COVID-19 - Does the Buck Always Stop with the Insurer?

Introduction

Everyone wants to do their bit, but the current environment is casting an unexpected light on insurance policies, particularly those little nooks and crannies which have rarely seen the light of day.

This unexpected focus is throwing up all sorts of questions about what a word or group of words means. The words might be ambiguous, might not fit together properly, be redundant or even be missing altogether. Those questions pose a bigger question –

Where, as between the parties to a contract, should the buck for those drafting defects stop?

Interpretation Generally

For many years, Courts throughout Australia, including the High Court itself, have been debating and developing the processes by which a contract should be construed. Insurance policies have not missed out with this statement from the High Court[1] often being the best starting point: -

‘A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.

The process of construction can be difficult with great minds often reaching different views. And each view may have merit.

Have you ever been advised that the Courts when facing powerful competing arguments about the meaning of an insurance policy, will favour the insured’s argument. After all, if the insurer meant to say something in its policy wording, it had the opportunity to say it and should have said it.

But is that right?

The Contra Proferentem Rule

You may have heard of the rule ‘verba chartarum fortius accipiuntur contra proferentem’ or, more likely, ‘the contra proferentem rule’.

It means that an ambiguous document will be construed against the interests of the party who proffered that document.

There are a couple of important points: -

  • Firstly, some[2] have said that this rule is just a fancy way of restating the principle that the contract is to be read as outsiders to the contract would read it.

  • Secondly, whatever the rule stands for, it only plays a role after every other principle of construction has been exhausted.

Contract construction can be a journey. It makes no difference whether the contract is an insurance policy or some other sort of contract.

A significant debate about the construction of insurance policies, particularly where they employ outdated language, is emerging. The simplicity of pointing to the ‘contra proferentem’ rule at the outset and saying that the buck stops with the insurer might be attractive, but it is jumping the gun.

Proper construction principles need to be deployed. If deployed properly, they should reveal the policy’s real meaning and leave nothing for the ‘contra proferentem’ rule to do. More importantly, they should leave no room for any perceived favouritism. They might even reveal the rule to be an illusion.

Conclusion

Returning to our question-

Where, as between the parties to a contract, should the buck for those drafting defects stop?

It should not necessarily stop at the insurers’ feet. To say otherwise gives the ‘contra proferentem’ rule too great a reach.

Call me at Sheller on (02) 9327 3690 or email me on mark@shellerlegal.com if you have any queries.

[1] Gleeson CJ in McCann v Switzerland Insurance Australia Ltd (2000) 2003 CLR 579. [2] Higgins J in Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533 at 574

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