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Drafting and Interpreting Policies

A Vote Against Broker-Drafted Manuscript Policies (in Most Cases)

Kenneth Wollner | April 1, 2003

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Manuscript wording should be used only to the extent necessary to achieve an important risk management objective. A manuscript policy can help achieve many important risk management goals, but it can cause much confusion as well. There are occasions when the only proper choice is a manuscript policy. If this is so, review the wording very carefully.

According to my friends in the insurance brokerage community, many major commercial insurance companies have stopped accepting manuscript insurance policies. However, insofar as I can tell, there has been no respite in the use of manuscript insurance policies in the so-called alternative risk transfer market.

When it comes to considering manuscript wording, I am reminded of this adage: Marry someone who is just beautiful enough to get the juices flowing; anything more is a problem. Manuscript wording should be used only to the extent necessary to accomplish an important objective. More often than not, this means limited customization of an insurer-drafted coverage form, along with interpretative letters as appropriate.

A manuscript policy can help achieve many important risk management goals. At the top of my list is use of a manuscript policy to counteract many of the subtle changes in the wording of general property and general/umbrella liability policy forms. Often under the guise of "clarifications," these changes have slowly but steadily eroded the scope of coverage over the past 17 years.

On the other hand, a policyholder with a manuscript insurance policy stands to lose important legal protections available to a policyholder with a standard policy. General rules of interpretation, such as construction against the drafter (contra proferentum), cannot be invoked in favor of the policyholder. If, as is often the case, a broker drafts or recommends a manuscript policy, the broker's knowledge and representations are imputed to the policyholder. The use of a manuscript policy drafted or recommended by a broker is relevant and may be determinative with regard to such issues as the meaning of coverage terms, the policyholder's reasonable expectations, and even bad faith, waiver, and estoppel.

A 2-Minute History

Insurance contract interpretation is not simply a matter of determining the literal meaning of the policy language. Since the earliest insurance cases, court decisions have been heavily influenced, and often controlled, by the circumstances surrounding the insurance transaction. One such circumstance is use of a manuscript insurance policy.

The individuals who congregated at Lloyd's Coffee House in the late 17th and 18th centuries were thought to be at the mercy of adroit ship captains who came seeking insurance protection against the perils of the distant seas. Insurance contract law principles emerged from the notion that the assured (the ship owner) did not need the court's protection. The decisions of even as enlightened a judge as Lord Mansfield reflected the tendency to favor the helpless insurer. Courts invoked maxims such as strict enforcement of warranties and the obligation of the parties to an insurance contract to deal in utmost good faith to defeat recovery by the assured. The maxims usually did not operate to benefit the policyholder.

In the 19th century, courts in the United States reversed their position. The insured, rather than the insurer, was believed to be most frequently in need of protection. In response, judges developed ways of handling insurance disputes favoring the policyholder, as they also balanced the scales toward consumers with regard to other standard-form contracts.

Judicial sensitivity to the circumstances surrounding a typical insurance transaction led to the development of the three most important standards of insurance contract interpretation: (1) construction against the insurance company, (2) strict construction of a coverage exclusion, and (3) construction according to the insured's reasonable expectations. The pro-policyholder stance may have reached its apex with the formalization an aggressive version of the reasonable expectations doctrine by a few courts during the 1970s and 1980s.

The Sophisticated Insured Exception

During the past 20 or so years, some courts have limited the application of the pro-insured doctrines in cases involving large commercial policyholders. In a landmark 1986 decision, the Fifth Circuit Court of Appeals carved out an exception with respect to a "sophisticated insured":

We do not feel compelled to apply, or indeed, justified in applying the general rule that an insurance policy is construed against the insurer in the commercial insurance field when the insured is not an innocent but a corporation of immense size, carrying insurance with annual premiums in six figures, managed by sophisticated business men, and represented by counsel on the same professional level as the counsel for the insurers.

According to an influential article published in 1989, another factor routinely cited by courts adopting the sophisticated insured exception is representation by large brokerage houses. In a follow-up article, two insurance company attorneys argued for the next logical step: interpretation of broker-drafted policies against the policyholder and in favor of the insurance company. Noting the mergers of large brokerage houses over the past few years, the authors of the later article opined:

The empowerment of these commercial insurance brokers is matched by the size and market power of their large-scale corporate customers, making them, together, more than a match for property and casualty insurance carriers.

