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Interpretation of an insurance contract for adhesion



As there is in almost all cases unequal bargaining power between an insured and its insurer, the courts that accepted the damages in bad faith concluded that the insured needs the extra leverage provided by bad faith even his or her negotiating position.

Since most insurance contracts are connection contracts where the insured has no choice over the wording of the insurance policy, the damages were considered necessary to protect the policyholder. Since the insurer requires the insured to purchase a contract with a wording written by the insurer and which it will not change, the courts interpret ambiguous language in the insurance against its founder and for the benefit of the policyholder.

The adherent nature of the agreement does. do not give rise to bad faith. It is how the conditions are applied that gives rise to the damages.

Of course, some policyholders have greater purchasing power and leverage than an insurer. For example, an international company may have larger assets than the insurer from which it seeks insurance, will require the insurer to adopt the wording developed by the international company or its risk management group. In such a situation, the contra preferentum rule is reversed and any ambiguities are interpreted against the insured rather than the insurer. [ Appalachian Ins. Co. v. McDonnell Douglas Corp. 214 Cal.App.3d 1, 19, 262 Cal.Rptr. 716 (1989).] When the insured failed to present any evidence showing that there was a mutual mistake in adopting the language of the endorsement negotiated by a sophisticated insured, the court refused to reform the insurance and granted a summary judgment. for the insurer. [ Mayer Hoffman McCann, P.C. v. Camico Mutual, USDC, ND California, 2016 WL 631946 (2016)]

In accordance with Pennsylvania law, the rule of contra proferentem was inapplicable to a general life insurance policy involving a dispute on the insured / investor questioned the insurer's right to limit the number of telephone / fax transfers among investment funds for investment funds controlled by the policy; the insured and the corresponding insurance purchaser who participated with the insured in investments were sophisticated investors, and there was evidence of the parties' negotiations and intentions to enter into agreements. [ Prudential Ins. Co. of America v. Prusky, USDC, E.D. Pennsylvania, 473 F. Supp2d 629 (2007)]

Irrespective of the source of the applicable law, when the insurance in question is an employer-purchaser and an employer-financed insurance prepared solely by the insurer, the contra-proverb rule applies. [ Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 540 (9th ed. 1990); see also Eley v. Boeing Co 945 F.2d 276, 279-280 (9th Cir.1991)] The rule of contra proferentum adopted in Kunin does not apply to insurance contracts that are a result of negotiations at arm's length between parties with equal power, as in the case of collective agreements, but which applies when the insured is at a disadvantage. [ Root v. Lincoln Nat. Life Ins. Co., 948 F.2d 1293 (9th Cir. 1992)]

Insurance contracts are usually connection contracts – where the buyer has no choice about the wording of the contract – and since insurers and the public have different powers – courts interpret the insurance contract to benefit the insured if there is any possibility that the terms of the contract are ambiguous. An ambiguous term will always be interpreted to benefit the insured rather than the insurer.


© 2021 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to the position of insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also acts as an arbitrator. insurance-related disputes. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

He is available at http://www.zalma.com and zalma@zalma.com. Zalma is the first recipient of the first annual Claims Magazine / ACE Legend Award. For the past 53 years, Barry Zalma has devoted his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to enable insurers and their claimants to become professionals in insurance claims.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com, the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Zalma on Twitter at https://twitter.com/bzalma ; Go to Barry Zalma videos at https://www.rumble.com/zalma; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ T the last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud- letter -2 / podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4


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