Insurance policies are famously obscure, full of non-sequiturs and jargon. Coverage disputes often feature disagreements about the meaning of policy wording. As a result, courts have developed a process for interpreting policies. In Oregon, the interpretation process (the Hoffman analysis, named for an important case) isn’t the same as for an ordinary contract. It focuses first on the plain meaning of a disputed term, then the immediate context of the disputed term, then the context of the term in the policy as a whole. Overlaid on that are the concepts of the “ordinary purchaser of insurance” among others. If a phrase is deemed ambiguous even after that analysis, the policyholder’s interpretation will prevail.
Two new cases from the Oregon Court of Appeals—released on the same day last week—offer a master class in how to move through those interpretation steps (even though one of them got it wrong, IMHO). Tl;dr: the court appears to be putting more emphasis on how an ordinary insurance purchaser would understand the terms; coverage grants are interpreted broadly, and exclusions narrowly; but disputed terms are interpreted in context, not isolation.
First case: Coelsch v. State Farm. Coelsch’s combine harvester malfunctioned and was shut down on an incline; then, it rolled downhill fast, damaging its internal workings because no oil was being pumped through its machinery. The policy covered “accidental direct physical loss” but excluded “mechanical breakdown.” The court concluded that “mechanical breakdown” meant breakage during normal operations, and thus the exclusion did not apply. The court looked to the other exclusions appearing in the same paragraph as “mechanical breakdown” and concluded that they supported the view that all of the exclusions were aimed at normal operations. The court also emphasized the perspective of the “ordinary purchaser” of insurance: “We therefore seek to determine the understanding that plaintiffs would have had of the term ‘mechanical breakdown’ when they bought an insurance policy for ‘accidental direct physical loss.'” The concept of the “ordinary purchaser” perspective is not new, but the emphasis on it has featured more frequently this year in this court (including in a case where we were privileged to represent the policyholder, Bighorn Logging v. Truck).
Second case: Summit Real Estate v. Mid-Century Insurance. Summit’s employee embezzled money from 2005-2013. During that time, Summit purchased coverage under two different employee dishonesty policy forms, both from Mid-Century. The first form was used in annual policies starting in August 2004, and renewed annually until 2008; the second form was used starting in August 2008, and renewed annually through 2013. The theft was discovered in July 2013. Mid-Century took the position that it only had to pay for loss occurring during three policy years, based on language in the policy limiting coverage to the loss occurring during the policy year, discovered one year after the end of a policy period, or occurring during a period of “prior insurance.” So Mid-Century paid during the current year (2012-2013); under the prior year (2011-2012); and the year before that (2010-2011). The “prior insurance” provision was the subject of the court’s interpretation analysis.
Summit argued that the use of the word “any” in the “prior insurance” provision (which read “during the period of any prior insurance”) meant that every prior year should be included, not just the immediately preceding year. The court agreed that in isolation Summit had the better argument. (After all, “any” means ANY). But the court went to the next step in the Hoffman process and looked to the immediate context. Another phrase in the same section (but not the same paragraph) referred to “the prior insurance” in a way that fairly clearly indicated it was only talking about the immediately prior year. The court concluded therefore that “prior insurance” as used in the whole section only referred to the immediately prior year’s policy.
And that is where the court appears to have gone astray, in my view. The court should not have proceeded further once it concluded that the word “any” meant “any”—it should not have proceeded to the “context” step. Even if the context was considered, there was a conflict between “any prior insurance” and the “the prior insurance” language, which should have led the court to conclude that the provision was ambiguous, meaning that Summit’s interpretation would win out.
Side-bar comment: Another frustrating aspect of this case for Summit was that its broker had told Summit that theft by an employee in “any” policy period would be covered no matter when it was discovered. Summit argued that under ORS 742.043 (relating to “binders” of insurance) this modified the policy, but the court rejected that contention on the basis that the broker’s statement was vague.
Lessons: These cases did not break new ground, but do offer the following lessons: 1) when interpreting a policy, what matters is the perspective of the ordinary purchaser of insurance, not insurance lawyers, or even brokers; 2) context matters (perhaps even when I think it shouldn’t); 3) don’t give up if the insurance company tells you that there’s no coverage because of an exception or exclusion in the policy; 4) if you can negotiate language in your policy, read and write very carefully; 5) don’t assume that any statement other than what’s in the policy will be binding come time to make a claim.