Contra proferentem rule is applied universally to interpret the ambiguities strictly in an insurance policy against the insurer and in favor of the insured even if both the parties had gone through the entire provisions of the contract(1). It is a contra-insurer doctrine best known for the construction of policy in insurance. The supreme importance is the intention of the parties which is similar in a way of interpreting the insurance policies(2). The vagueness and unclear draft is unavoidable which is a risk to the draftsman as per this ambiguity rule. “the party drafting an agreement should bear responsibility for any ambiguities in it, as ‘he is likely to provide more carefully for the protection of his own interests than for those of the other party(3).” This rule is applied when the party challenges the clauses or an entire contract before the court of law. The rule happens to be applicable only if it satisfies the three-step process(4):
1. To determine the ambiguity, the court has to examine the entire contract language in the policy.
2. When the court finds it is unclear, it looks forward to the foreign evidence and determines the intention of the parties at the time they enter into a contract. If such evidence dismisses the uncertainty, then the court allows the parties to perform the contract in the true sense as it is meant to be.
3. When the court ascertained the fact that evidence is still obscure, then the rule of contra proferentem or “guilt of the drafter” is applied.
The Supreme Court held in a recent decision that, “The Common Law rule of construction ‘verba chartarum forties accipiuntur contra proferentem’ means that ambiguity in the wording of the policy is to be resolved against the party who prepared it.(5)” The same court in the same case held that before applying this rule, the court had to examine the ambiguity in the contract. The fact is, there is no difference between insurance and ordinary contracts. The court has no duty to draft a new contract but only to interpret and find if the words put by the parties in the contracts are reasonable(6).
In the case of K Mohan Das(7), the question of interpretation arose regarding the clauses executed in Voluntary Retirement Scheme 2000 and Judge Lodhia held under the knowing fact that the bank has drafted the scheme that, “the optees of voluntary retirement under that Scheme will be eligible to pension under Pension Regulation, 1955,” so in order to seek the clarification, the risk lies upon the bank. But this case has no relevance if the parties to the contract have mutually agreed upon the terms of the contract ‘with open eyes’ even if there is an ambiguity, i.e., the situation will not attract the contra proferentem rule(8). In absence of such ambiguity, the party to the policy cannot invoke the principle of this rule to his case and also, in presence of such ambiguity but sine qua non being the policy language cannot invoke to interpret the clauses to decide the issues involved in the case, the doctrine of contra proferentem cannot be applied(9). It is an established rule of interpretation that the court has to decide on the clearness of the words to the contract regardless of the consequences.
EXEMPTION CLAUSE AND CONTRA PROFERENTEM RULE
Sushilaben Indravan Gandhi and another v. The New India Assurance Company Ltd(10)
A case of a motor vehicle accident that happened 23 years ago heard before the Supreme Court, claiming insurance compensation resulted in an interpretation to the exemption clause. The contract of insurance made between the deceased or insured, who was an eye doctor in a hospital. The legal representative of the insured claimed for the insurance compensation as the insured was not an ordinary employee but a professional who cannot be covered under the Workmens’ Compensation Act, 1923. As per the policies of the hospital. if the insured is considered as an employee of that hospital, he cannot claim such compensation.
The Apex Court raised an issue about whether the insured was an employee. Based on the observations made by the Court of law, it cleared the ambiguous issue. It held that the insured, being a professional, qualified to do the services cannot be treated as an employee. Instead he was an independent professional. This resulted in the applicability of the contra proferentem rule, which allowed the court to order the insurer to pay the compensation of Rs. 37.5 lakhs. The ambiguity is resolved.
