Interpretation of Insurance Contract Terms. The insured brought an action to recover losses in excess of $100,000 sustained because of employee theft. The thefts occurred during the terms of two different policies but were not discovered until the

Question

second policy had replaced the first. Each policy limited recovery to $50,000 for employee dishonesty and provided that for a loss "which occurs partly during the Effective Period of this endorsement and partly during the period of other policies, the total liability of the Company shall not exceed in the aggregate the amount of this endorsement." The insured maintained that he was entitled to recover $50,000 on each policy. What should the court decide? Discuss fully.

Answer 1

Interpretation of insurance contract terms
The insured's recovery was limited to $50,000. Although the court found that the provisions of the policy were complex, they were not seen as ambiguous in relation to the limits on liability. Courts are now using the doctrine of honoring reasonable expectations in resolving insurance disputes. The doctrine applies to expectations that are objectively reasonable even though a painstaking study of the policy provisions would have negated those expectations. In this case, the court found nothing in the policy that would create a reasonable expectation of higher limits of coverage.