I. The Insurance Contract

You're at a cocktail party, or at church, or maybe at a cocktail party at church, and someone comes up to you:

SOMEONE: You're a lawyer, aren't you?

YOU: Yes.

SOMEONE: Can I ask you a question?

YOU: Sure, but the answer won't be any good unless you pay.

SOMEONE: Fair enough. There was this guy who got hit in the head by a box of papers that someone threw out a window. Is that covered by insurance?

YOU: Have him come see me, we'll find out.

That someone sent Hiram Tweedle to you. Hiram is a sanitation engineer for Garbage Us, the new private waste disposal company that has a contract with Saxon Heights, Arkansas for garbage disposal. He was at the home of O. Julius Bananaberry, the notorious mood ring baron, to pick up the garbage, when suddenly a box of papers fell on his head.

Hiram's medical bills were paid for by workers' compensation. He was off work for a month. He had a ruptured disk which was repaired by surgery. He had physical therapy intermittently for several months. He was hurt, but he got well. He returned to his job with Garbage Us. However, now he's on a less dangerous route in nearby Gotham City.

It occurs to you that a third party claim against Bananaberry might be appropriate. You investigate and you learn that Bananaberry told the workers compensation adjustor that he looked out the window of his study, and dropped the box of papers to the ground. He denies having seen Hiram, either before or after the accident. He first realized something was amiss when he went down to throw the box into the garbage container and saw that the box was already missing.

Woford Ubiquitous, the driver of the trash truck, witnessed the accident. Hiram was going to pick up Bananaberry's trash when a box flew out the second story window. Ubiquitous helped Hiram to safety, then retrieved the box and kept it. He turned it over to an agent of Consolidated Federated Mutual Insurance Company of Sweet Haven, New Hampshire.

Consolidated was not the workers compensation carrier. It must be Bananaberry's carrier.

So you call Consolidated's local office, only to be told by adjustor Snidely Whiplash that Consolidated denies coverage. "Why?" You ask. "I can't tell you that," answers the adjustor.

Even if Bananaberry doesn't have coverage, he's a good defendant. He cornered the market on phlogiston, the substance that makes mood rings function. With his control of most of the phlogiston mining industry in the nation, it doesn't matter much whether he's insured. So you sue him. You take care to furnish a copy of the complaint to the insurance company.

Instead of one of the insurance defense lawyers you're used to, Bananaberry's personal lawyer, Jacqueline Hyde, of Runne, Laquelle, and Hyde signs the answer.

You ask in discovery, does Bananberry have coverage? You learn that Bananaberry asserts that he has coverage under not one but two policies issued by Consolidated, but Consolidated asserts some kind of policy defense. You request a copy of the policies. On reviewing them, you can't figure out why in the world Consolidated isn't defending.

At every step of the litigation, you forward copies of the documentation to Consolidated. Periodically Consolidated drops you a line that they owe no coverage in this case, but usually they just ignore you.

You get a judgment of $50,000. It's not as much as you would have liked, but enough to make pursuing the case worth it to you and your client.

You send the insurer a copy of the judgment by certified mail, return receipt requested. You are again ignored.

You now have to decide whether to execute on phlogiston mines, garnish Bananaberry's lavish income, or pursue his insurance coverage.

Thirty one days after the certified letter you sent with the judgment was received, you sue Consolidated. Consolidated answers alleging it owed no duty to pay because of the criminal acts exclusion in its policy.

Then Bananaberry intervenes, asserting not only that Consolidated owes the coverage and owes him his defense costs back, but also alleging that the claim was denied in bad faith.

Throwing a box of documents out a second story window without looking may be stupid, but a quick survey of the statutes fails to turn up an offense of Defenestration of Documents.

In discovery, you learn that the documents in the box had to do with Bananaberry's cornering the market in phlogiston. Apparently some of the means he used to do that were in violation of the antitrust laws. Fortunately for Bananaberry, the statute of limitations ran on the last conceivable offense shortly before your trial.

Antitrust concerns must have been serious for Bananaberry. You learn in discovery that Bananaberry was upset when Whiplash told him that he would be well advised to drop the claim for coverage. Whiplash suggested that he would hate to see those papers turn up in the hands of the Feds.

