Three Practices Experienced Practitioners Employ When Reading an Insurance Policy

There is a distinction worth recognizing between the mental discipline of reading compared to the legal practice of construing, an insurance policy. An insurance practitioner aims to first comprehend the insurance contract, before undertaking the legal analysis of construing it.

Here are three pointers on the discipline of reading an insurance policy:

1. When feasible, seek to read from a paper copy rather than on-screen

Reading a paper copy of an insurance contract provides distinct advantages to the reader over reading it on screen. Some researchers have concluded that the part of the brain used in reading is dedicated to “object” (as distinguished from “image”) recognition. Thus, the brain may perceive a document much as it would a physical landscape, for which one’s memory (if a physical document is being read) recalls various parts based upon whether they are higher or lower on a page or nearer the front of the document or toward the back, much as one would remember a milestone encountered during a walk. Holding the document while reading it helps form a coherent “mental map” of the contract. And the tactile experience of holding and turning pages of a physical document better enables the reader to understand the place where they are in the contract, and how the other parts of this “landscape” relate to that “location” and to one another. (Context, in other words). While reasonable minds can disagree, I personally would no more seek to interpret a policy without having read a hard-copy of it than I would judge the ripeness of an apple by examining its image on screen.

2. Do not hurry past the declarations: they contain crucial information.

Among other things, the declarations inform us regarding the identity of the “writing company” (the particular corporate entity that has made the contractual promise), the policy limits, the forms and endorsements comprising the policy, the policy limits, and deductibles or retentions. The identity of the writing company may be crucial, for example, with regard to jurisdictional issues, and the name of the actual writing company often differs from the insurer “brand” or parent that may appear elsewhere. What is more, the forms and endorsements in the policy you are examining may differ from (or more commonly, not include each of) those identified in the Declarations. When such discrepancies exist, some judicial decisions have deemed the Declarations controlling regarding which policy forms were intended to comprise the Policy.

3. Break down policy language into a checklist

Getting lost in a thicket of policy language can lead to an issue being missed. To avoid this, break down every independent requirement for coverage found in the Policy, and make it a checklist. For example, an issue checklist for a typical Directors & Officers (D&O) Policy could look as follows:

Coverage may exist if there has been:

1. Loss resulting from …

2. a Claim …

3. that was first made during the Policy Period …

4. against an Insured …

5. on account of a Wrongful Act,

6. which does not fall within any Exclusion.

Now, when we expand this diagram to insert the applicable portions of the definitions for the bolded terms and the potentially applicable exclusions, what emerges is the heart of a legal memorandum:

1. [“damages, award, settlement, or Defense Costs”] resulting from …

2. a [“Written demand for monetary or non-monetary damages … including a request for a tolling agreement”] …

3. That was first made during [February 1, 2020 through February 1, 2021] …

4. Against [XYZ Corp. or any company “of which it owns a majority of shares or a controlling interest”] …

5. on account of [“any actual or alleged breach of duty, neglect, error or omission, misstatement, or misleading statement”] …

6. which does not fall within [exclusions “a,” “f,” “h,” or “cc”]

The objective of the processes I’ve described in this post is to attain the most accurate comprehension of what is in the policy and how those elements relate to one another before we undertake the legal analysis to determine what these provisions mean in the context of the operative facts.