The Insurance Policy as a Contract

Question 1

What are two (2) maxims of contract interpretation that apply to insurance contracts in South Carolina?

Answer 1

Maxim 1:

The meaning of a clear and unambiguous clause in a contract will not be altered by the Court.

Maxim 2:

Contract language that is vague or ambiguous will be strictly construed against the drafter.

Question 2

Any contract provision that supersedes or directly contradicts an applicable state statute _____________.

Answer 2

Any contract provision that supersedes or directly contradicts an applicable state statute will be held invalid.

Question 3

Under South Carolina law, what is the effect of a choice of law provision in an insurance contract?

Answer 3

South Carolina courts generally uphold the principle that parties to a contract may specify the jurisdiction under whose laws the contract will be governed, and in the absence of a choice of law provision, the law of the state in which the contract was formed governs. HOWEVER, the South Carolina legislature carved out a statutory exception to the traditional governing law principles, stating that:

“All contracts of insurance on property, lives, or interests in this State are considered to be made in the State and all contracts of insurance, the application for which was taken within the State, are considered to have been made within this State and are subject to the laws of this State.”

Therefore, any choice of law provision in an insurance contract to which this section applies, stating that the laws of a state other than SC will govern, is invalid.

Question 4

At what point do the contractual obligations under an insurance contract begin?

Answer 4

Generally, the question of whether two parties have entered into a contractual relationship as it applies to an insurance agreement is a question of fact to be decided by a jury.

Regarding the question of when the contract is formed, the SC Supreme Court has held, “Laypersons who pay their premium at the time an application for insurance is filed are justified in assuming that payment will bring immediate protection.”

However, an insurer may reserve the determination of whether an applicant is an insurable risk on the date of the application, thus postponing the effective date of coverage, or limiting such coverage, until such determination is made. An insurer making this election MUST use clear and unequivocal language to evidence its intent to postpone or limit temporary coverage and also MUST call such conditions to the attention of the applicant.

Question 5

What does it mean that an insurance contract is divisible?

Answer 5

An insurance contract may be divisible under the same terms and conditions as another type of contract may be divisible.

The SC Supreme Court has expressly stated that “where an insurance policy covers separate items of property which are separately valued or insured for separate amounts, the contract is divisible, and a breach of warranty or condition as to one item will not affect the insurance on the remainder of the property, even though the premium be entire.