This article is an abbreviated version of a paper prepared by Larry Gilbertson and John Davis for the Canadian Institute meeting in May, 1994.

The Importance of the Policy

The insurance policy lies at the basis of every adjustment and claims analysis. But, like the nose on our face, it often goes unnoticed because of its familiarity. We ignore the wording of the contract of insurance, however, at our peril. The policy provisions operate as important determinants of the course of the adjustment and investigation to be pursued.

Unless the policy provisions are known and properly understood, key factual data essential to informed coverage decisions will be missing. Acts or omissions by the insured which may vitiate coverage can be overlooked. Questions which need to be asked in the investigation and adjustment may not be asked. Evidence which ought to have been preserved may well be destroyed or overlooked. Reservations of rights may not be made, and conduct by adjusters and claims personnel may be pursued so as to create an estoppel, preventing legitimate coverage defences from being effectively asserted.

The best way to ensure that policy provisions are known is for the adjuster and claims examiner to obtain and review a copy of the entire policy.

The proliferation of manuscript policies, and the use of significantly different policy wordings by different insurers, and of different wordings from time to time by the same insurer, necessitates a careful scrutiny of a replica of the precise document issued to the insured. If, as sometimes happens, underwriters do not have a copy of the policy readily at hand, enquiries may be made of the insured and the broker.

Principles of Interpretation

The process of policy review and interpretation can sometimes seem like "A battle against the bewitchment of our intelligence by means of language.” ²

Success in the exercise of policy interpretation requires a grasp of the principles applied by the courts, an appreciation of the sorts of materials the courts will scrutinize, and an awareness of the case law in respect to particular policy words and phrases. Although in some instances a legal opinion will be required, preliminary coverage determinations must be made at the investigation and adjustment stage. Circumstances will often require adjusters and examiners to evaluate coverage parameters to focus and advance the investigation and adjustment at the outset.

One of the leading cases on the principles of policy interpretation is Consolidated Bathurst Export Limited v. Mutual Boiler & Machinery Insurance Co.³ Mr. Justice Estey described policy interpretation as a two-step process involving:

1.   Application of general rules of contractual interpretation without bias; and

2.   If step one is inconclusive, application of the contra proferentem rule.

The "Step One" process is outlined by the Ontario Court of Appeal in Pense v. Northern Life Assurance Co.⁴ by Mr. Justice Meredith. His comments were adopted by the Supreme Court of Canada on the Pense appeal,⁵ and later quoted by Mr. Justice Estey in Consolidated Bathurst.

The "Step One" rules require giving effect to the intention of the parties. The primary source for the determination of this intention resides in the actual words of the policy. The insured must make out a right to recover on the terms of the policy. It then falls to the insurer to establish the existence of any defense based on the policy.

As Mr. Justice Meredith said in Pense, the "onus of proof" with regard to establishing coverage, or a defense on the policy, upon the insured and insurer, respectively, is precisely the same. One must be scrupulous to avoid any bias in the process of interpretation. As Justice Meredith said:

“... We are all, doubtless, insured, and none insurers, and so, doubtless, all more or less affected by the natural bias arising from such a position; and so ought to beware lest that bias be not counteracted by a full apprehension of its existence.”⁶

Step One

A number of aids or precepts may be invoked in implementing the "Step One" objective of giving effect to the intention of the parties as expressed by the words they have used, including context, ordinary meaning and technical meaning.

(i) Context

One must look to context in seeking the purpose of the policy. This requires that the policy be read as a whole. If there is an inconsistency between written or typed additions or endorsements to a pre-printed form of policy, the written or typed additions will govern.

The rationale here is that the parties have selected the added terms or endorsements with a view to expressing their intentions, while the pre-printed form is more general, having application to the parties' situation and that of all other contracting parties as well. Coverage provisions and insuring agreements, however, are broadly interpreted, whereas exclusions are given a narrow interpretation.⁸

Context extends beyond the policy document in particular cases, to include other critical documentary and oral evidence, as canvassed below under the section of the paper dealing with extrinsic evidence.

