Construing the Terms of the Insurance Contract

1.  The terms of the contract

While in many areas of contract Parliament has acknowledged that consumers need protection against onerous terms or attempts to limit liability, in insurance there has been relatively little statutory intervention. Insurance contracts are not covered by the Unfair Contract Terms Act 1977, which regulates clauses that limit or exclude liability for breach,1 and the Unfair Terms in Consumer Contracts Regulations 1999, which does apply to consumer insurance, was the product of a European directive.2 Before the changes introduced by the Financial Services and Markets Act 2000, which were discussed in Chapter 2, changes to the position of the consumer came from the industry itself, even if these were sometimes introduced to forestall statutory change:3 the Statements of Practice, which, among other things, sought to restrict the use by insurers of their legal rights; the regulation of intermediaries through the General Insurance Standards Council (now superseded by the Financial Services Authority);4 and the Insurance Ombudsman Bureau (replaced by the Financial Ombudsman Service), which among other things used an approach to settling disputes between consumers and insurers that did not simply rest on the common law and even referred to the Unfair Contract Terms Act to determine whether particular terms were unreasonable.5

Nevertheless, as with any contract, it is to the policy that one must turn to find the terms of an insurance agreement. Where a printed policy document has been amended in handwriting or in typing, then the former ‘must be read in the light of’ the latter.6 In many situations, however, the contract will have been formed before the policy document is issued, although typically in consumer policies, at least, insurers make reference to their usual terms on the proposal form; indeed, this was a requirement of the Statements of Practice 1977 and 1986. As has been seen in Chapter 5, there are problems in defining the terms applicable to various insurance contracts. Moreover, some insurance contracts may have been preceded by a good deal of discussion and negotiation between the parties, and it is important to distinguish between the terms of the contract and those statements made during the course of negotiation which are not part of the contract. The latter will not give rise to an action for breach of contract, although they could lead to other actions if, for instance, they constituted a misrepresentation, a breach of the duty of disclosure, or a breach of a collateral contract.7 The distinction between a term and a pre-contractual representation rests on the intention of the parties: did they intend that the particular statement should be a term of the contract? This issue is resolved objectively: in other words, it is not a matter of what the parties subjectively intended, but what the reasonable person present at the time of the contract would have deduced from their words and actions.


2.  Construing the terms of the insurance contract

Although the court determines the meaning of a contract, it ‘cannot either re-write contracts or impose on parties to them what the Court may think would have been a reasonable contract’.8 Its role is to determine the intention of the parties:

When one speaks of the intention of the parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties.9

Lord Hoffmann observed that construing a contract is ‘not a game with words. It is an attempt to discover what a reasonable person would have understood the parties to mean.’10 In Investors Compensation Scheme Ltd v West Bromwich Building Society,11 he said:

Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.12

But he also remarked that where a detailed analysis of the words in a commercial contract led to a conclusion that flouted ‘business common sense’, ‘it must be made to yield to business common sense’.13 Later, in Chartbrook Ltd v Persimmon Homes Ltd,14 Lord Hoffmann said that where a term of the contract is ambiguous,

the process of interpretation does not require one to formulate some alternative form of words which approximates as closely to that of the parties. It is to decide what a reasonable person would have understood the parties to have meant by using the language which they did.15

Sir Anthony Clarke summarised these principles in Pratt v Aigaion Insurance Co SA,16 by saying that ‘any clause in a contract must be construed having regard to its context within the contract, which must in turn be set in its surrounding circumstances or factual matrix’, and adding that ‘the more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they should make their meaning clear’.17

