Are There Special Rules For Interpreting An Insurance Contract?

An Insurance Policy Can Be Difficult to Read. Also, Buyers of An Insurance Policy Are Usually Without An Opportunity to Negotiate the Specific Words Used Within. Accordingly, the Law Provides That An Ordinary Person Meaning Is Used When Interpreting...


Understanding the Ordinary Person Meaning Requirement When Interpreting Special Terms Within An Insurance Policy

Insurance Claim Document Insurance documents are often extensive consisting of dozens of pages that also contain significant legalese that may be difficult for the ordinary person to understand. Additionally, insurance policies are typically known as a contract of adhesion where there is little, if any, opportunity to negotiate the specific words within the contract.

The Law
General Interpretation Principles

The interpretation of an insurance policy is straightforward when the terms within are unambiguous, being clear and concise, when the context and meaning of the terms are readily understood upon fully reading the policy for complete context.  Where terms are ambiguous, the same principles for interpreting common contracts should be used to address the ambiguity; however, if the ambiguity remains despite the applying of the general rules of contract construction, then the principle of contra proferentem may be applied.  Principles for the general interpretation of insurance policies were explained in, among other cases, Emond v. Trillium Mutual Insurance Company, 2022 ONSC 5519, and Parker Pad & Printing Ltd. v. Gore Mutual Insurance Company, 2017 ONSC 3894, whereas these cases stated:


[21]  The general principles for interpreting insurance policies are well-established. In Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co.,[3] the Supreme Court of Canada set out the applicable principles as follows:

The primary interpretive principle is that where the language of the insurance policy is unambiguous, effect should be given to that clear language, reading the contract as a whole. ... Where, however, the policy’s language is ambiguous, the general rules of contract construction must be employed to resolve that ambiguity. These rules include that the interpretation should be consistent with the reasonable expectations of the parties, as long as that interpretation is supported by the language of the policy; it should not give rise to results that are unrealistic or that the parties would not have contemplated in the commercial atmosphere in which the insurance policy was contracted, and it should be consistent with the interpretations of similar insurance policies. … Only if ambiguity still remains after the above principles are applied can the contra proferentem rule be employed to construe the policy against the insurer.[4]

[22]  Insurance policies must be interpreted as they would be understood by the average consumer and not as they might be perceived by persons versed in insurance law: National Bank of Greece (Canada) v. Katsikonouris, at p. 1043.[5]

[23]  In interpreting insurance polices, the policy should be interpreted to promote a reasonable commercial result. Provisions granting coverage ought to be construed broadly, provisions excluding coverage ought to be construed narrowly, and in the case of ambiguity, the interpretation most favourable to the insured should be adopted. Even a clear and unambiguous clause should not be given effect if to do so would nullify the coverage provided by the policy: Sam’s Auto Wrecking Co. Ltd. v. Lombard General Insurance Company of Canada, at para. 37.[6]

[24]  When interpreting an endorsement to an insurance policy, the endorsement and the policy must be read together. This is because “an endorsement is generally not understood to be a self-contained policy”: Pilot Insurance Co. v. Sutherland, at para. 21.[7] As the Court of Appeal for Ontario stated in Pilot,

An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence.[8]

[25]  In Ledcor, the Supreme Court reaffirmed its guidance on the “generally advisable” order in which to interpret insurance policies: the insured has the onus of first establishing that the damage or loss claimed falls within the initial grant of coverage. The onus then shifts to the insurer to establish that one of the exclusions to coverage applies. If the insurer is successful at this stage, the onus then shifts back to the insured to prove that an exception to the exclusion applies: Ledcor, at para. 52.


[30] The general principles of interpretation that apply to insurance policies are well established. I adopt this summary of those principles from the Ontario Court of Appeal's decision in Cabell v. Personal Insurance Co.  (2011), 104 O.R. (3d) 709, [2011] O.J. No. 622, 2011 ONCA 105, at paras. 11-13:

A clause in the policy providing coverage will be broadly interpreted in favour of the insured. An exclusion clause limiting coverage will be strictly interpreted. Since insurance contracts are contracts of adhesion, any ambiguity in the policy will be construed against the insurer, applying the contra proferentem doctrine: Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, [1993] S.C.J. No. 10, at pp. 268-69 S.C.R.]; Consolidated Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, [1979] S.C.J. No. 133]. However, these principles of interpretation cannot create ambiguities; if the exclusion clause is clear, it is to be applied according to its terms, subject to the nullification of coverage doctrine discussed below.

[31] As to interpretation of endorsements generally speaking the endorsement does not operate independently of the policy. As Lang J.A. put it in Pilot Insurance Co. v. Sutherland (2007), 86 O.R. (3d) 789, [2007] O.J. No. 2596, 2007 ONCA 492, at para. 21:

An endorsement changes or varies or amends the underlying policy. While it may be comprehensive on the subject of the particular coverage provided in the endorsement, it is built on the foundation of the policy and does not have an independent existence. [page612]

[32] However, if limitation of apparent coverage in an endorsement is ambiguous, the limitation should be set out in the endorsement itself. As Cory J.A. said in Wigle v. Allstate Insurance Co. of Canada (1984), 49 O.R. (2d) 101, [1984] O.J. No. 3422, 1984 CanLII 45 (C.A.), at p. 120 O.R., in relation to underinsured motorist coverage:

Limitations on the apparent coverage in the endorsement that are ambiguous in the sense that they are not clearly apparent, should be set out in the endorsement itself. If it was the intention of the insurer that the endorsement was not to cover an "unidentified" vehicle, it would have been a simple matter to say so in the explanatory note.

