Ambiguity Principle (Insurance) – Definition

Cite this article as:"Ambiguity Principle (Insurance) – Definition," in The Business Professor, updated June 8, 2019, last accessed October 20, 2020,


Ambiguity Principle (Insurance) Definition

In the insurance industry, the ambiguity principle is a rule that protects the insured from obscurity and inexactness that might be contained in an insurance policy or contract. This principle maintains that if an insurance has no clear terms or open to more than one interpretation, the meaning that favors the insured and goes against the insurance firm will prevail.

Insurance policies are often drafted by one party, the insurance firm, the insured has no input in setting the terms of an insurance policy or contract. Therefore, if the terms of the policy are ambiguous, the meaning which favors the insured overhauls other meanings that the contract might have.

A Little More on What is the Ambiguity Principle in Insurance Contracts

When applied in insurance contracts, the ambiguity principle holds that the terms of a contract or an insurance policy must be clear and without vagueness or ambiguity. Since the insured has no say when it comes to setting up the terms of the contract, the insurance firm must conduct a holistic review of the contract to ensure that no uncertainties in meaning of the language used occur.

When the meaning of a contract language is uncertain, it is due to any of these four major reasons; ambiguity, vagueness, absurdity, and obscurity.


When a language has more than one interpretation, it is said to be ambiguous. Ambiguity can occur in an ordinary use of language, contract language and even in context. A good example of a case of ambiguity in contract language between Morgan Stanley Group and New England Insurance Company. The policy holds that New England will compensate Morgan Stanley loss  by reason of any actual or alleged negligent act, error or omission committed in the scope of the Insured’s duties as investment counselors.

When the matter was taken to court, the court found that ‘investment counselors” as used by this group is an ambiguous term. While Morgan Stanley argued that the term covered all instances in which Morgan Stanley provided investment advice, New England argued that it covered only instances in which Morgan Stanley had a contract with a client to give investment advice for a fee.

Although, the decision of the court favoured New England but it did not settle other ambiguities contained in the contract language such as ‘alleged negligent act, error or omission.’


A contract language can be regarded as uncertain if its terms are vague. Vagueness refers to imprecision in terms of a contract, when this occurs in an insurance policy, a court can infer a precise meaning to the language. The court also does not enforce a vague term in a contract, rather, almost all words and phrases found in insurance policies have been accurately defined by the courts. However, not all terms that appear to be vague are vague in the real sense.

Oftentimes, in insurance policies, vagueness can be used when specificity of a term is not necessary in a contract, a good example is when the insurance firm is meant to report a claim to the insurer “in the shortest time possible.” this term ‘shortest time possible is vague and has no specificity.


When some terms in an insurance contract seem difficult to understand and have the tendency of being regarded as insignificant or unimportant, the term is obscure. Obscurity of insurance contracts and policies often mislead or confuse policy holders. The insured can however notify the insurer of the occurrence of such situation under the coverage of a section titled; “PROCEDURE OF INSURED IN CLAIM OR SUIT.”

The coverage above is in itself misleading because what an insured should do in unusual occurrence is not explicitly stated. For instance, it is possible for an insured not to notify an insurer if there is an accident that involves the death of a patient until he is sued.


Absurdity in insurance contracts occur when a provision of a contract is ridiculous or unreasonable when compared to other provisions of the insurance policy. Inconsistency of a provision or incompatibility of provisions in a contract can also be interpreted as absurdity. If a provision is removed from a policy and put in another policy, it is absurd.

For instance, an aircraft policy that excludes coverage for liabilities as a result of personal injuries incurred by the insured’s relatives is held as an absurd provision by the court. Provisions that have unreasonable terms are also termed absurd.


As a result of uncertainty in terms and provisions of insurance policies and contracts, courts are continuously held responsible for the establishment of fairness in the interpretations of certain terms. The ambiguity principle is one that upholds that if an insurer in his insurance policy does state the clear meaning of provisions in the policy,  the meaning favors will prevail over other meanings. In order to reduce misinterpretations of terms of contracts and misunderstandings that occur as a result, insurers need to carefully review contracts so as to detect and clarify uncertainties and misinterpretations.

References for Ambiguity Principle

Academic Research on Ambiguity Principle

Insurance as Contract: The Argument for Abandoning the Ambiguity Doctrine, Miller, D. S. (1988). Columbia Law Review, 88(8), 1849-1872.

The Ambiguity Rule and Insurance Law: Why Insurance Contracts Should Not Be Construed Against the Drafter, Rappaport, M. B. (1995). Ga. L. Rev., 30, 171.

Risk, ambiguity, and insurance, Hogarth, R. M., & Kunreuther, H. (1989). Journal of risk and uncertainty, 2(1), 5-35.

Insurance contract interpretation: Issues and trends, Young, N., Lewis, J. R., & Lee, J. F. (1975). Ins. Lj, 71.

A theory of insurance policy interpretation, Wehr, E., & Jameson, E. J. (1994). The future of children, 115-133.

The impact of ambiguity prudence on insurance and prevention, Berger, L. (2015).

Insurance-Contracts-The Ambiguity in the Doctrine of Reasonable Expectations, Horner Jr, K. J. (1986). NDL Rev., 62, 423.

Four Conceptions of Insurance, Abraham, K. S. (2012). U. Pa. L. Rev., 161, 653.

Interpretation of insurance policy coverage in the case of ambiguity-or how big is the consumer’s piece of the rock, Bloom, A. (1981). Whittier L. Rev., 3, 177.

Ambiguity on the insurer’s side: The demand for insurance, Amarante, M., Ghossoub, M., & Phelps, E. (2015). Journal of Mathematical Economics, 58, 61-78.

Ambiguity and insurance: robust capital requirements and premiums, Walker, O., & Dietz, S. (2012).

Was this article helpful?