The principles of interpretation can offer assistance on a general basis in the event of any dispute as to the meaning of the policy, particularly as to coverage issues or exclusionary clauses.

Generally

The case law referenced below has established these principles for the interpretation of insurance contracts in the broadest perspective:

1. The goal is to interpret the true and reasonable intent of the parties;
2. In so doing, any windfall must be avoided;
3. As insurance contracts are ones of adhesion and the bargaining power is not equal, coverage issues should be interpreted broadly and restrictive clauses narrowly;
4. Any ambiguity should be read contra proferentem;
5. The contract must be read in the context of the intended risk to be insured; and
6. Should the ambiguity have the impact of defeating the object of the insurance, it must be clearly brought home to the insured.

The Supreme Court of Canada in its 1992 decision ¹ summarized the rules of construction relating to insurance contracts in a general perspective, particularly “those of a standard nature such as life insurance policies”:

The court should search for an interpretation which, by reference to the language of the entire contract, would appear to promote the true and reasonable intention of the parties at the time of entering into the contract;

• the court should look at the words of the contract to determine if there is an ambiguity; and

• the court should construe any ambiguity found in the insurance contract in favour of the insured.

The Supreme Court of Canada followed with a 1993 decision, ² offering further principles of interpretation of insurance policies, apart from the above to state that (1) coverage provisions should be read broadly while restrictive clauses should be interpreted narrowly and (2) where the policy is ambiguous, the reasonable expectations of the parties should rule the day.

Mr. Justice Estey in an often referenced decision, ³ added words of caution to the application of the contra proferentem rule to ensure that this rule is used to resolve an uncertainty, rather than create one:

In a case on the line, in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying an ambiguity, when the circumstances of the case raise no real difficulty.

A further 2002 decision of the Supreme Court of Canada ⁴ authored by Mr. Justice Iacobucci spoke to “the special principles of interpretation and the general principles of law applicable to insurance contracts”, but is much to the same effect as the above 1992 decision, ⁵ noting that contracts of insurance are essentially contracts of adhesion, and that coverage issues are to be read broadly and exclusionary provisions restrictively, due to the “unequal bargaining power at work in insurance contracts”.

In 2006, the Supreme Court of Canada ⁶ once again spoke to the unequal bargaining power of the parties when the contract was formed, which was seen as an important issue when an ambiguity had been found. In this case, no such finding was made and the decision remains obiter. The Court did note that even where the contract was negotiated by a broker for the insured party, there still may be a power imbalance.

The Court added that in assessing the primary objective, to give effect to the reasonable expectations of the parties, the contract should be constructed in a manner to avoid a “windfall” to either side and further that the context of the risk must be considered.

A further 2010 decision of the Supreme Court of Canada, ⁷ much to the same effect,  Mr. Justice Rothstein writing for the court, set out the successive steps to be undertaken in interpreting the policy, namely (1) give effect to the clear language of the policy, and (2) if ambiguous, apply the normal rules of contract construction set out below. These rules have been enshrined by the above decisions. The only additional note was that “similar insurance policies are construed consistently”.

When such rules do not resolve the ambiguity, the courts will apply the doctrine of contra proferentem, a corollary of which is that coverage terms are interpreted broadly and exclusionary provisions narrowly.

The Ontario Court of Appeal ⁸ in its 1980 decision noted that an ambiguity in the disability provisions of the Insurance Act should be construed in the manner most favourable to the insured.

The same court also stated, ⁹ that where the ambiguous clause “stands significantly to defeat the objective of the purchaser”, it should be clearly brought to the attention of the insured:

A clause intended to achieve the purpose argued for by the insurer would, in my view, have to be drawn so as to bring it clearly to the attention of the insured.

It may not be necessary to go the length of having the clause “printed in red ink with a red hand pointing to it” to use the expression of Lord Denning, M.R ¹⁰ but its alleged purpose should be clearly brought home to the ordinary insured.

In the case at bar, the insurer argued that liability should be excluded based on a policy term which excluded individuals then suffering from a disability directly or indirectly resulting from alcoholism or drug addiction, the latter being argued as the use of cigarettes. The argument of the insured was dismissed on the facts, but the point was nonetheless clear, namely that the exclusionary provision should be read narrowly in favour of the insured.

The above rules will clearly apply to policies of disability insurance and in particular, group policies in a non-union setting, in which the insured beneficiary typically plays no role in policy negotiation and clearly takes the policy terms as a contract of adhesion.

