Contra Preferentum When Interpreting a Policy

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Since, in almost every case, there is uneven bargaining power between an insured and its insurer, the courts that adopted the tort of bad faith, concluded that the insured needs the extra leverage provided by the tort of bad faith to even his or her bargaining position.

Since most insurance contracts are adhesion contracts where the insured has no choice over the wording of the insurance policy the tort was considered necessary to protect the policyholder. Because the insurer requires the insured to purchase a contract with wording the insurer has written and which it will not modify courts construe any ambiguous language in the policy against its drafter and in favor of the policyholder.

The adhesive nature of the contract does not give rise to the tort of bad faith. It is how the terms are applied that gives rise to the tort.

Of course, some insureds have greater buying power and leverage than an insurer. For example, an international corporation may have greater assets than the insurer from whom it seeks insurance, will insist that the insurer adopt the wording prepared by the international corporation or its risk management team. In such a situation, the contra preferentum rule is turned around and any ambiguities are interpreted against the insured rather than the insurer.

As a general rule, a written contract, having been deliberately executed, is presumed to correctly express the parties’ intentions. [Appalachian Ins. Co. v. McDonnell Douglas Corp., 214 Cal.App.3d 1, 19, 262 Cal.Rptr. 716 (1989).] When the insured fails to introduce any evidence showing that there was a mutual mistake with regard to adopting the language of the endorsement negotiated by a sophisticated insured the court refused to reform the policy and granted summary judgment for the insurer. 

Under Pennsylvania law, the rule of contra proferentem was inapplicable in a dispute involving variable universal life insurance in which the insured/investor challenged the insurer’s right to limit number of telephone/facsimile transfers among mutual fund investment options controlled through policy; the insured, and co-defendant policy purchaser who participated with insured in investments, were sophisticated investors, and there was evidence of parties’ negotiations and intentions in entering contract. 

Zalma Opinion

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