1.3 CONSTRUCTION
1.301 In General.
A. Intent of the Parties. The same rules, with some exceptions, that apply to contract construction apply to insurance contracts. The intent of the parties is a fundamental inquiry, and the intent is gathered generally from the language of the policy construed as a whole.
B. When Construction Is Not Necessary. As with other types of contracts, the threshold determination is whether interpretation or construction is even necessary in the first place. The cardinal rule of construction of an insurance contract is that when the contract is clear and unambiguous, the court should try to uphold the contract and not make a new contract from one previously written. 25
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A succinct summary of how a court should approach the interpretation of an insurance contract appears in Graphic Arts Mutual Insurance Co. v. C.W. Warthen Co., 26 in which the court stated that
"[a]n insurance policy is a contract, and, as with any contract, the words used are given their ordinary and accepted meaning when they are susceptible of such construction" (citation omitted). Additionally, in the absence of an ambiguity . . . we must interpret the contract by examining the language explicitly contained therein. "[W]here an agreement is complete on its face, is plain and unambiguous in its terms, the court is not at liberty to search for its meaning beyond the instrument itself" (citation omitted). . . . The guiding light in the construction of a contract is the intention of the parties as expressed by them in the words they have used, and courts are bound to say that the parties intended what the instrument plainly declares. 27
This interpretive philosophy has long been the approach of the Virginia Supreme Court. 28
C. Terms Implied by Law. Another general rule guiding construction is that an insurance contract includes not only those terms expressly contained in the policy, but also those implied by law. In State Farm Mutual Automobile Insurance Co. v. Duncan, 29 the court addressed this issue, stating that
[t]he plaintiff argues that he has the right to rely upon the terms of the policy as written, and that since it makes no mention of the statutory provision requiring service of process on the Insurance Company, the latter has no right to rely upon it as a defense to this action. The ready answer to this argument is that it is an elementary rule of construction of insurance contracts
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that such a statutory provision is as much a part of the policy as if incorporated therein. 30
In the event of a conflict between the policy and statute, the rule is that the statute governs in construction. 31 For example, it is well established that the provisions of the uninsured motorist statute 32 control at every point there is a conflict between the statute and the relevant policy. 33 This is not to say, however, that an insurer cannot provide more coverage in a policy than a statute requires. On the contrary, no inconsistency exists when "the policy provides all the coverage the statute demands, and more." 34
D. Meaning of Words. Ordinarily, the words and phrases used in insurance contracts should be given the meaning that they receive in the ordinary affairs of life. 35 Suggs v. Life Insurance Co. 36 illustrates this principle:
When the contractual terms and the provisions of the policy including those in the endorsement, are read in their entirety it is clear that the word "After" as used in the phrase "Increased After Age 21" means "subsequent in point of time" to, or "later in time" than, the insured's attainment of his 21st birthday. This is in accord with the commonly accepted definition of the word after. The language indicating that the amount of insurance payable at the death of the insured is "Increased After Age 21" obviously refers to the provision in the policy that
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upon the happening of that event the amount of the insurance is increased as therein provided.
Often, parties to an insurance contract will specify certain meanings for commonplace words or language. For example, in a case involving an auto insurance policy defining the term "occupying" as "in or upon, getting into or out of, or getting off," the court gave the policy effect in accordance with the meaning agreed upon by the parties. 37 Although the court found that the child struck by another driver was not "occupying" the school bus, the court held she was "using" it because the safety equipment on the outside was activated to allow her to cross to the bus.
Obviously, the meaning of words also depends on the context of their use: "[T]he meaning of a word takes color and expression from the purport of the entire phrase of which it is a part, and it must be read in harmony with its context." 38 For example, in State Farm Mutual Automobile Insurance Co. v. Smith, 39 as one might expect, the court interpreted the words "resident" or "residence" in the context of the phrase "of the same household," which immediately followed it.