It will be on the very rare occasion that a member of group disability policy actual reads its terms before necessity arises.

Disability Policies

As noted in the 2010 decision of Madam Justice Baker ¹¹ there are some basic principles of interpretation dealing with policies of disability insurance.

These are as follows: ¹²:

1. The specific wording of the policy must be interpreted and applied to the facts;

2. The court’s function is to interpret the policy language and to construe this reasonably and not literally;

3. Disability policies insure against the ability to work and not against unemployment, itself.

A popular 1999 decision of Baynton J. set out ten (10) principles which should be applied to the adjudication of disability cases. ¹³

• The terms of each particular disability policy or plan determine the nature and extent of the coverage, and each case must be decided on the terminology of the policy or the plan applicable to it. Accordingly, there are not many legal principles in this area of the law, and the specific provisions of a disability policy may well override such legal principles. The medical condition of the plaintiff, his or her training, education and experience, and the wording of the policy or plan in issue, are the determining factor of each case, and must be carefully considered.

As noted, the policy terms will rule the day. The decision notes that the policy terms may directly overrule the legal principles, so care must be taken to reference the policy itself. The reference to the training, education and experience is referenced in the context of a total disability “any occupation” claim.

Interpreting the Disability Policy

The court continued to elaborate other principles in the interpretation of disability policies, as set out below.

1. The general principles of law pertaining to disability insurance policies apply as well to private plans, statutory plans, or government plans.

This requires no commentary.

2. The onus is always on the plaintiff on a balance of probabilities to establish that she is totally disabled within the definition of the Plan. Once the plaintiff has made out a prima facie case of total disability, (i.e. that her medical condition is such that she is likely incapable of substantially performing any reasonable occupation for which her training, education, or experience have fitted her), the onus shifts to the defendant to prove that there is such a specific occupation that the plaintiff is capable of substantially performing. The plaintiff is not required to prove a negative, (i.e. that she is not capable of performing each and every conceivable occupation that may be reasonable in the light of her background).

Later cases, discussed below, have described the shifting onus as an evidentiary one and that the plaintiff always maintains the overall onus to prove the case. The topic of onus has become unduly complicated and will be discussed in some detail subsequently.

3. The wording of disability policies and plans must be interpreted not literally but reasonably. The benefit of interpretation is most often given to the insured.

This principle that the benefit of interpretation is most often given to the insured is an important issue, particularly in the interpretation of exclusionary provisions in a group context, where the covered party is not part of the negotiation process or indeed a direct party to the contract.

4. Declarations of total disability for a period beyond the date of trial are seldom made unless the policy or plan provides for a presumption of permanent disability. Most plans and policies require an annual review or assessment of the insured, and the onus is always on the insured to maintain his qualification for total disability benefits.

Most plans do not presume a permanent disability. The accuracy of this statement, as noted subsequently, is in serious doubt in a modern context and will be examined subsequently.

5. Most policies or plans contain provisions that require an insured, as a condition of receipt of total disability benefits, to engage in reasonable rehabilitation or retraining to mitigate the amount of the benefits otherwise payable for the period of total disability. This issue creates a contractual duty to mitigate, a breach of which may cause the claim to be lost or reduced.

6. Disability policies or plans are not income security plans. They only protect an insured against potential income loss if the insured is incapable of performing reasonable employment. The fact the insured loses income because no suitable job is available, is of no consequence from an entitlement to benefits perspective.

This is an important point. The insured, usually in “any occupation” claims must prove that he or she lacks the medical ability to carry on the relevant occupation. If they are medically able to work based on the relevant test, the fact that such employment is not available is of no impact to the defence of the insurer. Later cases have spoken to the “real world” interpretation of this context which have required an examination of a new employer’s willingness to accommodate apparent work restrictions.

7. Any occupation is not “any reasonable occupation” for which the insured is fitted by experience, training, or education, unless that occupation is reasonably comparable to the occupation previously performed by the insured.

Many cases have added definition to this concept. This again is dealing with an “any occupation” claim.

8. It is not the insured’s actual “job” but his “occupation” that is relevant to the determination of whether one is totally disabled from performing any reasonable employment, (i.e. it is the class of occupation, not the specific employment of the insured that is relevant).

This is a modification of the above point.

9. The lack of a physical basis for pain, and the fact a disability arises primarily as a subjective reaction to pain does not preclude a finding of total disability.

The statement may be so, but again further cases have refined this concept.

