• Caleb Meriwether

Ambiguity in Policies

Ambiguous terms in insurance contracts are construed against the insurer. Terms are generally ambiguous if they are susceptible to more than one reasonable interpretation. An example is found in the depreciation reduction used to determine the actual cash value of a loss. Does depreciation include labor costs?

In Lammert v. Auto-Owners, 572 S.W.3d 170, the insurance policy defined the actual cash value as “the cost to replace damaged property with new property of similar quality and features, reduced by the amount of depreciation applicable to the damaged property immediately prior to the loss.” The policy did not define “depreciation.” Tennessee’s Supreme Court concluded that depreciation was ambiguous – the general public considers depreciation to refer to lost value from physical deterioration and the insurer considers depreciation to include labor costs based upon a more technical meaning of depreciation. Because ambiguous terms are construed against the insurer, the Court held that labor costs are not included as part of depreciation.

Contra Proferentem is the concept that an ambiguous contract or term should be construed against the drafter. It applies to many types of contracts, not just insurance policies, and is frequently invoked in litigation. If you’ve ever wondered why a contract has a “Not Construed Against Drafter” or “Mutually Drafted” clause, now you know.

LEGAL JARGON DISCLAIMER: The foregoing is not legal advice. Even if you construe it that way, it’s probably only worth what you paid for it. I am an attorney but am not yours.

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