E. Choice of Law and Delivery. The conflict of law rules that apply generally to contracts apply equally to contracts of insurance. 40 In Rossman v. State Farm Mutual Automobile Insurance Co., 41 for example, the court held that Virginia's conflict of law rules required that an insurance contract made in Illinois be interpreted according to Illinois law. Similarly, in Lexie v. State Farm Mutual Automobile Insurance Co., 42 the court held that where a policy was made, issued, and delivered in North Carolina and the vehicle was also garaged there, North Carolina law governed the interpretation of the policy, even though the accident occurred in the District of Columbia.
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In analyzing whether a conflict of law question exists, it is important to look first to where the contract was delivered. 43 Various statutes govern delivery of insurance policies, 44 and it is important to analyze any issue of delivery and choice of law question in the context of those provisions.
F. Applications. The application for an insurance policy is deemed a proposal to enter into a contract and, like any other contract, its acceptance must be on the terms offered. 45 The contract of insurance does not exist until there is acceptance, and an insurance contract cannot be made, for example, through delay on the part of the insurer or negligence. 46 Similarly, with respect to the applicant, "[i]n the absence of circumstances for which an acceptance may be implied, an acceptance will not be presumed from a mere failure to decline the proposal." 47
The statements made by a prospective insured in or on an application for insurance are, by statute, "deemed representations and not warranties." 48 Under prior law, a warranty was a statement or stipulation of a fact or condition which, if untrue, would prevent the policy from attaching as an insurance contract. 49 Under current law, however, "[n]o statement in an application or in any affidavit made before or after loss under the policy shall bar a recovery upon a policy of insurance unless it is clearly proved that such answer or statement was material to the risk when assumed and was untrue." 50 Generally, coverage will not be barred unless the statement or representation in the application was both false and material to the risk. 51
1.302 Ambiguity.
A. Ambiguity Defined.
1. In General. "Ambiguity" is language that either is susceptible to two different meanings or is so doubtful that reasonable minds could
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disagree as to its meaning. 52 Another way to think of ambiguity is to say that it exists if the language refers to two or more things at the same time. 53 As noted above, construction is not necessary if the insurance contract is clear and unambiguous. 54 When and if ambiguity is found to exist, it must be found on the face of the policy. 55 In determining whether a contested term is ambiguous, the court must look at the term at issue in the context of the entire insurance contract, not just the term in isolation. 56 It follows, as the Virginia Supreme Court has explained, that parties cannot use extrinsic evidence to create ambiguities.
Berry and Wright ask us to adopt a rule permitting extrinsic evidence of the intentions of the contracting parties, regardless of the clarity of the contract language. See, e.g., Pacific Gas & Electric Co. v. G.W. Thomas Drayage [& Rigging] Co., 69 Cal. 2d 33, 69 Cal. Rptr. 561, 442 P.2d 641 (1968). We decline the invitation. We adhere to the "plain meaning" rule in Virginia: "[W]here an agreement is complete on its face, is plain and unambiguous in its terms, the court is not at liberty to search for its meaning beyond the instrument itself. . . . This is so because the writing is the repository of the final agreement of the parties (citations omitted). 57
Examples abound regarding when a particular provision is, or is not, deemed ambiguous. The following examples, although not exhaustive, provide some illustration of cases where ambiguity was found, as well as instances where the language was upheld as clear and unambiguous.
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2. Ambiguity Found. In Lincoln National Life Insurance Co. v. Commonwealth Corrugated Container Corp., 58 the term "actively at work" was found patently ambiguous.
Because the phrase "epilepsy or nervous disorder" could mean either a nervous or general physical disorder, or both, the court determined it was ambiguous. 59 The policy definition of "occurrence" in S.F. v. West American Insurance Co. 60 was held ambiguous because it could be interpreted to provide for multiple occurrences, depending on the events described.
In Southern Insurance Co. v. Williams, 61 the court found that a latent ambiguity existed in the policy because the named insured was not a legal entity and the individual insured was not named. Therefore, the court resorted to an examination of the parol evidence to determine the original intention of the parties to the policy.
3. Ambiguity Not...
