By: Donna Russo, Esq.

Insurance policies are contracts. Over the years, a body of case law has developed by the New Jersey courts governing the interpretation of insurance policy language. The following is a synopsis of the rules set forth in the various decisions:

Overview

1. An insurance policy is a contract that will be enforced as written when its terms are clear in order that the expectations of the parties will be fulfilled.
2. Language in an insurance policy is construed according to its plain and ordinary meaning.
3. If the terms of the policy are not clear, but instead ambiguous, the ambiguous terms are construed against the insurance company and in favor of the insured so as to give effect to the insured’s reasonable expectations. However, the courts cannot write for the insured a better policy than the insured purchased.
4. Exclusions are presumptively valid and are enforced if the exclusion is specific, clear, prominent, and not contrary to public policy.
5. If the words of an exclusionary clause are clear and unambiguous a court should not engage in a strained construction to support the imposition of liability.
6. Exclusions are to be narrowly construed and it is the insurance company’s burden to prove that the exclusion applies. If there is more than one possible interpretation of the language, courts apply the meaning that supports coverage rather than a meaning that limits coverage.
7. If the language of an exclusion requires a causal link, courts must consider its nature and extent of the causal link to determine the meaning and application of the exclusion.
8. If the exclusion’s terms make plain that coverage is unrelated to any causal link, it will be applied as written.
9. The duty to defend and indemnify are not coextensive and must be analyzed separately.
10. Coverage questions are not always clear, and an insurance company can have a duty to defend although after trial, it may not have a duty to indemnify.
11. A duty to defend depends on a comparison between the allegations set forth in the complaint and the language of the insurance policy. In evaluating the complaint, doubts are to be resolved in favor of the insured. Therefore a potentially covered claim obligates the insurer to provide a defense.

First Party Coverage - Multiple Events

1. If there is a covered loss and an uncovered loss in the chain of events, the loss is covered if a covered cause starts or ends the sequence of events leading to the loss.
2. If the claimed causes, one covered and one not, combine to produce an indivisible loss, the loss will not be covered unless the insured can prove the allocation between the covered and uncovered cause.

Concurrent Causes

1. If the policy is silent on concurrent causation, the insurance company has a duty to defend but not necessarily to indemnify.
2. If the claim could be based on the covered cause which is independent of an excluded cause, the insurance company has a duty to defend.

Interpretation of “Arising Out Of” Clauses

1. These types of clauses have been interpreted broadly to define the link between the conduct and the covered activity as “originating from”, “growing out of” or having a “substantial nexus”. The specific language is important. A “substantial nexus” is a broader exclusion and could be interpreted as excluding coverage if the covered and uncovered causes are interrelated or concurrent. Source: Flomerfelt v. Cardiello, N.J. (2010), NJ Supreme Court decided July 7, 2010.