Courts to the Rescue on Exclusion Clauses in Policies

It may be seen that courts across the world are fairly unanimous regarding the fact that exclusions need to carry strict interpretation and cannot be loosely thrown at insureds. It is well known that courts feel that to deny or limit coverage there has to be fundamental or material breach and not a technical or an illusory breach, and that no exclusion can be allowed to snipe at the main purpose of the policy. Country wise analysis shows a parallel approach by courts in various countries:

Courts India

Delhi High Court: Hari Om Agarwal vs Oriental Insurance Co. Ltd., 2007

“There is some authority that an exclusion clause, in the context of a contract of insurance, which is an assurance whose main purpose has to be given prominence, should be construed strictly (Ref. Skandia Insurance Co. Ltd. v. Kokilaben Chandravadan and Ors. (SC 1987); B.V. Nagaraju v. Oriental Insurance Co. Ltd. (SC 1996). The primacy given to the main purpose, notwithstanding that contracting parties agreed to certain exclusions, is founded on the principle of interpretation that if contracting parties seek to achieve a certain purpose by entering into an agreement, the existence of exclusion clauses should be strictly interpreted and if it tends to defeat the main purpose, should be read down by the Court; if that is not possible, the court should altogether ignore it (Ref Halsbury, LC in Glynn v. Margeston and Co. 1893 AC 351).”

Supreme Court of India in the case Canara Bank vs M/S United India Insurance Co. Ltd on, 2020, stated: “21. The principles relating to interpretation of insurance policies are well settled and not in dispute. At the same time, the provisions of the policy must be read and interpreted in such a manner so as to give effect to the reasonable expectations of all the parties including the insured and the beneficiaries. It is also well settled that coverage provisions should be interpreted broadly and if there is any ambiguity, the same should be resolved in favour of the insured. On the other hand, the exclusion clauses must be read narrowly. The policy and its components must be read as a whole and given a meaning which furthers the expectations of the parties and also the business realities. According to us, the entire policy should be understood and examined in such a manner and when that is done, the interpretation becomes a commercially sensible interpretation.”

In Lakhmi Chand vs Reliance General Insurance (2016) the Supreme Court cited SC judgment of the court in the case National Insurance Company Ltd. v. Swaran Singh & Ors (2004): “69. The proposition of law is no longer res-integra that the person who alleges breach must prove the same. The insurance company is, thus, required to establish the said breach by cogent evidence. In the event the insurance company fails to prove that there has been breach of conditions of policy on the part of the insured, the insurance company cannot be absolved of its liability.”

Courts UK

Crowden & Anor v QBE Insurance (Europe) Ltd [2017] EWHC 2597

“60…The position in respect of insurance contracts is wholly distinguishable in that an exclusion clause in an insurance policy is not designed to exclude, restrict or limit a primary liability on the part of the insurer; instead, it is intended to define the risk which the insurer is prepared to accept by way of the insurance contract. Further, the exclusion clause in an insurance policy does not ordinarily operate to deprive the insured of rights which existed prior to or but for the cover afforded by the Policy.”

65….the Court must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract. The Court should not adopt principles of construction which are appropriate to exemption clauses -?i.e.?provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability - to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford.”

Courts US

Continental Cas. Co. v. Phoenix Constr. Co., 46 Cal.2d 423 (SC California 1956): “If semantically permissible, the contract will be given such construction as will fairly achieve its object of securing indemnity to the insured for the losses to which the insurance relates. (Fageol T. & C. Co. v. Pacific Indem. Co. (1941)".

Other principles enumerated include as stated by SC California in the case Joshua Lee Haynes v. Farmers Insurance Exchange, (2004):

1.???????????????We begin with the fundamental principle that an insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear. As we have declared time and again ‘any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.’” (State Farm Mut. Auto. Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201.)

2.???????????????But to be enforceable, any provision that takes away or limits coverage reasonably expected by an insured must be “conspicuous, plain and clear.” (Steven v. Fidelity & Casualty Co. (1962) 58 Cal.2d 862, 878 (Steven).)