The background knowledge, to which Lord Hoffmann refers in Investors Compensation Scheme,18 ‘includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man’, except evidence of previous negotiations because, at that point, they were not in agreement.19 In Chartbrook, Lord Hoffmann said that, while this exclusion could result in parties being bound by terms which a reasonable person would not have intended, it ‘may be justified in the more general interest of economy and predictability in obtaining advice and adjudicating disputes’;20 but, along with Baroness Hale, he suggested the Law Commission conduct an empirical study into the effects of admitting pre-contractual material. Nevertheless, the courts do not entirely prohibit inquiry into the pre-contractual period when seeking to determine the meaning of the contract. They recognise that it may be necessary to look at negotiations in order to understand the particular meaning intended by the parties of words used in the contract; but this does not involve a search for evidence of the terms upon which they agreed. Moreover, as has been seen in Chapter 5, where one party is seeking rectification on the ground that the policy document does not express the common intention of the parties, the court can only address that issue by inquiring into the matters arising before the agreement was reduced to writing. Lord Hoffmann, in Chartbrook, pointed out that rectification was available not only when the parties intended to use a different word from that which appeared in the contract, but also when they used a word intending it to have a meaning different from the meaning it had in ordinary usage and that this difference might be gathered from pre-contract negotiations. But, again, the court is looking only to understand the agreement between the parties to see if it matches the documentation and not at any negotiations which preceded that agreement being reached.

In Durham v BAI (Run Off) Ltd,21 the Court of Appeal reviewed the principles relating to the construction of a contract. The case involved six employer’s liability policies and turned on whether the insurers were liable for claims relating to mesothelioma which had appeared only after the termination of the insurance contract. In some of the policies liability arose where the disease was ‘sustained’ within the policy period, while in others it was triggered where the disease was ‘caused’ within that period. The Court held by a majority that there was a difference in the effect of the words ‘sustained’ and ‘caused’. The employees did not sustain an injury within the terms of the policy when exposed to asbestos; the injury was only sustained at the time of the onset of the disease. Thus, a policy with the ‘sustained’ wording did not cover the employer’s liability because the disease appeared outside the policy period. Rix LJ refused to consider pre-contractual negotiations when construing the policies.22 In his view the commercial purpose of the policy was to ‘provide employers with insurance to meet the liability which their activities as employers in each period of insurance engendered’.23 At first instance, Burton J had concluded that the words in the policies should be construed within the factual maxtrix and this led him to the view that they meant the same thing on the ground that this was consistent with public policy and the intent of such policies to protect the employee injured as a result of the tortious actions of an employer. Rix LJ, however, remarked:

The judge considered that the wordings could be manipulated, because something had gone wrong with the language. In my judgment, however, it is extremely difficult to think that a reasonable reader would conclude that something has gone wrong with language when what is being considered is standard wording in a contract which is renewed year after year, and when there are other standard wordings, such as the extremely well known tariff wording, which plainly adopt a causation wording.24

He then went on to say:

It is true that such a prima facie meaning of ‘sustain injury’ would be in conflict with the commercial purpose of EL insurance. That is undoubtedly a powerful consideration. Nevertheless, it is not an absurd or meaningless or irrational interpretation. It can operate entirely successfully in some 99 per cent of cases.25

Thus, Rix LJ felt that factual matrix was irrelevant in construing the relevant clauses, particularly as the outcome of his interpretation was not ‘absurd or meaningless or irrational’. He argued that the House of Lords applied the particular principles of construction in Chartbrook to avoid a meaning that lacked rationality’,26 and for this reason the Court had construed the term against the factual matrix. In the present case, however, Rix LJ took the view that ‘sustaining injury’ meant the injury should have occurred within the policy period:

Despite the pressure produced by the policy’s commercial purpose, I do not feel able to say that something has gone wrong with the wording, so as to gloss the contractual language. … [T] he language of sustaining injury is in my judgment too strong to be able to give effect to the underlying commercial purpose.27

Alongside these general principles, the judges employ a number of tools in construing a contract. The words used by the parties are normally given their ‘natural and ordinary meaning’,28 although care must be employed since the parties may not have used these words in that sense.29 Where they have defined a word the courts will use that definition. Theft policies commonly exclude liability if goods were stolen while not ‘attended’ or while ‘left unattended’.30 Lord Denning MR commented:

I do not think that the words ‘left unattended’ are capable of any precise definition. It is a mistake for a lawyer to attempt a definition of ordinary words and substitute other words for them. The best way is to take the words in their ordinary sense and apply them to the facts.31