These and other generalizations regarding large commercial insurance transactions should not go unchallenged. While "mega-brokers" offer many valuable services, they, like all intermediaries, exist to "make transactions happen." Brokers bring buyers and sellers together, step into the middle transactions, and provide other services that the principals do not want to provide themselves. This is not the sort of "representation" that normally extends to knowledge about contract interpretation nuances, nor do I think an insurance company approving use of a manuscript policy can rightfully lay the blame for poor draftsmanship on the policyholder.

In my experience, brokers that have developed these manuscript policies have an understanding with one or more insurance companies. Only then do the brokers recommend a manuscript policy to the policyholder. I see no reason why the rules of insurance policy interpretation should turn on whether a broker markets a standard policy or an insurance company approved manuscript policy.

With respect to drafting and interpreting insurance policies, I also disagree with the conclusion that legal representation for large insurance companies and legal representation for large commercial policyholders are "on the same level." It is a secret worth knowing that a person can graduate from law school and be admitted to the practice of law without once having to read or write a contract in its entirety. Insurance contract drafting and interpretation are skills learned on the job.

Unlike other large businesses, insurance companies have, in-house or through their trade groups, legions of attorneys and other professionals who spend their time examining every word, punctuation mark, and font in insurance policies in light of the case law and other sources. I do not mean to suggest that underwriters always have all the support they need when modifying standard policy language. But at least insurance companies are in a much better position to draft and evaluate manuscript language.

If anyone wants more proof, I suggest he or she request a comparison by a specialist between the draftsmanship of some of the popular manuscript policies and the draftsmanship of corresponding ISO forms. Better yet, use as a model one of the specimen policies produced by Chubb and available on their website. If you do not want to hire a specialist, count the number of:

  • Incomplete sentences,
  • Nominalizations,
  • Expletives,
  • Passive voices,
  • Double and triple negatives,
  • Baffling changes in terminology, and
  • Appearances of "unless otherwise," "notwithstanding," and other signs of discontinuity.

The Deconstructionists

My comments notwithstanding, there is ample evidence that many decisions are heavily influenced by the use of a manuscript policy in resolving coverage disputes. For example, one prominent court stated:

[E]ven if the policy language is considered ambiguous or open to doubt, any ambiguity or doubt must be resolved against Metpath and in favor of Birmingham since the drafter of the insurance policy was Metpath's agent, J&H, and those provisions requested by Metpath's representatives are the very provision which limit the coverage to the period of the strike. Metpath, Inc. v Birmingham Fire Ins. Co. of Pennsylvania, 449 NYS2d 96 (NY App Div 1982).

To my knowledge, no appellate court has yet explicitly held that a manuscript policy should be construed against the policyholder. However, it is hard to account for many decisions involving construction of a manuscript policy on any other basis.

This leads me to a decision on the most notorious manuscript policy, the Wilprop form. Sr International Business Insurance Co., Ltd. v World Trade Center Properties LLC, 01 Civ. 9291 (SD NY Sept 11, 2002). In the portion of opinion interpreting the Wilprop form's definition of "occurrence," Judge Martin stated:

Under New York law, the terms of an insurance policy are interpreted from the vantage point of the "average man on the street." When interpreting a "specialized business policy," however, "the average person is not the housewife purchasing flight insurance but the average purchaser of broad business liability insurance …"

The court then proceeded, on the basis of the ipsi dixit logic this writer criticized in& another article, to rule that:

The ordinary businessman would have no doubt that when two hijacked planes hit the Twin Towers in a sixteen minute period, the total destruction of the World Trade Center resulted from "one series of similar causes."

The opinion does not discuss the cases in New York and elsewhere that limit the inquiry to the immediate, efficient, physical cause of loss. 1 Silverstein has appealed Judge Martin's decision, so we may soon learn more about interpretation of manuscript insurance policies by the Second Circuit.


To conclude, manuscript wording should be used only to the extent necessary to achieve an important risk management objective. There are, however, occasions when the only proper choice is a manuscript policy. In such cases, the wording of the manuscript policy should be reviewed with at least as much diligence as the wording of a standard policy.

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Another decision by the Southern District of New York warrants mention here, Ethicon, Inc. v Aetna Cas. & Surety Co., 737 F Supp 1320 (1990). There, the court held that "[t]he fact that [the insured] claims that no negotiation actually took place over the details of the [standard] insurance policies at issue … has no bearing on the Court's view of this matter."