Study 3: Policy Contract Analysis - Summary

Question 1

Assessing whether a policy covers a loss

Answer 1

With enough information on the first notice of loss, the loss adjuster can confidently map out a preliminary plan of investigation to clarify issues that affect how the loss will be resolved. An objective analysis of the facts is required and may result in amendments to the investigative plan.

Question 2

Elements of Policy Analysis

Answer 2

• At the outset, a loss must be allocated to the correct policy held by the insured person (ex. a person may have an auto policy, home policy, boat policy, etc.)
• The correct policy to respond may be obvious, but there are times when further investigation is needed (ex. a company delivering fuel oil which spills - does the auto policy respond or the CGL policy?)
• Essential elements of a contract (ex. ACCGL) must be looked at to see if they affect the policy.
• Specific rules governing insurance contracts (ex. Indemnity, insurable interest, utmost good faith) must be considered as well.
• Loss adjuster must test whether utmost good faith prevailed when the contract was formed (i.e. did the policy accurately reflect the risk?)

Question 3

Questions to determine whether insurable interest exists

Answer 3

• What property was damaged by an insured peril?
• Is the property the subject matter of the insurance?
• What is the insured’s relationship to the property in law

Agents, mortgagees, trustees, lessees, bailees, consignees, tenants, custodians, and lienholders may all have a direct financial interest in the preservation of property

Question 4

Assessing proximate cause

Answer 4

• It is up to the insured to prove his or her loss under the policy and to show that an insured peril was the proximate cause of the loss
• To assess causation, the loss adjuster applies the theory of proximate cause to determine whether a loss is directly caused by an insured peril or, under a broad-form all-risks policy, whether the loss is excluded.

Question 5

Concurrent causation

Answer 5

• When losses occur concurrently, coverage will apply to that part of the loss caused by the covered cause unless the policy wording clearly states its intention to totally exclude coverage.
• If the damages caused by concurrent causes cannot be discerned, the entire damages are covered.

Question 6

Language and terminology of an insurance policy

Answer 6

• Policies have been overhauled to improve readability and eliminate legal jargon to make them easier to understand
• However, because policies are contracts, they must precisely describe their scope and application, so certain technical terms must be retained (ex. specifying “compensatory” damages)
• Words with a special meaning are distinguished by boldface type, capitalization, quotation marks, etc. and defined in the policy wording
• Standard wordings usually include an introduction, definitions, statutory conditions, and insuring agreements that include the subject matter of the insurance, the perils insured against, conditions, and exclusions.

Question 7

Declarations Page or Coverage Summary Page

Answer 7

• In the event of a claim, the loss adjuster first reviews the declarations page
• The declarations page provides details of who is insured, how much insurance was purchased and for what lines of coverage (for example, building, contents, additional living expense), the policy period, a description of the insured property, lists of endorsements or riders that apply, loss payees, and other identifying information specific to the risk.

Question 8

Insuring Agreement

Answer 8

Describes the property covered and the circumstances under which coverage will apply.

Question 9

Exclusions

Answer 9

• What is not covered under a policy, can show as a limitation or outright exclusion of coverage.
• Residential broad-form wordings usually cover “all risks of direct physical loss or damage.” Exclusions are used to determine coverage, so they must be examined very carefully.

Question 10

Conditions and warranties

Answer 10

• Many policies include specific conditions in addition to the statutory conditions. For example, typical residential policy wordings provide that the insured must give immediate notice to the police of theft or vandalism.
• Warranties are promises to maintain certain conditions of the risk during the policy term. Breaching a warranty can void the policy from the time of the breach.

Question 11

Additional Coverages and Limitations

Answer 11

• Most policies include special additional coverages or limitations
• Typical residential policy wordings cover indirect losses such as debris removal, fire department charges, and lock replacement.
• Limitations may include theft of jewellery, watches, gems etc. to a $5,000 maximum

Question 12

Principles used to interpret insurance contracts in the common law provinces and territories

Answer 12

1. Contra proferentem
2. Coverage provisions construed broadly
3. Exclusion clauses construed narrowly
4. Reasonable expectations and intent of the contracting parties

Question 13

Contra Proferentem

Answer 13

• “Against the offender”
• Insurer has an advantage because they set the terms of the contract. The law balances this by ruling against the insurer in cases of ambiguity or doubt

Question 14

Coverage Provisions Construed Broadly

Answer 14

The law of precedent has established that coverage provisions must be construed broadly in the insured’s favour.

Question 15

Exclusion Clauses Construed Narrowly

Answer 15

Legal precedent has established that exclusions in insurance policies are to be interpreted narrowly and generally against the insurer.

Question 16

Reasonable Expectations and Intent of the Contracting Parties

Answer 16

• The reasonable expectations and intentions of the parties to the contract are given effect
• The words used in the contract provide the basis for making a decision on coverage
• Evidence must be considered to determine what the parties intended and their expectations

Question 17

Rules of Contract Interpretation in Quebec

Answer 17

• Article 1425: the common intention of the parties is given precedence over the literal meaning of the language.
• Article 1426: provides that the circumstances relating to the nature, formation, usage, and prior interpretation of a contract must all be considered in interpreting it.
• Article 1427: supports the notion of treating the contract as a whole in determining its meaning.
• Articles 1428–1431: similar to the common law principle that a contract should be read to give it effect.
• Article 1432: deals with ambiguity in the contract: When there is any doubt as to the meaning of the contract, the contract will be interpreted against the person who made it.
• Article 1437 frees an insured of an abusive clause (excessivly detrimental to the consumer) in the contract either completely or in part.

Question 18

Legislation and the Insurance Policy

Answer 18

• Legislation may affect coverage provided under a policy, such as by specifying minimum coverage requirements for certain kinds of policies.
• Statutory conditions, general conditions, regulations, and even automobile insurance coverage (in some provinces) are governed by provincial and territorial legislation.

Question 19

Evaluating coverage under property policies - issues common to most claims

Answer 19

• Does the loss fall within the policy period?
• Does the loss fall within the insuring agreement?
• Do any exclusions apply to the cause of the loss or to the property that was damaged? If so, how is the coverage affected?
• Have all policy conditions been met?
• Does the policy offer any extensions of coverage or do any endorsements apply?
• Is the amount claimed reasonable for the damages sustained? If not, why not? What adjustments must be made to the claim amount?
• Is there a deductible to be applied?

Question 20

Additional steps and investigation to evaluate coverage under liability policies

Answer 20

• Does the occurrence fall within the policy period? Make sure to confirm occurrence or claims-made policy and whether the loss falls within the policy as appropriate.
• Does the loss fall within the insuring agreement?
• Are there exclusions under the policy that apply to the claim?
• Are there limitations or conditions that affect the claim?
• Does the insurer have a duty to defend?