Insurance Coverage For Collapse: How Has It Changed and Why?



...the nature of insurance. A premium is paid in return for the assurance that a potential loss will be covered.

A Contract of Adhesion

Since an insurance policy is drafted or written by the insurance company (or an advisory organization such as AAIS or ISO) and generally accepted by the insured without any discussion or negotiation, insurance contracts are said to be contracts of adhesion. The insured ordinarily has no voice in establishing the terms of the policy and simply adheres to the policy terms as drawn by the insurer.

Note, however, that many large commercial insureds with a sophisticated risk and insurance management staff are in a position to negotiate or bargain with an insurer regarding coverage. In these cases, the policy eventually agreed upon will likely not be considered a contract of adhesion. For example, a manuscript policy (usually prepared for high value or unusual risks by a brokerage firm or consultant with input from the insured) would ordinarily not be considered a contract of adhesion.

When policy language is clear and unambiguous, the parties to the contract are usually bound by its terms. Generally, a party to a contract is expected to have knowledge of the contract provisions and will be bound by the terms whether they were read and understood or not.

Courts, however, have shown some reluctance to hold insureds responsible for having read or having understood their policies. 1 This is because of the highly technical nature of insurance and the fact that insurance policy language is often complicated and not easily understood by the average insured. Court decisions stemming from insurance disputes often tend to balance what is perceived as the unequal bargaining positions of insureds and insurers by giving the insured the benefit of the doubt.

What “Contract of Adhesion” Means for Insurers

Expressed simply, a contract of adhesion means that any doubt or ambiguity in a policy provision will be resolved against the party that drafted it. Since the insurer drafted the policy, any question concerning its meaning will ordinarily be decided against the insurer and in favor of the insured. Courts across the country have essentially adopted this position. Fairness dictates that any doubt as to the meaning of the language used should be resolved in favor of the insured. To do otherwise, and employ a narrow and technical construction, would result in an injustice.

Most insurers do not take denial of coverage lightly. Awrongful denial of coverage can lead to bad faith claims against the insurer...

“Fairness dictates that any doubt as to the meaning of the language used should be resolved in favor of the insured.”