Looking beyond labels: Prioritizing policy language over terminology

Insurance policies are meticulously crafted documents outlining the rights, duties, and obligations of both policyholders and insurers. Despite this, the scope of coverage and the interpretation of a policy’s terms and conditions often become subjects of disagreement between insurers and policyholders. Despite their unique characteristics, insurance policies are fundamentally contractual agreements subject to the customary rules of contract interpretation.

This article briefly explores an essential principle of insurance policy interpretation — policy interpretation must be grounded in the actual language of the policy, regardless of the headings and labels created by policy drafters and the generally accepted meanings of those labels. This concept was extensively explored in Stryker v. Steadfast Ins. Co., [No. C089374, 2022].

In Stryker, after homeowners won a judgment against a developer, they sued the developer’s insurer as judgment creditors and assignees, claiming that the insurer had a duty to defend and indemnify the developer in the underlying lawsuit and therefore, a duty to pay the judgment the homeowner obtained against the developer. The trial court entered judgment for the insurer, ruling Steadfast had no duty to defend or indemnify because the developer never paid the “self-insured retention,” a condition precedent to the insurer’s obligations under the Home Builders Protective Insurance Policy.

The Court of Appeal reversed the judgment, finding that the relevant policy language did not expressly provide that satisfaction of the self-insured retention was a condition precedent to the insurer’s obligations to the insured developer, even though the law indicates that as a general matter, a satisfaction of a self-insured retention is a condition precedent to a duty to indemnify.

The self-insured retention provision of the policy stated: “Our obligations…to pay damages…applies only to the amounts of damage…in excess of any ‘self insured retention’ amounts…If you do not pay the applicable ‘self insured retention’ amount…the insurance provided by this policy will not replace the ‘self insured retention.” The insurer thus had a duty to indemnify the insured for any damages beyond the self-insured retention amount but had no duty to pay the self-insured retention amount. In other words, if the insured did not pay the applicable self-insured retention amount, the insurance provided by the policy would not replace the self-insured retention.

The court found that the policy language defining the self-insured retention did not expressly indicate that the satisfaction of the self-insured retention was a condition precedent to the insurer’s obligation under the policy. The court made this finding even though established precedent indicates that, as a general matter, a satisfaction of a self-insured retention is a condition precedent to coverage. The court reasoned that even though this provision was labeled as a “self-insured retention” provision, the express language of the policy did not condition coverage on the payment of the self-insured retention. [Stryker, at p. 4.]

Finding in favor of the insured, the Striker court relied on a holding in Vons Companies, Inc. v. United States Fire Ins. Co. (2000) 78 Cal.App.4th 52—“the labels used to define policy terms are not controlling; the terms themselves are.” [Id. at p. 62.]

Stryker highlights an important principle in the interpretation of insurance policies — the policy’s language will control the coverage, not the headings, labels or generally accepted meanings of those labels. To avoid potential disputes and ensure fair and accurate interpretations, insurance policies, as contractual agreements, necessitate careful attention to the specific language of each provision and not mere labels regardless of any generally accepted meaning of any particular label.

Maia Mdinaradze (maia.mdinaradze@tuckerellis.com) is an attorney with Tucker Ellis LLP.

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