Ordinary Meaning

The ordinary meaning precept requires that words be read in their ordinary or popular sense. In one case, the insurer contended for a technical meaning of the term "windstorm" as a wind of either force 10 or 11 on the Beaufort scale.⁹  In view of the fact that the case law did not support a technical connotation for the word "windstorm," and since a definition had not been provided within the policy itself, the Court had regard to dictionary definitions and applied the "ordinary meaning" of the term.

Technical Meaning

However, the courts will apply the technical meaning precept where technical terms have become a part of ordinary language. A specialized or technical meaning may be assigned to policy terms, as Justice Greschuk of the Alberta Supreme Court stated in Ronaghan v. Canada West Ins. Co.:¹⁰

"... Words and phrases are to be construed primarily in their ordinary and popular sense unless the context compels a different construction, or, if they are words of common form which from long usage and frequent decisions of the court have received a fixed and more or less conventional meaning, or if by the universal custom of some trade or business, an artificial meaning peculiar to that trade or business has been attached to the words in question ..."

If the insurer is advancing an argument which relies upon a technical interpretation of policy language, expert opinion evidence may be necessary. In Sterling Electro Plating Co. Ltd. v. The Aetna Casualty & Surety Co.,¹¹ Mr. Justice Lerner of the Ontario Supreme Court accepted certain engineering testimony of the experts. The policy excluded loss or damage caused by electrical disturbances unless fire or explosion ensued, and provided coverage only for loss or damage caused by the ensuing fire or explosion.

The engineering evidence distinguished "arcing", which is characterized by the production of heat but not flame or ash; "explosion", being a rapid release of pressure with an acoustical shock wave; and "fire," where there is evidence of flame, ash or soot. Because the insured had satisfied the burden of showing that a fire or explosion followed an electrical disturbance, the Court awarded recovery to the insured based on its assessment of the damage done by explosion and fire, which was covered, while denying recovery for damages caused by the arcing or electrical disturbance.

Step Two

If it is not possible to determine whether coverage exists after applying the "Step One" rules, because of ambiguity in the policy language, the next stage of the process applies "Step Two," the contra proferentem rule.

The rule is formally stated in Cheshire & Fifoot's Law of Contract:¹²

"If there is any doubt as to the meaning and scope of the excluding or limiting term, the ambiguity will be resolved against the party who has inserted it and who is now relying on it. As he seeks to protect himself against liability to which he would otherwise be subject, it is for him to prove that his words clearly and aptly describe the contingency that has in fact arisen."

One often finds today that policies are prepared by large, sophisticated brokers on behalf of large, sophisticated insureds. The insurer may be presented with the wording, and simply asked to accept or reject the risk on the basis of that particular policy language. Logically, if there is ambiguity, it should be construed against the insured in this circumstance.

Particular courts may be disposed to hold that even if the policy language is prepared by the insured or its representatives, it must be construed against the insurer, in the event of ambiguity, as was suggested by the trial Judge in British Columbia Ferry Corporation v. Commonwealth Insurance Co. et al.¹³ Justice Finch had stated at trial that an unclear wording prepared by the insured's broker could not be construed against the insured because there would be an incentive for the insurer to agree to an unclear wording. He nonetheless found that the loss was excluded by reason that there was a "flood", having regard to its definition in the policy to mean "waves, tides, tidal waves, and the rising of, the breaking out or the overflow of, any body of water whether natural or manmade ..."

The Court of Appeal, however, held that "flood", as defined, contemplated both cause and effect. Not only must there be waves, on the language of the exclusion, but the waves must result in the rising of, the breaking out or the overflow of a body of water. Because this latter circumstance did not arise, the Court of Appeal held there was no flood within the meaning of the policy.