Consolidated takes the position that destruction of the evidence of his illegal business practices constituted obstruction of justice, a crime. The policy contains this exclusion:

We do not cover any bodily injury or property damage intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, any insured person. This exclusion applies even if:

This exclusion applies regardless of whether or not such insured person is actually charged with, or convicted of a crime.

Bananaberry also has a homeowners' policy. That policy contains a business pursuits exclusion under which the insurer denies coverage The "business pursuits" exclusion of the policy provides that the liability coverage does not apply "to bodily injury or property damage arising out of business pursuits except activities therein which are ordinarily incident to non-business pursuits."

Why did you keep sending information to the insurer when they had already told you in no uncertain terms that they did not intend to defend or pay the claim?

Why did you send the judgment to the insurance company? In particular, why by certified mail?

Why was it preferable to devote your efforts to collecting from the insurer, rather than the well-heeled insured?

If Bananaberry cross-claims against his insurer now, what should his claim be?

In its purest form, an insurance policy is just a contract between the insurer and the insured. But it differs from the ordinary contract in that it is heavily regulated, it involves issues of public policy, and it is practically never negotiated.

Only the largest institutional purchasers are in a position to negotiate terms. Say, for example, I would like an uninsured motorist policy that would pay if I'm run off the road by a phantom vehicle, whether it hits my car or not. I check the policies that the local insurers have to offer, and every insurer has a provision that reads something like this:

I am unlikely to be able to talk my insurance agent into dropping the proviso from the definition of hit-and-run vehicle. I can select among options, but the option of getting coverage for a phantom vehicle running me off the road is not one I can get. I have to take the one size fits all policy. Maybe I can tack on some higher limits and a few additional coverages, but that's it.

What do you buy when you buy an insurance policy? The more skeptical among us might feel that what you buy is a lawsuit:

If a man goes into a butcher shop, asks for two pounds of ground meat, and tenders $2.89 in payment, he will expect his meat to be forthcoming from the grinder. Imagine the scene were the customer to ask for his meat, and be answered that the butcher has no intention to deliver the same. "Where is my meat?" the customer would reply, possibly in other than dulcet tones. "I won't give you any meat," replies the butcher firmly. "Then give me back my $2.89 and I shall go elsewhere," says the customer. "I won't give you the $2.89 either," replies the butcher, "for you must bring a lawsuit to get it from me."

* * *

Yet such a colloquy proceeds with regularity in the area of insurance. The case of fire insurance leaps instantly to mind when companies frequently deny liability under contracts with their own insureds. Furthermore, if a man's car is damaged negligently by another party, the tort-feasor's insurance carrier, recognizing full well the liability, may well decline to pay forthwith, relying instead upon its ability to wear the injured victim down with legal expenses and the cost of stamps for the exchange of meaningless correspondence.
Jarrett v. E. L. Harper & Son, Inc., 160 W.Va. 399, 405, 235 S.E.2d 362, 366 (1977) (Neely, J., concurring).

What's more, in some circumstances, the customer might be told that the butcher behind the counter isn't the agent of the butcher shop at all, but the agent of the customer. Dodds v. Hanover Insurance Co., 317 Ark. 563, 880 S.W.2d 311 (1994). Arkansas recognizes the difference between a general agent and a soliciting agent, Id., although it is questionable whether most insurance purchasers do.

The approach in Arkansas is, in theory, "Read the Statute and Read the Policy." State Farm Mut. Auto. Ins. Co. v. Beavers, 321 Ark. 292, 295, 901 S.W.2d 13 (1995), quoting from Douglass and Telegadis, Stacking of Uninsured and Underinsured Motorist Vehicle Coverages, 24 U. Rich. L. Rev. 87 (Fall 1989). Of course, it wouldn't hurt to review the applicable cases on interpretation of the particular policy provision you have in mind.

Insurance is heavily regulated. Statutory regulations on insurance policy provisions are a good starting point when considering any policy provisions. If a policy provision is inconsistent with a statute, the statute controls. In fact, a statute applicable to an insurance policy is considered part of the policy.
Carner v. Farmers Ins. of Arkansas, 3 Ark. App. 201, 203, 623 S.W.2d 859, 860 (1981).

A. Contract Interpretation

The next step is to read the policy. An insurance policy is supposed to be written in plain English.

