Ambiguity arises when policy provisions and/or exclusions are unclear. As a general matter, an ambiguity arises if the language used is susceptible to having more than one meaning at a time.

Under the reasonable expectations doctrine, an insured’s reasonable expectation that coverage is afforded will prevail over a contrary exclusion or limitation. The reasonable expectations doctrine considers three separate components: (1) the reasonableness of the insured’s expectation of coverage; (2) the clarity of the limitation on coverage; and (3) the conspicuousness of the limitation on coverage.

California case law provides that the doctrine of reasonable expectations comes into play when there is an ambiguity in a policy. These cases also hold that the reasonableness of an insured’s expectations of coverage is a question of law based exclusively on the policy language.

The best expression of the law often comes in cases involving two insurance companies or insurance company vs. major business. In Fireman’s Fund Insurance Co. v. Allstate, the court restates the law governing ambiguity:

As a general rule, ambiguities and uncertainties in a policy of insurance are resolved in favor of the insured. “Although we construe all provisions, conditions or exceptions that tend to limit liability strictly against the insurer …, strict construction does not mean strained construction. We may not, under the guise of strict construction, rewrite a policy to bind the insurer to a risk that it did not contemplate and for which it has not been paid.” The words used in a policy of insurance are to be construed according to the plain meaning a layman would ordinarily attach to them, and the policy is to be construed as a whole, each clause helping to interpret the other.ii

Often times, the correspondence from the agent to the insured gives a broader interpretation of the policy than the language contained in the policy form. Agents frequently use form cover letters to transmit policies. These cover letters may contain descriptions of policies different than the policies actually enclosed. “Specified peril” property damage policies may be sent with “all risk” cover letters. Business liability package cover letters may fail to note auto exclusions.

When questioned, brokers may have a different understanding of what they sold than the company’s position. Policy face sheets from the company may not list one or more exclusions that the company relies upon to deny coverage. In each of these cases, significant additional coverage may result from a careful review of the policy documents or from questioning the broker.


Insurance companies have an independent duty to explain to their insured any limitations or exclusions contained in their policy. Sometimes, the policy language may not be a sufficient explanation. Any alleged exclusions may therefore be unenforceable if the company or its agent did not explain to or discuss with the insured(s) such exclusions.

The fiduciary duties owed by an insurer to its insured are governed by the contract of insurance. The implied covenant of good faith and fair dealing contained in every insurance contract prohibits an insurer from doing anything “to deprive the insured of the benefits of the policy.”iii

The insurer has a duty to accurately describe the provisions of the insurance policy purchased by the insured’s and must inform the insured of relevant exclusions in the policy. iv In Westwick v. State Farm Insurance Co., the California Court of Appeals noted that under California law a disparity of knowledge may impose an affirmative duty of disclosure upon the insurer. The court reasoned that the quasi-public nature of the insurance industry imposes upon the insurer a duty of good faith and fair dealing. This requires the insurer to “give at least as much consideration to the [insured’s] interest as it does to its own.”v

The court further noted that “it is a matter almost of common knowledge that a very small percentage of policy-holders are actually cognizant of the provisions of their policies … and the insured confides implicitly in the agent securing the insurance.” vi Accordingly, the court held that the insurer has a duty to reasonably “inform an insured of the insured’s rights and obligations under the insurance policy.”vii

Pursuant to the principals of agency, an insurer will be held liable for its agent’s failure to inform an insured of limiting language contained in an insurance policy. The insurance agent’s primary function, as the agent of the insurance company, is to market insurance policies.viii Such marketing includes the “solicitation of business, explanation of policies and coverage provisions, negotiations, preparation, and submission of insurance application[s] to carriers, collection of premium money, and delivery of policies to the customer.”xi

Under California law, an agent has such authority as the principal actually or ostensibly confers on him. Actual authority is defined as “such [authority] as a principal intentionally confers upon the agent, or intentionally or by want of ordinary care, allows the agent to believe himself to possess.”x Ostensible authority is defined as authority that “a principal, intentionally or by want of ordinary care, causes or allows a third person to believe the agent to possess.”xi

In most cases the agent has binding authority to market insurance policies and solicit business on behalf of the company, explain policies and coverage provisions on behalf of the company, negotiate, prepare and submit insurance applications to the company, collect premium money from insured’s for the company, and deliver the company’s policies to its customers. Accordingly, the company is bound by its agent’s representations, acts, or omissions pursuant to the doctrines of actual or ostensible authority. Thus, the company may be liable for its agent’s failure to describe the limiting or exclusionary provisions of the insurance policy in question to its insured’s.