The Appeal Court did not address at all the comments of Justice Finch which would, we suggest, substantially eliminate the possibility of applying the contra proferentem rule against the insured. This was, presumably because the Court of Appeal thought the exclusion clause was clear.

If the rationale of Justice Finch were a rationale at all, it would have to be redeployed in a manner consistent with the contra proferentem rule. This would require that where the insured through its broker prepares the policy, it must be construed, in the case of ambiguity, against the insured, for to do otherwise would act as an incentive to insureds and brokers to promulgate unclear policy wordings. It is submitted that the contra proferentem rule is too firmly anchored in our jurisprudence to be applied other than in an even-handed manner, equally to the insurer and insured alike, as the facts dictate. Nonetheless, adjusters and claims personnel must be prepared for the practical reality whereby courts may very often strive for a construction of the policy against the insurer, despite the dictates entailed by a literal application of the contra proferentem rule.

An adjunct to the "Step Two" interpretive process arises with the advent of the reasonable expectations doctrine in Canadian jurisprudence. Mr. Justice Cory, then sitting as a judge of the Ontario Court of Appeal in Wigle v. Allstate Insurance Co. of Canada,¹⁴ outlined those aspects of the reasonable expectations doctrine adopted by American courts as being appropriate to the interpretation of a standard form of motor vehicle insurance contract in Ontario as follows:

"The basic rules of construction adopted by the American courts are as follows:

1) The court should look at the words of the contract to determine if there is ambiguity;

2) The court should ascertain the intention of the parties concerning specific provisions by reference to the language of the entire contract;

3) The court should construe ambiguities found in the insurance contract in favour of the insured ..."¹⁵

Madame Justice McLachlin, in the recent case of Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co.,¹⁶ held that with respect to the reasonable expectations of the parties; "... it is settled that where the policy is ambiguous, the courts should consider the reasonable expectations of the parties," citing the Wigle v. Allstate Insurance Co. of Canada decision. In Reid Crowther, Madame Justice McLachlin referred to the reasonable expectations doctrine in outlining the principles of interpretation to be applied to insurance policies:

"In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance policies, including, but not limited to:

 1) the contra proferentem rule;
    2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
    3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties."¹⁷

Considering the foregoing, it may be concluded that the reasonable expectations doctrine is capable of tempering the effects of an arbitrary application of the contra proferentem rule to the exclusion of the "reasonable expectations of the parties," or in the face of commercial reality.

Extrinsic Evidence

Adjusters, examiners and legal counsel cannot always be content with examining the policy alone in the effort to arrive at its correct interpretation, or to assess the insurer's potential liability. It may sometimes be necessary to seek the intentions of the parties in the underwriting file, in correspondence between the parties setting out policy terms and conditions, in publications of the insurer, or in documents comprising part of the "commercial atmosphere" to which the policy owes its genesis. All of these materials comprise the background or surrounding circumstances in which the policy is issued.

In the English case of Youell v. Bland Welch, Staughton L.J. dealt with the concept of "surrounding circumstances" as follows:

"It is now, in my view, somewhat old-fashioned to approach such a problem armed with the parol evidence rule, that evidence is not admissible to vary or contradict the words of a written contract. The modern approach of the House of Lords is that, on the positive side, evidence should be admitted of the background to the contract, the surrounding circumstances, the matrix, the genesis and aim. Almost every day in these courts there is a contest as to what comes within that description. As Lord Wilberforce said in Reardon Smith Line Ltd. v. HansenTangen, [1976] 2 Lloyd's Rep. 621 at p.624, col. 2; ... the expression `surrounding circumstances' is imprecise. But so to some extent is `matrix', if I may say so, although it is a picturesque metaphor. It may well be that no greater precision is possible. The notion is what the parties had in mind, and the court is entitled to know, what was going on around them at the time when they were making the contract. This applies to circumstances which were known to both parties, and to what each might reasonably have expected the other to know.

