January 22, 2021

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How Are Insurance Contracts Interpreted in North Carolina?

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North Carolina is known as The Tar Heel State, and I am proud to call The University of North Carolina at Chapel Hill my alma mater. The official state bird is the cardinal and the blossom of the beautiful dogwood tree is the official state flower.

In North Carolina, courts apply general principles of contract law to insurance policy interpretation. “The interpretation of language used in an insurance policy is a question of law governed by well-established rules of construction.”1

Under . . . North Carolina law, words in an insurance policy are given their ordinary, usual, and commonly accepted meaning where they are susceptible to such construction. Anderson v. Allstate Insurance Co., 145 S.E.2d 845 (N.C.1966); Graphic Arts Mut. Ins. Co. v. C.W. Warthen Co., 397 S.E.2d 876 (Va.1990). In determining the ordinary construction of a word, courts often look to dictionary definitions. See Guyther v. Nationwide Mut. Fire Ins. Co., 428 S.E.2d 238, 241 (N.C.App.1993); Van Sumner, Inc. v. Pennsylvania Nat’l Mut. Casualty Ins., 329 S.E.2d 701, 703 (N.C.App.), disc. rev. denied, 336 S.E.2d 406 (N.C.1985); Hill v. State Farm Mut. Auto. Ins. Co., 375 S.E.2d 727, 729 (Va.1989); Ayres v. Harleysville Mut. Casualty Co., 2 S.E.2d 303, 306 (Va.1939). Otherwise, courts look to the four corners of the policy, without resort to extrinsic evidence, to determine whether a word or phrase is ambiguous. Wachovia Bank and Trust Co. v. Westchester Fire Ins. Co., 172 S.E.2d 518 (N.C.1969); Nationwide Mut. Ins. v. Wenger, 278 S.E.2d 874 (Va.1981). Language in a policy is ambiguous if it is capable of two reasonable constructions. Van Sumner, 329 S.E.2d at 703; Caldwell v. Transportation Ins. Co., 364 S.E.2d 1, 3 (Va.1988).

Where the language of the policy is unambiguous, a court must apply the terms of the policy as written. Wachovia, 172 S.E.2d at 518; United Serv. Auto Ass’n v. Webb, 369 S.E.2d 196 (Va.1988). On the other hand, if language in a policy is ambiguous, the most favorable construction must be given to the insured. Van Sumner, 329 S.E.2d at 703; Caldwell, 364 S.E.2d at 3.2

The court’s end game will be to determine the intent of the parties at the time the contract was formed.3 To determine the parties’ intent, the courts will first look to the plain and ordinary meaning of the terms of the insurance policy. If the terms are unambiguous then strict construction applies. If the terms are found to be ambiguous – i.e., the language of the policy may be susceptible to more than one reasonable meaning – then the court will construe any ambiguity against the drafter of the contract. Herein lies the caveat. Generally, the scrivener is the insurance company with the greater bargaining power because the insurer provides the insured with the policy and, essentially, tells the policyholder to “take it or leave it.” However, some courts will consider the sophistication of the policyholder and whether the policyholder negotiated the policy terms outside the standard property forms.

In North Carolina, courts largely apply the “universal rule . . . that insurance contracts will be liberally construed in favor of the insured and strictly construed against the insurer, since the insurance company selected the language used in the policy.”4 Policyholders in the Tar Heel State can rest easy knowing courts commonly construe ambiguities against the insurer to effectuate coverage and place the burden on the insurer to prove any application of the policy’s limitations or exclusions.
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1N.C. Farm Bureau, Mut. Ins. V. Mizell, 530 S.E.2d 93, 95 (N.C. Ct. App. 2000).
2Highway Exp. Inc. v. Fed. Ins. Co., 19 F.3d 1429 (4th Cir. 1994).
3See, e.g., Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 172 S.E.2d 518, 522 (N.C. 1970) (“As in other contracts, the objective of construction of terms in the insurance policy is to arrive at the insurance coverage intended by the parties when the policy was issued.”).
4Mazza v. Med. Mut. Ins. Co., 319 S.E.2d 217, 223 (N.C. 1984).

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