It is further held that medical professionals can never be mistaken as ordinary employees of any organization or an establishment since the contract they make is ‘contract for service’ and not ‘contract of service.’ The ‘contract for service’ is a contract made between the professionals. Therefore, the insurance company or the insurer is bound to pay the compensation. The Hon’ble Supreme Court applied the rule in this case of ambiguity, “it is well-settled that exemption of liability clauses in insurance contracts are to be construed in the case of ambiguity contra proferentem.(11)”
The insurer or the contract of the insurance has no permission to state the rule of contra proferentem does not apply to the wordings and language of the contract. The Supreme Court of Canada has a say in the matter, “Equitable insurance principles of subrogation, though not the principle of interpretation contra proferentem, may be altered by the terms of the contract between the parties.(12)”
LIMITATIONS TO THE CONTRA PROFERENTEM DOCTRINE
The applicability of this rule is often to those contracts that are genuine and hold inadequacy. Nevertheless, both the parties knowingly and wantonly put on the clause that is ambiguous, then the doctrine is of no use. The rule has no applicability when the ambiguity is not genuine. It mostly occurs in commercial insurance contracts.
Commercial insurance contracts are contracts that are entered between two sophisticated companies where both the policyholder and the insured are well aware of the clauses in the contract. While procuring the contract, the policyholder offers the insurance broker or the respective counsel of their entity to make them understand the clauses and negotiate the same with the policymaker to avoid the rows. Recently, in Oxford Realty Grp. Cedar v. Travelers Excess & Surplus Lines(13), the New Jersey Court held that this doctrine is nothing but protection to the consumer, also known as consumer protection doctrine. The Court made a strong statement that the rule applies only when both the parties have inadequate bargaining power and here it is equally wise. So, the applicability of this doctrine is not appropriate and it is less applicable to contracts of commercial insurance.
Since such recognitions are increased before the courts, the policymakers or the insurers should care to take a look over the fact of having to record the evidence of such demonstrations and the power of negotiation of the insured as a precaution to defend over the future disputes. In Emmis Commc’ns. Corp. v. Ill. National Ins. Co.(14), though the policyholder being a very big corporation, the court applied the doctrine against the insurer to construe the contract language. The Court of Indiana decided against the insurer and stated that this case is nothing but a warning to the insurers who fail to record and introduce the evidence when the whole case depends on the arguments and rely on the doctrine. The evidence on record by the insurer is an exception to the rule of sophisticated-insured contra proferentem.
The Supreme Court of India in a case(15) has excluded applying this rule. It states that the party to the insurance contract cannot claim more or for what is not in the contract. The insured has to read and accept the terms as they are guaranteed.
1. United India Insurance Co. Ltd v Pushpalaya Printers 1 SCALE 308 (2016)
2. Duncan, E. (2006). THE DEMISE OF “CONTRA PROFERENTEM” AS THE PRIMARY RULE OF INSURANCE CONTRACT INTERPRETATION IN OHIO AND ELSEWHERE. Tort Trial & Insurance Practice Law Journal, 41(4), 1121-1140. Retrieved December 3, 2020, from http://www.jstor.org/stable/25763818
3. Dardovitch v. Haltzman, 190 F.3d 125, 141 (3d Cir. 1999)
4. Julie Young, Contra Proferentem rule, Investopedia, 30 Oct 2020, https://www.investopedia.com/terms/c/contra-proferentem-rule.asp
5. M/s. Industrial Promotion & Investment Corporation of Orissa Ltd. vs. New India Assurance Company Ltd. & Anr., SCC ONLINE SC 842 (2016)
6. General Assurance Society Ltd. v. Chandmull Jain and Anr. 3 SCR 500 (1966)
7. Bank of India v K. Mohan Das, 5 SCC 313 (2009)
8. Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran, AIR SC 2829 (2012)
9. United India Insurance Company Limited v. Orient Treasures Private Limited, 3 SCC 49 (2016)
12. Somersall v. Friedman, SCC 59 at para. 56 (2002)
13. 229 N.J. 196 (2017)
14. U.S. Dist. 323 F.Supp.3d 1012 (S.D. Ind. Mar. 21, 2018)
15. Export Credit Guarantee Corporation of India Limited v. Garg Sons International, 1 SCC 686 (2014)
1. Ms. Roohi Babu, B.SC., B.L., (Hons), Advocate practicing at Madras High Court, with 5 years of experience in IPR and Family matters.
2. Angujanani. G, 4th Year student of BBA, LLB (Hons) at Saveetha School of Law, SIMATS, Chennai.