Where goods are left in a vehicle, the courts do not interpret such words as requiring someone to be in the vehicle at all times, but when left it must be locked, the driver must be away for no more than a few minutes and it must be in view most of the time. A car is ‘attended’ when left on a garage forecourt near the cashier’s kiosk and locked, while the driver goes in to pay,32 but not when it is out of sight for fifteen minutes with the keys in the ignition,33 or when the driver is thirty-seven yards away urinating behind some bushes even if parts of the vehicle are always in view.34

The ejusdem generis rule involves determining the meaning of a word ‘in the landscape of the instrument as a whole’.35 Where a policy covered damage by ‘storm, tempest or flood’, the word ‘flood’ was construed by reference to its juxtaposition to ‘storm, tempest’ and interpreted as meaning that any damage caused must be the result of a sudden and violent pouring in of water and not merely a slow seepage.36 In another case, a policy required the insured to declare ‘jewellery, watches, field-glasses, cameras, and other fragile or specially valuable articles’, and it was held that this wording did not require the insured to inform the insurers of a valuable fur coat because it was not of the same type of article as those specifically mentioned.37 In Hawley v Luminar Leisure plc,38 the expression ‘accidental bodily injury’ was determined using the definition given in an earlier part of the policy, thus the question was whether the injury suffered by the claimant was ‘accidental—sudden, unforeseen, fortuitous and identifiable’.39

It has been suggested that where certain words are used in similar policies across the industry, then it makes sense to presume that those words have the same meaning.40 This has much to recommend it where the wording of policies are the same; otherwise it is sensible to regard earlier decisions as, at best, constituting ‘valuable and helpful guidance’,41 and to recognise that, ‘[a]uthorities may determine the principles of construction, but a decision upon one form of words is no authority upon the construction of another form of words’,42 or where the language used to describe the same peril differs between different policies.43 Confronted by contradictory views in the cases as to the meaning of ‘accident’ Mustill LJ, in De Souza v Home and Overseas Insurance Co Ltd,44 thought it ‘better to withdraw a little from the authorities to the former ground of this policy and these facts, and to look critically at each authority to see whether it really leads inexorably to a solution of our present problem’.45 In his view the curious state of the case law had obliged the judge at first instance to reach a conclusion that did not conform to a common sense understanding of the word:

The cases, regarded simply as decisions, are difficult if not impossible to reconcile. Some of them would, I believe, be regarded by at least some lawyers as wrong. Others would perhaps be differently decided in today’s social context, and even at the time it is plain that the Judges were not all of a like mind. In many instances I venture to detect, not a chain of reasoning leading inexorably to a conclusion, but the intuitive choice of a solution, followed by efforts to rationalize it. Again, as reported case succeeds reported case even finer distinctions of language are drawn: sometimes so fine that, approaching them with all the respect due to their authors I find them either impossible to understand, or to reconcile with statements by other judges worthy of equal respect.46

If a technical word has been used by the parties, it will be given its technical meaning, unless it is clear that another meaning was intended. Where the phrase ‘liable as damages’ appeared in a policy, it was argued that the general principles of construction should be applied and these would take into account that reasonable parties could not be expected to have knowledge of the full implications of the Riot (Damages) Act 1886 since this depended on reading cases on the legislation and, possibly, its long history. Longmore LJ rejected this argument, saying:

A technical phrase has been used and it must be interpreted in its technical sense without regard to reasonably available background knowledge. If, therefore, the phrase ‘legally liable to pay as damages’ has connotations which a reasonably experienced layman might not appreciate or if the phrase leads to an inquiry which only a lawyer or a historian would be qualified to conduct, the concept of limiting this inquiry to background knowledge reasonably available to an insurance broker or an insurer must necessarily fade into the background.47