The negative aspect of the modern doctrine is that evidence of negotiations is not admissible as an aid to interpretation, at all events unless they show an agreed meaning for the language used ... ¹⁸

On occasion, the court may appear to conclude that it did not require resort to extrinsic evidence in interpreting the policy.¹⁹ Nonetheless, one may speculate whether, in a particular case, it would reach the same interpretative result without the benefit of extrinsic evidence. From the adjuster's perspective, it will be of benefit to ascertain from underwriters and the insured their understanding of the purpose of the insertion of a particular clause. On occasion, one will want to review the underwriting practices and manuals of the insurer to determine if they support the particular interpretation contended for by the insured or insurer.

Justice Dohm of the British Columbia Supreme Court held in one case²⁰ that an insurer may provide extrinsic evidence in the resolution of an ambiguity in the policy. Although in the absence of an ambiguity, the parol evidence rule would normally prevent the adducing of evidence outside the policy to vary the terms of the policy, such evidence is admissible as an aid to its interpretation.

Justice McGillivray, in a 1964 decision of the Ontario Court of Appeal, stated:

"... in cases where in a court of equity an extraordinary remedy, such a specific performance, or correction of a document in writing, is sought and a defendant pleads mistake parol evidence of extrinsic circumstances indicating the intention of the parties may be heard. Except in such last-mentioned instances parol evidence is not to be admitted to vary the words of the written document. It is, however, admitted for the purpose of explaining terms of the contract and to prove the facts upon which the interpretation of the written document depends and so is admissible to establish the validity of the document or the identity of the parties, to explain technical terms or commercial usage, and in all other places where the admission of such evidence is necessary to enable the court to construe the document before it ...”²¹

One potential source of extrinsic evidence in insurance disputes is found in the application for coverage. The application for coverage will be read with the policy itself when explicitly made part of the contract,²² subject to governing insurance legislation.

Under the Ontario Insurance Act, the application cannot be deemed a part of, or be considered with, the policy, as against the insured, unless it contains a material misrepresentation inducing the insurer to enter into the contract.²³  The contract may be voided by an inaccuracy in the application where the inaccurate statement is material to the contract.²⁴  These provisions, however, are not applicable to fire or automobile policies,²⁵ where somewhat different provisions apply.

Fire policies are deemed to be intended to be in accordance with the terms of the application, unless the insurer takes steps to notify the insured of the difference in writing.²⁶ A similar provision is contained in Part VI of the Ontario Insurance Act, s. 232 (4) in respect to automobile insurance.

Often policy provisions direct one, expressly or impliedly, to a consideration of other documents, subject to the materiality constraints and provisos contained in governing insurance legislation.²⁷

Thus, if a policy excludes loss arising from the use of a boat, where the application contemplates coverage for the boat, coverage will be inferred on the basis that the application, together with statements and declarations therein, is usually incorporated into the contract by reference, so as to be read with it.²⁸  In resolving the conflict between the application and the policy language, then, the application was held to be controlling.

Another aspect of incorporation by reference was also considered in the same case. Both policies considered by the Court in that case contained excess clauses, as a result of which each clause was disregarded. The interpretation of excess clauses in a particular policy, then, must be construed in the light of clauses in other potentially applicable policies. It cannot, therefore, be assumed that it is only the policy directly under consideration which would be of relevance to its proper interpretation.

Extrinsic evidence is important in respect to misrepresentation issues. If the insured falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate a material circumstance material to be made known to the insurer in the context of fire insurance, the contract is void as to any property in relation to which the misrepresentation or omission is material.²⁹ Similar provisions with regard to misrepresentations are found in s. 233 (1) pertaining to automobile insurance.

On occasion, it may be necessary to obtain and examine promotional or informational material published by an insurer to facilitate policy interpretation, or to assess the insurer's exposure in tort.

