TEXAS LAW OF PROPER INSURANCE POLICY INTERPRETATION:
PRINCIPLES, RULES, APHORISMS, & MAXIMS

Michael Sean Quinn, Ph.D., J.D., Etc.

There are established legal principles as to how to interpret contracts and that almost always includes insurance policies–how could it not be since insurance policies are unquestionably a type of contract.  Whole books have been written on the general subject. 

In addition, coverage lawyers often find themselves rooting around looking for an applicable principle in this or that situation. For “ordinary” lawyers, the situation is often even more grueling. 

In 2015, the Texas Supreme Court issued an opinion in a very difficult case. RSUI Indemnity Company v. The Lynd Company, 13-0080 (May 8, 2015). The case was difficult for at least four reasons. First, the contract analyzed was a relatively rare sort and very complex in and of itself; second, the problem was (and remains) unusual; third, the language of the contract was defective in a variety of ways; fourth, it was a 6-3 opinion and the justices who wrote the opinions–did not appear, at any rate, to be restrainedly affable-though divided as to jurisprudence–a rarity for a Texas appellate court.

I will discuss the actual case concretely in another blog-essay. Here I propose to set forth what the case says about the legally approved logic of the semantics of contract interpretation. Much of what a reader will find here are quotes–or near quotes–from the opinions in RSUI; most of them will come from the lengthy majority opinion, with some from the quite short dissenting opinion.  

[QC. What the majority opinion states and quotes is a broad and helpful compilation of the relevant semantical principles.

I shall paraphrase a few principles enunciated with particularity as applicable to this set of facts. I will formulate them in general ways; these generalized versions are themselves established rules of interpretation.  

When I comment, it will be in brackets and begin “QC” standing for “Quinn’s Comments.” The same applies to slight changes, e.g., changing the phrase “insurance policy” to “contract.” Thus, this very paragraph should have begun with “[QC.” and closed with “]”.

The opinion I am using is frequently based what it says on older opinions and cite them explicitly. For the sake of simplicity, I am leaving out the citations and most of the “internal” quotes.  The reader who is looking for authority, as well as exposition, can do it quickly]. 

PRINCIPLES OF INTERPRETATION 

The following are taken from the RSUI Indemnity case’s majority opinion written by the 6 justices. 

“An insurance policy is a contract, generally governed by the same rules of construction as all other contracts. When construing a contract, our primary concern is to ascertain the intentions of the parties as expressed in the document. Unless the [contract or] policy dictates otherwise, we give words and phrases their ordinary and generally accepted meaning, reading them in context and in light of the rules of grammar and common usage. We strive to give effect to all of the words and provisions so that none is rendered meaningless. ‘No one phrase, sentence, or section {of a contract} should be isolated from its setting and considered apart from the other provisions.’

[QC. The bracket sign {} in the last sentence of the quote are those of the majority opinion. The principle in the last sentence implies that a contract, including an insurance policy, should be interpreted as a whole, with the language of various parts fitting together and being interpreted jointly. But what is one to do if two parts are unquestionably inconsistent? One can imagine this happening, and the parties together admitting that it’s true.]

“When interpreting an insurance policy, we are mindful of other courts’ interpretations of policy language that is identical or very similar to the policy language at issue. ‘Courts usually strive for uniformity in construing insurance provisions, especially where. . . the contract provisions are identical across the jurisdictions. (‘We have repeatedly stressed the importance of uniformity ‘when identical insurance provisions will necessarily be interpreted in various jurisdictions.’)” [QC: The parentheses are those of the majority opinion; the language quoted within them is from the case quoted].

“[In insurance policies, for sure, and other contracts often:] If only one party’s construction is reasonable, the policy is unambiguous, and we will adopt that party’s construction. But if both constructions present reasonable interpretations of the policy’s language, we must conclude that the policy is ambiguous. In that event, ‘we must resolve the uncertainty by adopting the construction that most favors the insured,’ and because we are construing a limitation on coverage, we must do so, ‘even if the construction urged by the insurer appears to be the more reasonable or a more accurate reflection of the parties’ intent.’ ‘This widely followed rule is an outgrowth of the general principle that uncertain contractual language is construed against the party selecting that language,’ and is ‘justified by the special relationship between insurers and insured arising from the parties’ unequal bargaining power.” 

[QC. The paradigm here results from two factors. First, contracts of insurance are usually standardized, and the insurer is in much more control than the insured. Second, the “special relationship” is crucial to interpreting insurance policies. Not all standardized contracts are treated the same.]

“In contract law, the terms ‘ambiguous’ and ‘ambiguity’ have a more specific meaning that merely denoting a lack of clarity in language. ‘An ambiguity does not arise simply because the parties offer conflicting interpretations.’ Instead, ‘a contract is ambiguous only when the application of pertinent rules of interpretation to the face of the instrument leaves it genuinely uncertain which one of two or more meanings is the proper meaning.’ Thus, a contract is ambiguous only if, after applying the rules of construction, it remains ‘subject to two or more reasonable interpretations.'” [QC. The emphasis is mine, not the opinion’s.]

“Nor does the law deem a contract provision ambiguous merely because both parties can point to words or phrases, that read in isolation, favor different constructions of the contract or because both parties can identify language that, through the lens of hindsight, could have been more clearly stated. Few contracts could withstand that scrutiny. ‘An ambiguity does not arise simply because the parties offer conflicting interpretations.’ To be ambiguous, both interpretations must be a reasonable interpretation of the words chosen by the parties when read in the context of the policy taken as a whole.”

[QC: Notice that the language of the court is “only when” and “only if.” This is potentially very important. Neither, “only when” or “only if” constitute “when” or “if.” This means what the court is saying is that language can possibly remain unclear and something other than ambiguous, even after all the pertinent rules of construction has been applied. The phrases “only when” and “only if” state necessary conditions only and not sufficient conditions.  I have never seen this distinction applied, and contract lawyers including coverage counsel do not think of the logic of this semantic principle working this way. The majority opinion, however, is quite clear on this point.” Virtually all competent lawyers know the difference between necessary and sufficient conditions]. 

 

 

 

 

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

Hits: 3