An insurance policy is a contract that attempts to set out in writing the agreement of the parties as to their respective rights and responsibilities. When the parties disagree about what the terms of their contract mean, they may look to the courts to resolve the dispute.

Some types of contracts, known as contracts of adhesion, receive special treatment by the courts. Contracts of adhesion are prepared solely by one party to the agreement. The other party cannot negotiate the terms; he or she may only accept or reject the contract as written by the other side. Since one side has the advantage of selecting the language used in the contract, the courts assume that the words that are used are exactly the words that the drafting party wanted to use. Therefore any ambiguity in the contract will be construed against the drafter and in favor of the other party.

The majority of courts will enforce the contract as written when the language is clear and give the benefit of any ambiguity to the nondrafting party when the language is not clear. A minority of jurisdictions have court-made law that gives even greater advantage to the nondrafting party. When faced with a provision of a contract�particularly an insurance contract�that conflicts with that court�s view of the way the contract should have read, the court "will find ambiguity in policy language where most other courts will say that the policy is perfectly clear. These courts are accused of employing `constructive ambiguity� in their effort to impose liability on the insurer."

An even smaller minority of jurisdictions employ a philosophy that has come to be known as the reasonable expectations doctrine. This is an interpretation of contract law that has not acquired a significant following since it was first proposed in 1970. The essence of this view is that the reasonable expectations of the nondrafting party in a contract of adhesion will control even if the language of the contract is contrary and unambiguous. This is clearly contrary to the traditional view that it is the intentions of both parties that control contract interpretation. While this philosophy gained some credence in the past, it now seems to have passed its prime.

On occasion there is a dispute between the insurer and a beneficiary about the amount of proceeds that should be paid to the beneficiary or even about whether the person asserting the claim is in fact eligible to be a beneficiary. To protect the rights of the public in settling these disputes, the National Association of Insurance Commissioners (NAIC) developed the Unfair Claims Settlement Practices Model Act in 1990. Almost all of the states have enacted laws similar to this model act. These laws require insurers to investigate all claims promptly and to settle those claims as soon as the insurer�s liability has become reasonably clear. The model act contains a list of unfair practices that are prohibited. In addition, the NAIC has prepared the Unfair Life, Accident and Health Claims Settlement Practices Model Regulation, which gives a list of actions that are required of insurers in settling claims. About half of the states have adopted regulations similar to those in the model.