In an interesting adaptation of the contra proferentem rule, the Supreme Court of Canada has held in the course of finding a duty of care to inform the policy holder of available coverages, that ambiguity in a renewal form must be resolved in favour of the policyholder.³⁰

In that case, the insurer had advised the public of underinsured motorist coverage at the bottom of a column of a one page flyer in some nine lines of small print, as well as by means of a poster displayed at the end of a long and busy counter, and by means of the words "NOT APPLIC." in a box on a renewal form marked "UMC." The insured had requested maximum coverage. The words "NOT APPLIC." in the "UNIC" box were held to be ambiguous and thus were construed contra proferentem against the insurer.

The insured had not seen the poster in the insurer's office, and the flyer had not conveyed "with sufficient clarity or seriousness the availability, importance and relatively low cost of UMC."^3l

This case illustrates that the interpretation of documents comprising the surrounding circumstances of the contract can be important, if not to the interpretation of the insurer's obligations in contract, then in any event to a potential exposure in tort.

In the case of Builders' Risk coverages, documents comprising the construction contract may be of importance in construing the policy, so that efforts should be made to obtain the underlying construction contract documentation. In construing a "faulty workmanship" exclusion, the Ontario Court of Appeal refused to isolate one part of the work from the total contractual obligation, having regard to the scope of the "work" outlined in the contract underlying the policy.³²

On occasion, the policy as issued may not reflect the actual agreement apparent from a review of documents extrinsic to the particular policy. Although insurance legislation may prohibit application of terms not set out in the policy to the prejudice of an insured,³³ it has been held that rectification may still be permitted to amend the policy wording to reflect the actual agreement made by the parties.³⁴  Identification of the actual agreement may of necessity lead one to documents outside the policy itself.

Concluding Comments

The principles of policy interpretation give rise to practical questions which are of importance to the course of the investigation and adjustment, and to coverage determinations. These may be summarized as follows:

1) Has a copy of the entire policy been obtained and established to be identical to the insurance contract in the hands of the insured?
2) Dos the factual enquiry involve evidence of a potential forfeiture of coverage because of non-compliance with policy conditions, or misrepresentations or omissions in the process of obtaining coverage?
3) Do the descriptions of the risk, and the factual circumstances of the loss, fall within the ambit of coverage?
4) Do the factual circumstances of the loss fall within the particular exclusion, or exception to an exclusion?
5) Are there precedents which bear on the interpretation of the policy?
6) If a particular word or a phrase is in issue, is its meaning clarified by reading the policy as a whole, or by resort to context, its ordinary meaning, or technical meaning?
7) Has a copy of the application been obtained, together with any renewal documentation?
8) Is it necessary to obtain and review the underwriting file, underwriting manuals and procedures, brochures or literature sent to the assured, or underlying documents, such as contract documents or specifications in the Builders' Risk context, comprising part of the factual matrix?
9) Is there potential ambiguity, and in that event, who prepared the policy, the broker, the insured or the insurer?
10) At least where there is potential ambiguity, what were the "reasonable expectations" of the parties?
11) Is a reservation of rights letter, nonwaiver agreement, or denial of coverage appropriate?

 Policy interpretation is not an exact science. Nonetheless, the process can be expedited and facilitated by an awareness on the part of adjusters and claims personnel of the approaches to it adopted by Canadian courts.

Endnotes

 1.  This paper derives from a paper written by the authors and Dennis R. Cook for the Canadian Institute meeting of May
     20th, 1994 and from certain oral remarks made by John Davis in the presentation of that paper.

 2.  Philosophical Investigations, Ludwig Wittgenstein, Trans. G.E.M. Anscombe (Bassel. Blackwell, 1965) S. 109,
      paraphrasing remarks in another context.

 3.  Consolidated- Bathurst Export Limited v. Mutual Boiler & Machinery Insurance Co., [1980] S.C.R. 888, 112 D.L.R. (3d) 49.

