Policy Interpretation

6.  Policy Interpretation

6.1   Policies

No particular form is required for a valid liability insurance contract, however, it is usually recorded in an insurance policy.339 The policy may be concerned only with liability insurance or it may extend to other kinds of insurance, such as fire insurance, in the case, for example, of a private householder’s policy.

Should a question of interpretation arise, the rules that follow are those applicable not only to market policies but also to Bermuda Form policies. The Bermuda Form was drafted to cover potentially extensive liabilities which at the time could not be insured against on the market. In the 1980s, American companies in particular found it increasingly difficult to buy large amounts of liability insurance against damage caused by pollution and against personal injury caused by contact with asbestos. To meet the needs of corporate insurance buyers, new insurance companies were set up in Bermuda. Each of these insurers produced its own standard-form policy (which have been revised and reissued subsequently), and collectively these policies are loosely described as the “Bermuda Form.”

Of course, the policy in issue and its interpretation is what counts most340 but Bermuda Form policies share certain similarities.341 Notably, they exclude liability for asbestos and pollution; they also exclude awards or punitive damages. A liability that might be covered by a Bermuda Form is, for example, advertising liability, an issue in the United States. The law of New York is usually stipulated as the law by which the Form is governed.342 However, to reduce the perceived risks of the American jury system, the policies usually provide for disputes to be resolved by arbitration, often in London. Bermuda Form arbitrations are confidential and therefore rarely reported.343

6.2   Objectiue Interpretation

The courts’ overriding aim in policy interpretation has often been said to be to find the intention of the parties.344 However, others have spoken of the so-called objective theory that, although the aim is indeed “to give effect to the intention of the parties,” the methodology “is not to probe the real intentions of the parties but to ascertain the contextual meaning of the relevant contractual language. Intention is determined by reference to expressed rather than actual intention.”345 To achieve this aim, the courts apply the same rules of interpretation to all kinds of contract.346 An outline of the rules, as applied to insurance contracts, follows.

6.3   Words: Their Ordinary Meaning

The starting point is that words are to be understood in their ordinary sense,347 but what is that? One view is that the ordinary sense is that of the man in the street, the popular348 albeit perhaps “incorrect” sense. Another view, and the one usually adopted in England, is that the ordinary meaning of a word is the dictionary meaning of the word.349 However, courts are aware that dictionaries have to be updated and so the meaning of even a word such as “insurance,” for example, may change.350 Nonetheless words will be applied in the ordinary sense, as written, unless that was obviously an error.351 For example, “actually paid” means “really paid” and not “notionally paid” or “prospectively paid.”352

6.4   Context

Each word or phrase is to be understood not in isolation but in context. The context is not only the immediate context of the phrase, the sentence, or the paragraph353 but that of the policy as a whole.354 This has the important consequence that the operative insuring clause is subject not only to the conditions and exceptions expressed in or with it but to all such terms in the rest of the policy.355

With regard to the sentence or paragraph, construction in context is carried out according to the ejusdem generis rule: if particular words have a generic character, more general following words are construed as having the same character.356 By contrast, there is the rule expressio unius (est exclusio alterius

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