As a general proposition, parol evidence is not allowed to establish the subjective intent of one party to an insurance contract. This was the conclusion of the Federal Court in its May 2012 decision. ¹⁴ [24]

The Standard of Appellate Review

Traditionally an appellate court’s function on the issue of the interpretation of a contract of insurance has been determined to be a question of law on which the standard of review is correctness.

In the 2009 decision of the British Columbia Court of Appeal, Chief Justice Finch provided a general direction on the rules for appellate review of written contracts. ¹⁵

The correctness standard referenced above was determined to be no longer the accepted practice in Canada. The Court referenced Hall’s text on “In Canadian Contractual Interpretation Law” in which he stated:

Interpretation involves a complex interplay between the words of a contract and the context in which they arise. Consideration of the context involves questions of fact which require a trial judge to hear evidence, and consideration of the words cannot be cleanly separated from consideration of the context. Thus, it is no longer appropriate to consider the endeavour to be a pure question of law which can be reviewed by an appellate court on a standard of correctness.

The Court also referred to Chitty on Contracts and the Ontario Court of Appeal decision ¹⁶ which conclude that the interpretation of a contract can involve (1) questions of law, (2) questions of fact and (3) questions of mixed fact and law. The standard of review depends on the nature of the question.

In the case reviewed by Chief Justice Finch, he saw the issue as one of mixed fact and law and concluded that there must be a clearly identifiable or “extricable” error of law apparent from the reasons of the trial judge, and that the trial judge’s conclusions should be reviewed with deference.

In particular, the Court concluded that the trial judge’s findings of fact may only be set aside if the appellant can demonstrate palpable and overriding error.¹⁷

However, the Supreme Court of Canada in its August 2014 decision ¹⁸ set new rules relating to the interpretation of written contracts.

Perhaps the most dramatic consequence of this case is that the Court determined that the issue of contractual interpretation generally will involve a question of mixed fact and law and not one of law alone. This has significant impact on the appeals taken from a trial or other first level finding, which will thus need to pass the higher test for appellate review on a question of mixed fact and law, as discussed below.

The threshold issue in the Supreme Court was whether the decision appealed from involved a pure question of law, as required by the statute, or a question of mixed fact and law.

Should the latter finding have been made, leave could not be granted and the arbitrator’s award would stand, as it could not then have been challenged on its merits. This hence became the pivotal point in debate.

In answering this question, the Court noted the trend in recent years of courts to drift away from the traditional historical model of contract interpretation to look only at the words of the documents to arrive at the intent of the parties.

This was done, the Court reasoned for two reasons. The first is the need to examine the “true intent of the parties and the scope of their understanding”:

To do so,[29] ¹⁹ a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning…

A further reason for this development, Rothstein J. stated for the unanimous bench, was to allow the court to understand the meaning of the words used by understanding the context, the purpose and the nature of the relationship between the parties:

The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement ….

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

By this decision, the Supreme Court decided that the historical approach was no more and that the issue of contract interpretation was hereafter to be one of mixed fact and law:

With respect for the contrary view, I am of the opinion that the historical approach should be abandoned. Contractual interpretation involves issues of mixed fact and law as it is an exercise in which the principles of contractual interpretation are applied to the words of the written contract, considered in light of the factual matrix.

The door to issues arising on a contract of a question of pure law, however, remains slightly ajar. Should the issue be confined to one of law alone, as may be present when there is an “extricable” issue, a matter on which caution must prevail in its determination, a submission may remain on a question of pure law.

Rothstein J. gave these directions to day to day practitioners.

“Surrounding circumstances” may be used to interpret the provisions of the contract, yet cannot “overwhelm” the agreement. The mission is to heighten the adjudicator’s comprehension of the “mutual and objective intentions” of the parties. Such evidence cannot deviate from or contradict the words of the document.

These surrounding facts, the Court added, should be limited to “objective evidence of background facts” which were in existence at the time the contract was formed. This is limited to “knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting”.

This includes “absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable [person]”.

This rule does not prohibit the admissibility of “surrounding circumstances” evidence, the Court stated. The intent is to allow for such evidence to interpret the true intent of the parties, not to alter or overrule the meaning of the words on the page.

It was noted that rule against parol evidence prohibits evidence relating to the subjective intent of the parties, one which remains protected and not caught by the “surrounding circumstances”:

It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties.

This decision will make the barrier facing an appellate review of trial court rulings involving contractual interpretation an onerous one. The standard for a review of a finding of mixed fact and law is palpable and overriding error, which reflects considerable deference being shown to the first decider. All this, again, presumes no “extricable issue” of law alone.