3.???????????????Thus, any such limitation must be placed and printed so that it will attract the reader’s attention. Such a provision also must be stated precisely and understandably, in words that are part of the working vocabulary of the average layperson. (National Auto. & Casualty Ins. Co. v. Stewart (1990) 223 Cal.App.3d 452, 458; Ponder v. Blue Cross of Southern California (1983) 145 Cal.App.3d 709, 719, 723.)

4.???????????????The burden of making coverage exceptions and limitations conspicuous, plain and clear rests with the insurer. (State Farm Mut. Auto. Ins.Co. v. Jacober, supra, at pp. 201-202; Harris v. Glen Falls Ins. Co. (1972) 6 Cal.3d 699, 701.)

Court of Appeals of the State of New York in the case Seaboard Surety Company v. The Gillette Company, 1984, stated: “Moreover, whenever an insurer wishes to exclude certain coverage from its policy obligations, it must do so "in clear and unmistakable" language.

Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction.

Indeed, before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case (?Neuwirth v Blue Cross Blue Shield,; etc.)?and that they are subject to no other reasonable interpretation (cf.?International Paper Co. v Continental Cas. Co., supra,?at p 325;?Hoffman v Aetna Fire Ins. Co."

MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003) Supreme Court of California

Moreover, insurance coverage is “interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] . . . exclusionary clauses are interpreted narrowly against the insurer.” ’ ” (White v. Western Title Ins. Co. (1985) 40 Cal.3d 870, 881.)

“[A]n insurer cannot escape its basic duty to insure by means of an exclusionary clause that is unclear. As we have declared time and again ‘any exception to the performance of the basic underlying obligation must be so stated as clearly to apprise the insured of its effect.’ [Citation.]

Thus, ‘the burden rests upon the insurer to phrase exceptions and exclusions in clear and unmistakable language.’ [Citation.] The exclusionary clause ‘must be conspicuous, plain and clear.’ ” (State Farm Mut. Auto Ins. Co. v. Jacober (1973) 10 Cal.3d 193, 201-202, italics in original.)

This rule applies with particular force when the coverage portion of the insurance policy would lead an insured to reasonably expect coverage for the claim purportedly excluded. (Gray v. Zurich Insurance Co., supra, 65 Cal.2d at pp. 272-273.)

The burden is on the insured to establish that the claim is within the basic scope of coverage and on the insurer to establish that the claim is specifically excluded. (Aydin Corp. v. First State Ins. Co. (1998) 18 Cal.4th 1183, 1188.)

Courts Canada

In Cabell v. Personal Insurance (2011 Ont. CA), the court applied the “no nullification of coverage doctrine” to avoid application of the “settling/moving” exclusion to an endorsement specifically issued to cover an in-ground swimming pool. The endorsement provided that “all other policy terms remain unchanged”, including the standard exclusion which would have included the standard settling/moving exclusion. The insurer was “hard pressed to give an example of damage to the pool that would not be caught by the exclusion”. Given that the endorsement was specifically issued to cover the swimming pool, the court invoked the nullification of coverage doctrine saying that it was “an independent doctrine that applies even in the absence of ambiguity”.

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. 2016 SCC?37

[66]?????????????????????????Therefore, in my view, the purpose behind builders’ risk policies (MCE/CAR) is crucial in determining the parties’ reasonable expectations as to the meaning of the Exclusion Clause. In a nutshell, the purpose of these polices is to provide broad coverage for construction projects, which are singularly susceptible to accidents and errors. This broad coverage — in exchange for relatively high premiums — provides certainty, stability, and peace of mind. It ensures construction projects do not grind to a halt because of disputes and potential litigation about liability for replacement or repair amongst the various contractors involved. In my view, the purpose of broad coverage in the construction context is furthered by an interpretation of the Exclusion Clause that excludes from coverage only the cost of redoing the faulty work itself”

Conclusion

It is clear from the above, the insurers cannot throw about vague exclusions or cite clauses in the policy without clearly indicating in what manner the alleged breach is material or fundamental. The intention of an insurance policy is to give coverage and a denial of a loss sustained should be clearly outside the coverage given. As rightly said, the policy language will be understood in its most inclusive sense, for the benefit of the insured.