Similarly, ‘theft’ is usually defined according to its meaning in the Theft Act.48 Although there is logic in this approach, it may work against the consumer, who, unlike the insurers, will have little idea as to the law on theft and whose understanding of the word is, therefore, likely to differ from that contained in the law.49 Yet, the use of what appear to be legal terms does not always mean they will be construed according to their legal meaning. In Wooldridge v Canelhas Comercio Importacao e Exportacao Ltd,50 the claimant ran a wholesale jewellery business in São Paulo. Its stock of jewellery was insured under a policy which, in a clause headed ‘Hold-Up or Robbery’, excluded liability in respect of loss by ‘robbery’ when the premises were open for business or when any employee was present at the premises. English law was the proper law of the contract. Members of the managing director’s family were kidnapped and the managing director was told that in order to get them back he had to go to the premises and obtain all the emeralds in stock. He went to the premises, got his staff to fill two bags with emeralds and then made the exchange with the kidnappers. The insurers denied liability on the ground that ‘robbery’ according to its legal meaning involved the taking of property using violence and this was what had occurred. The Court of Appeal held the insurers liable. Mance LJ observed that it was not appropriate to apply the strict English or Brazilian definition of robbery; instead, the court should, in accordance with Lord Hoffmann’s principles, construe the clause within the context of the policy as a whole and interpret it according to the view that would be taken by ‘ordinary commercial men’. He concluded that the clause was designed to exclude loss where the premises were open for business and the theft was effected by violence directed at the staff, so that there had to be a connection between the theft and the violence to staff in the shop. Here there was no violence against the managing director or the staff, and even though there was duress this came from the kidnapping of the family members, which was a different type of risk. While Mance LJ firmly rooted this approach to the meaning of ‘robbery’ in the Hoffmann principles, there was older authority for his view, as he briefly acknowledged. In Algemeene Bankvereeniging v Langton,51 where an English policy covered property in Belgium, Maugham LJ had said:

[I]t is quite wrong in principle to construe the words … ‘fire, burglary, theft, robbery, or hold-up’ as if those words could only be construed in a technical sense according to English law. The Belgian bank, of course, do not know what the precise technical meaning, for instance, of the word ‘larceny’ is, if the word ‘larceny’ had been used, in England, and I imagine it is equally true to say that very few commercial men in this country are fully aware of the fact that in order entirely to apprehend the meaning of that word, you must go through more than 100 closely printed pages of ‘Archbold on Criminal Pleading, Evidence and Practice,’ and consult certainly more than 100 decisions going back for over 100 years. I am content with this, that in my opinion, the phrase ‘lost, destroyed, or otherwise made away with by fire, burglary, theft, robbery or hold-up, whether with or without violence, and whether from within or without,’ is a phrase which has to be construed as ordinary commercial men would construe it, or rather would understand it.

He noted that ‘ordinary commercial men’ would recognise that the offence leading to the loss would occur in Belgium and, therefore, that the words should be construed in light of the fact that the investigation and any prosecution would be undertaken under Belgian law. In any case, as Maugham LJ observed, the clause itself did not appear to have been intended to be understood in a technical way because of its use of non-legal words, such as ‘made away with’ and ‘hold-up’. It is submitted that the conclusion in both cases is further supported by the fact that, since the parties were in England and Brazil in one policy and in England and Belgium in the other and the inquiries into the crime would take place in, respectively, Brazil and Belgium, there cannot have been an intention to apply a technical meaning drawn from the criminal law of one particular country.

Any ambiguity is construed against the party that inserted the wording—the contra proferentem rule.52 This is likely to mean that the ambiguous words will be construed in favour of the insured since it is the insurers who draw up the contract: ‘It is extremely important with reference to insurance, that there should be a tendency to hold for the assured than for the company, where any ambiguity arises upon the face of the policy.’53 If, however, an ambiguous word or phrase is commonly used in particular types of contracts, the courts will seek to adopt a consistent approach to the meaning of those words rather than simply resorting to the contra proferentem rule.54 Moreover, the courts will approach a document with the expectation that there are no ambiguities rather than with the intention of seeking them out, and the contra proferentem rule cannot be used unless there is ambiguity.55 The general principle is that if the words have a clear meaning, the courts will give effect to that meaning even though this leads to a consequence which seems unreasonable,56

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