 4.  Pense v. Northern Life Assurance Co. (1907), 15 O.L.R. 131 at 137 (C.A.) 

 5.  Pense v. Northern Life Assurance Co. (1908), 42 S.C.R. 246

 6.  See note 4 above

 7.  See: James Duncan & Co. v. British American Insurance Co. (1871), 1 PE.I. 370, Peters 243 (sub nom) Duncan, Hodgson &
 Robertson v. Montreal Assurance Co.)

 8.   Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. (1993), 99 D.L.R. (4th) 741 (S.C.C.); Indemnity"
            Insurance Co. v. Excel Cleaning Service, [1954] S.C.R. 169, [1954] IL.R. 1-143  
 
  9.   Scott v. Canadian Mercantile Insurance Co. et al. (1965, 2 O.R. 66 (H.C.)

10.  Ronnghnn v. Canada West Ins. Co., [1957] IL.R. 1-277 (Alta. S.C.), citing Robertson v. French (1803) 4 East 130, 135; Hart v. Standard Marine (1889) 22 Q.B.D. 499, 500

11. Sterling Electro Plating Co. Ltd. v. The Aetna Casualty Surety Co., [1977] IL.R. 1-828 (Ont. S.C.).

12. Cheshire & Fifoot's Law of Contract, (9th ed.) (1976) at 152-3

13. British Columbia Ferry Corporation v. Commonwealth Insurance Co. et al. (1985), 14 C.C.L.I. 216 (B.C.S.C.); rev'd at 40 D.L.R. (4th) 766, (1987), 27 C.C.L.I. 281 (B.C.C.A.)

14. Wigle v. Allstate Insurance Co. of Canada (1984), 14 D.L.R. (4th) 404, 10 C.C.L.I. 1, 49 O.R. (2d) 101 (leave to appeal to S.C.C. refused [1985]), 14 D.L.R. (4th) 404n (S.C.C.)

15. Ibid, 14 D.L.R. (4th) 404, at p. 421

16. Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co. (1993), 99 D.L.R. (4th) 741(S.C.C.), p. 753

 17. Ibid., at p. 752

18. Youell v. Bland Welch ca Co. Ltd. and Others, [1992] 2 Lloyd's Law Reports 127, p. 133

19. Stelco v. Royal Insurance Co. of Canada et al., [1993] LL.R. 1-2966 (O.C.G.D.) (this case is pending appeal)

20. Goldnev v. CU & C Health Services Society(1988). 34 C.C.L.I. 122 (B.C.S.C.)

 21. Alnmpi v. Swnrtlz et at., [1964] 1 O.R. 488 (C.A.), at p. 492, 43 D.L.R. (2d) 11, at p. 15

 22. Dominion of Canada Guarantee & Accident Insurance Co. v. Mahoney, [1930] S.C.R. 122, [1929] 4 D.L.R. 823

 23. Insurance Act, R.S.O. 1990, c. I.8, s. 124 (4)

 24. Ibid., Section 124 (5)

 25. Insurance Act, R.S.O. 1990, c. 1.8, s. 124 (7)

 26. Insurance Act. R.S.O. 1990, c. 1.8, s. 146

 27. See, e.g., Insurance Act, R.S.O. 1990, C.I. 8, ss. 124(4) and (5). and Statutory Condition 1, s. 148

  28. The Dominion of Canada General Insurance Company et al. v. The Wawanesa Mutual Insurance Company,
         [1986] IL.R. 1-1990 (B.C.S.C.)

29.. Insurance Act (Ontario) supra, s. 148, Statutory Condition 1

30. Fletcher v. Manitoba Public Insurance Company, [1990] IL.R. 1-2672 (S.C.C.)

31. Ibid., p. 10, 559

32. Savers & Associates Limited v. The Insurance Corporation of Ireland et al., [1981] I.L.R.1-1436 (Ont C.A.).

33. See: e.g. Ontario Insurance Act, R.S.O.1990, c. I.8, ss 124 (1), (4) and (5)

34. Goodchild v. Hartford Fire Insurance Company, [1991] IL.R. 1-2748 (Ont. Gen. Div.)

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