below) because it makes risk assumption and pricing difficult, I suspect the reason for this language has to do with the fact that contract language preciseness is either difficult or this particular verbiage might allow more flexibility and less restrictiveness than a specific time limit. As a matter of good faith, hopefully the phrase “short time” would be interpreted favorably for the insured.

Ambiguities come in two major flavors. Semantic ambiguities involve the “choice of words,” their meaning and their contextual use in the contract, and within the facts and circumstances of each claim. Syntactic ambiguities involve the “arrangement of words,” including sentence structure, punctuation, tabulation, connectives, nouns, verbs (and their tense), adjectives, adverbs, prepositions, etc.

With regard to semantic ambiguities, take for example mice, rats, squirrels, roaches, bedbugs, carpet beetles, snakes, turtles, bats, pigeons, owls, raccoons and skunks. What do these creatures have in common? They have all been cited in claim denials involving policies that excluded damage caused by “vermin.” In each instance, the agent was able to get a reversal on the denial except for those that were birds, rodents or insects, and specifically excluded as such elsewhere in the policy.

Avoiding or preventing a claim dispute is a far better approach than trying to resolve a denied claim after the loss has occurred. The ability to do this is what separates good agents from not so good agents, and from insurtechs that say they can insure someone in 60-90 seconds.

Years ago, I did extensive research and could not find a single precedent-setting court case that had upheld a vermin exclusion (other than critters like bedbugs and rats) as unambiguous. As a result, ISO removed that exclusionary term from its homeowners policies to eliminate the ambiguity. (To read the article I wrote, simply Google “what is a vermin” and the article should be the first nondictionary result listed.)

My experience has been that semantic ambiguities are far more common in claim denial challenges than syntactic ambiguities. Yet in many cases, an ambiguity may be created by a combination of the choice of words and their arrangement. This is particularly true in policies that organize exclusions in tabular lists. I have used the two interpretative rules below on countless occasions to successfully reverse denied claims involving lists of exclusionary terms.

Noscitur a sociis is a Latin phrase that roughly translates as, “it is known from its associates.” I can’t overstate how powerful this interpretive rule is in determining the meaning and context of policy language, especially in the case of exclusionary terms that are most often the subject of coverage disputes.

Take, for example, a claim I mentioned in my February column. A warehouse was insured using the ISO CP 00 10 Building and Personal Property Coverage Form, and the ISO CP 10 30 Special Causes of Loss form. The latter form covers damage to property caused by vehicles. In this case, a truck slammed into a loading dock causing about $6,000 in damage. The adjuster denied the claim, citing the Property Not Covered section of the CP 00 10, which excluded damage to “bulkheads, pilings, piers, wharves or docks …”

In the listing of “bulkheads, pilings, piers, wharves or docks,” the meaning of the word “dock” is “known from its associates” (noscitur a sociis). In other words, examining the other four classes of property in the same list enables us to determine that “dock” refers to a waterfront structure, not a loading dock on a warehouse.

In another case, a contractor was using mobile equipment to tear down a retaining wall around a storage tank. The operator lost control of the vehicle and damaged the tank. The adjuster denied the claim under the CGL policy, citing this exclusion: “The use of ‘mobile equipment’ in … any prearranged racing, speed, demolition or stunting activity.” The adjuster’s logic was that the equipment was used to “demolish” the retaining wall and, thus, excluded.

However, the use of the word “demolition” must be viewed within the context of the entire listing, which includes the terms “racing, speed … or stunting activity.” Clearly, these refer to vehicle competitive activities such as a demolition derby. In this case, the denial had already made its way into the hands of the insured’s attorney, and my role was to write a short letter explaining the use of “noscitur a sociis” and the claim was quickly settled.

Noscitur a sociis, again, is a powerful tool I’ve used enumerable times to quickly resolve claim disputes involving exclusionary policy terms, from wear and tear and mechanical breakdown to pollution claims.

Ejusdem generis is a Latin phrase that roughly translates as “of the same kind, class, or nature.” Its use is similar to that of noscitur a sociis in that it usually involves a list of terms, but in this case one that ends in a catch-all category. Whether a particular object or event not specifically referenced in that list is subject to the exclusionary function of the listing depends on its similarity to the other items in the listing. If that explanation is confusing, three illustrations might help.

President Clinton was impeached by the House but acquitted by the Senate. A president can be impeached for “treason, bribery, and high crimes and misdemeanors.” The question is, what constitutes the catch-all phrase “high crime or misdemeanor?” That’s an ejusdem generis question. The legal consensus was that such illegal activities must rise to the level of treason and bribery, and presumably the Senate collectively decided that this was not the case for the president’s actions or that the term was ambiguous. (Disclaimer: I am not an attorney or legal scholar, so this explanation comes from a layman’s apolitical viewpoint.)

In a more practical and insurance-oriented example, an expensive carved wooden bowl was broken. The adjuster denied the claim under the insured’s homeowners policy, citing an exclusion for “breakage of art glass windows, glassware, statuary, marble, bric-a-brac, porcelains, and similar fragile articles.”

The question is whether a wooden bowl is “similar” in both nature and fragility to the items listed.

Our position was that it was not, or that it was ambiguous to the point that such ambiguity had to be interpreted in the favor of the insured.

In another case, not a claim but a coverage dispute involving a new business homeowners application, a detached garage was separated from the dwelling by a covered breezeway that was roofed but without sides. The question was whether the garage was part of Coverage A, or if it was a Coverage B structure. At issue was the adequacy of the Coverage A and B limits, depending on what coverage the garage structure fell under.

The homeowners policy defined Coverage B to apply to structures separated from the dwelling by clear space or those “connected to the dwelling by only a fence, utility line, or similar connection.” The question was whether the covered breezeway was “similar to” a fence or utility line. The new agent and underwriter agreed that it was not “similar,” and therefore, the value should be included in Coverage A.

In addition to illustrating the meaning of ejusdem generis, this last example also is an excellent example of how resolving coverage issues prior to loss, as discussed earlier in this series, may prevent a claim dispute later. Avoiding or preventing a claim dispute is a far better approach than trying to resolve a denied claim after the loss has occurred. The ability to do this is what separates good agents from not so good agents, and from insurtechs that say they can insure someone in 60-90 seconds.

It’s not that easy.

So, in the preceding claims, whose interpretation was right? The answer is no one, everyone and it doesn’t matter.

Resolving claims is very often not about right or wrong, or correctness or incorrectness. It is often enough just to establish through logic and language, supported by a preponderance of the evidence, that a term in dispute is ambiguous.

In the next two installments of Step 3 in the resolution process, we will examine several other principles you may be able to use to resolve coverage and claim disputes. Your knowledge and understanding of policy language is critical, as is your ability to use logic and reason supported where possible, by research and authoritative resources.