The court in Westrick reaffirmed the duty of the agent of an insurer to inform the insured of exclusionary and limiting provisions in a policy of insurance. In reaching its conclusion, the Westrick court examined the insured’s testimony, his request for insurance, his previous questions related to insurance coverage, his long relationship with the insurance agency, and the foreseeability of harm. The court held that as between the agent and the insured, the agent had superior knowledge concerning the scope of coverage such that it was “only ‘just and equitable’ to require [the agent] to explain the limiting provisions to [the insured].”xii

Exceptions, exclusions and limitations that impact on the extent of coverage an insured would reasonably expect under a policy must be called to the insured’s attention “clearly and plainly” before an insurer can rely on those exclusions to limit coverage.xiii If the company or its agent failed to advise the insured’s of the exclusionary language contained in the original policy, the company might not be able to rely upon those exclusions to relieve itself of the duty to defend and indemnify its insured’s for the judgment rendered against.


Lack of adequate insurance to compensate clients is a growing problem. The search for money increasingly centers upon the applicability of insurance policies that may previously have been disregarded. Careful review of the policy language and investigation into the circumstances surrounding the issuance of the policy may result in payment to the victim.

c2009 Lee S. Harris, Goldstein, Gellman, Melbostad & Harris & McSparran, LLP, 1388 Sutter, Ste 1000, San Francisco, CA  94109, T: 415/673-5600.

i See Wolf Machinery Co. v. Ins. Co. of N. Am., 133 Cal.App.3d 324, 328-329 (Cal. Ct. App. 1982); Chamberlain v. Allstate Ins. Co., 931 F.2d 1361 (9th Cir. 1991).
i 234 C.A.3d 1154 (1991) (internal citations omitted).
ii Fletcher v. Western Nat’l Life Ins. Co., 10 Cal. App. 3d 376, 401 (Cal. Ct. App. 1970); see also Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 575 (Cal. 1973).
iv Westwick v. State Farm Ins. Co., 137 Cal. App. 3d 685, 692 (Cal. Ct. App. 1982).
v Id. at 692.
vi Id.
vii Id. (emphasis added.)
viii See 4 Cal. Ins. Law & Practice, Section 61.01[1].
ix Id.
x Cal. Civil Code § 2316 (Deerings 1981).
xi Cal. Civil Code § 2317 (Deerings 1981).
xii Westwick, 137 Cal. App. 3d at 692.
xiii Logan v. John Hancock Mut. Life Ins. Co. 41 Cal. App. 3d 988, 995 (Cal. Ct. App. 1974).

1 See Span, Inc. v. Associated Int’l Ins. Co., 227 Cal. App. 3d 463 (Cal. Ct. App. 1991).
2 30 Cal. 3d 220 (Cal. 1981).
3 Id. at 240.
4 Id.
5 Id. at 240-41 (internal citations omitted).
6 Id. at 241(internal citations omitted).
7 Id. at 242.
8 259 Cal. Rptr. 50 (Cal. Ct. App. 1989).
9 758 P.2d 58 (Cal. 1988).
10 State Farm Mutual Insurance Co., 250 Cal. Rptr. at 52.
11 268 Cal. Rptr. 284 (1990).
12 Span, Inc., 227 Cal. App. 3d at 485.
13 573 S.W.2d 908 (Ark 1978).
14 Id. at 648.

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Harris & McSparran based in San Francisco including the North and South Bay Areas. He has represented injury and insurance clients in numerous disaster claims. He has also served as chair of the American Association for Justice, Insurance and Bad Faith Litigation groups and serves on the board of Consumer Attorneys of California.