Consider this regulation:

The fact that policies are supposed to follow this regulation does not prevent the policies from being complicated.

It is not unusual, for instance, for an exclusion to have exceptions. Even with modern "plain language" rules, insurance policies can be a maze to read and interpret.

Since the policy is supposed to be written in plain English, it is to be interpreted the same way. Courts often say that they construe the meaning of contract provisions in their plain and ordinary and popular sense,⁽¹⁾ Conley Transportation, Inc. v. Great American Insurance Co., 312 Ark. 317, 849 S.W.2d 494 (1993) "rather than their legal or technical meaning." Union Insurance Co. v. The Knife Co., Ltd., 897 F. Supp. 1213, 1215 (W.D. Ark. 1995). "Courts often ascertain the ordinary and popular sense of undefined words in an insurance policy by consulting a dictionary. Id., quoting from David B. Goodwin, Review Essay: Disputing Insurance Company Disputes, 43 Stan. L. Rev. 779, 784 (1991).

That does not mean that the courts ignore the fact that it is an insurance policy that they are interpreting. A good example is Deal v. Farm Bureau Mutual Insurance Co., 48 Ark. App. 48, 889 S.W.2d 774 (1994). In that case a policy application asked whether the insured had suffered a previous "fire loss." The insured answered in the negative. After a fire, the insurer learned that property the insured owned had been destroyed in a fire in 1976. The insured countered that although the property had been destroyed, he did not have an insurance claim arising out of the fire. The Arkansas Court of Appeals agreed with the insured that the word "loss" has an established meaning in the field of insurance, i.e. "Death, injury, destruction, or damage in such a manner as to charge the insurer with a liability under the terms of the policy." "Loss" in this context is at best ambiguous. The lesson is that if a term has one meaning in English, and another in insurance language, it can be ambiguous.

Rules of construction are applicable to insurance policies. The most commonly cited rule of construction is the one that ambiguities in insurance policies are construed in the light most favorable to the insured:

In order to be ambiguous, a term in an insurance policy must be susceptible to more than one equally reasonable construction.
Insurance Co. of North America. v. Forrest City Country Club, 36 Ark. App. 124, 127, 819 S.W.2d 296, 298 (1991).

This rule is so old and venerable it has a Latin name, contra proferentum. It comes from ordinary contract law. In contract law, an ambiguous provision is construed against the drafter. This rule is followed with particular vigor in the insurance context because insurance is a contract of adhesion in which the terms are not subject to negotiation. This language is so favorable to insureds, that they seek to quote it whenever possible. The problem is, that this language is not applicable unless there is an ambiguity. The party asserting that there is an ambiguity has the duty to point the ambiguity out to the court.
Reynolds v. Shelter Mutual Ins. Co., 313 Ark. 145, 852 S.W.2d 799 (1993).

Only when an ambiguity has been found can the doctrine of contra proferentum apply.

Another rule of construction is that the policy should be read so as to give meaning to all its parts:

A construction which neutralizes any provision of a contract should never be adopted if the contract can be construed to give effect to all provisions.
Fowler v. Unionaid Life Ins. Co., 180 Ark. 140, 20 S.W.2d 611.
Continental Casualty Co. v. Davidson, 250 Ark. 35, 40-41, 463 S.W.2d 652, 655 (1971).

Since we place such importance on the language of an insurance policy, we require that insureds read that language. They fail to do so at their peril. The insured has a duty to educate himself or herself about the language of the policy.
Scott-Huff Insurance Agency v. Sandusky, 318 Ark. 613, 887 S.W.2d 516 (1994).

What is the insurance policy? Usually, an insurance policy is a self contained document, clearly marked. But in Entertainment Innovations, Inc. v. Scottsdale Insurance Co., 839 F.Supp. 654 (W.D. Ark. 1993), the policy was delivered in a three page "jacket." The jacket had definitions printed in it. Since the policy was apparently delivered in the jacket, the court decided that the definitions in the jacket were part of the policy. This was true even though the rest of the policy made no reference to the jacket.

1. They often say the same about statutes. In fact, I'm curious about exactly where it is that courts do not purport to interpret language in its plain, ordinary and popular sense.
Back up to where you were.