[33] In Cabell, the Ontario Court of Appeal also considered the doctrine of nullification of coverage (at paras. 15-17):

These passages appear to indicate that the nullification of coverage is simply a particular application of the broader rule of interpretation that in case of an ambiguity in an exclusion clause, the ambiguity is to be construed against the insurer. The subsequent decision of the Supreme Court of Canada in Consolidated Bathurst also created some ambiguity as to how the doctrine applied. In a passage that has been repeatedly applied in interpreting insurance contracts, Estey J., speaking for the majority of the court, held as follows, at pp. 901-902 [S.C.R.]:

Even apart from the doctrine of contra proferentem as it may be applied in the construction of contracts, the normal rules of construction lead a court to search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract. Consequently, literal meaning should not be applied where to do so would bring about an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted. Where words may bear two constructions, the more reasonable one, that which produces a fair result, must certainly be taken as the interpretation which would promote the intention of the parties. Similarly, an interpretation which defeats the intentions of the parties and their objective in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result. It is trite to observe that an interpretation of an ambiguous contractual provision which would render the endeavour on the part of the insured to obtain insurance protection nugatory, should be avoided. Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.

. . . . .

These passages suggest a different way of looking at the nullification of coverage doctrine, namely, that it is an independent doctrine that applies even in the absence of an ambiguity. This court has adopted this interpretation of the doctrine in a number of cases, including Weston Ornamental and, [page613] more recently, in Zurich Insurance Co. v. 686234 Ontario Ltd. [ (2002), 2002 CanLII 33365 (ON CA),] 62 O.R. (3d) 447, [2002] O.J. No. 4496 (C.A.), at para. 28 (leave to appeal to S.C.C. refused [2003] S.C.C.A. No. 33):

From Weston Ornamental Iron Works it is clear that this court has concluded that even though an exclusion clause may be clear and unambiguous, it will not be applied where: (1) it is inconsistent with the main purpose of the insurance coverage and where the result would be to virtually nullify the coverage provided by the policy; and (2) where to apply it would be contrary to the reasonable expectations of the ordinary person as to the coverage purchased.

[34] The Court of Appeal also considered whether any evidence was necessary to reach the conclusion that the clause would nullify the coverage purchased. It stated (at para. 28):

It seems to me that a court is in a good position to determine what are the most obvious risks for which an ordinary homeowners' policy is issued. If the court is able to determine on an objective basis that the insurer's interpretation would render nugatory coverage for the most obvious risks for which the endorsement is issued, a tactical burden shifts to the insurer. It will be for the insurer to show that the effect of its interpretation would not virtually nullify the coverage and would not be contrary to the reasonable expectations of the ordinary person as to the coverage purchased. This is a reasonable approach given that the insurer is in an ideal position to show that, contrary to what appears to be the case, the endorsement does in fact provide coverage. For example, the insurer would have access to its records and the experience in the industry and would be able to show that claims have been paid for loss or damage not falling within the exclusion.

Ordinary Person Meaning

Insurance buyers are often unsophisticated in the terms and legal language of insurance policies. To protect insurance buyers, courts developed special rules for the interpretation of insurance policies including the ordinary person meaning for interpreting special words and terms that may have a certain meaning to laypeople and yet another meaning in law.

The rule of interpretation based upon the ordinary person meaning was stated by the Supreme Court within the case of Co-operators Life Insurance Co. v. Gibbens, [2009] 3 S.C.R. 605 wherein it was stated:


[20]  The courts have developed a number of general interpretative principles that reflect a concern that customers not suffer from the imbalance of power that often exists between insurers and the insured but, on the other hand, that customers obtain no greater coverage than they are prepared to pay for.  The exercise of interpretation should avoid “an unrealistic result or a result which would not be contemplated in the commercial atmosphere in which the insurance was contracted”:  Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, per Estey J., at p. 901.

[21]  In Mutual of Omaha Insurance Co. v. Stats, 1978 CanLII 38 (SCC), [1978] 2 S.C.R. 1153, Spence J. stated that the word “accident” is “an ordinary word to be interpreted in the ordinary language of the people” (p. 1164).  Such terms should be construed “as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law”:  National Bank of Greece  (Canada) v. Katsikonouris, 1990 CanLII 92 (SCC), [1990] 2 S.C.R. 1029, at p. 1043.  This approach was affirmed by McLachlin C.J. in Martin, at para. 19.

... terms should be construed “as they would be understood by the average person applying for insurance, and not as they might be perceived by persons versed in the niceties of insurance law”.
~ Supreme Court of Canada

Summary Comment

The terms within an insurance policy can be confusing to the ordinary person without the special knowledge of insurance experts or lawyers, paralegals, among other professionals with legal training.  To protect the ordinary person as an insurance broker, the law imposes special rules of interpretation for insurance policies by requiring that any special terms be interpreted using the meaning that would, generally, be understood by an ordinary person.

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