Will the Contra Proferentem Rule Remain Relevant for Insurance Contracts in Malaysia?

The contra proferentem rule is no stranger to the insurance industry in Malaysia. It is trite that pursuant to section 3(1) of the Civil Law Act 1956, the Malaysian courts could invoke the contra proferentem rule under the common law of England to interpret an ambiguity or uncertainty in an insurance contract.
When a term in an insurance contract lends itself to more than one possible construction/ interpretation, an ambiguity may be said to arise in the meaning of the term. In such event, the ambiguity is to be resolved against the insurers by applying the contra proferentum rule as they are the parties responsible for formulating the terms of the contract.
The contra proferentem rule has been applied by the Malaysian courts as part of the rules in interpreting insurance contracts as exemplified by the cases discussed below.
In Malaysia National Insurance Sdn Bhd v Abdul Aziz bin Mohamed Daud [1979] 2 MLJ 29, the Federal Court held that the insurance policy should be construed in favour of the appellant insured. The Federal Court pointed out that the general rules of interpretation apply to insurance policies as in any other written document and laid down the well-trodden principle (at p 32) that:
“… as between the assured and the insurers, the exception clause in the proviso, on the ordinary principles of construction has, as far as possible, to be read against the insurance company, that is to say, if there is a doubt as to its extent and the question were to arise as to the liability of the insurers, the construction most favourable to the assured must be given to him…”
Lord Brightman in the Privy Council case of Kandasami v Mohamed Mustafa [1983] 2 MLJ 85, 88, succinctly held that:
“… there is a principle of construction that if a document inter partes contains an ambiguity which cannot otherwise be satisfactorily resolved, it is to be construed adversely to the party who proffered it for execution.”
The application of the contra proferentum rule can also be seen in Ayob bin Salleh v AmGeneral Insurance Bhd & Anor [2015] 11 MLJ 301 where the plaintiff’s car was taken from him by three persons impersonating as motor repossessors from the finance company. The first defendant was the insurer of the car and the policy of insurance provided cover for loss due to theft. However, the plaintiff’s claim under the policy for loss of the car due to theft was rejected by the first defendant. The first defendant relied on an exception under the policy which absolved them of liability in instances where there was an element of “cheating/ criminal breach of trust” (“the exception”).
The first defendant took the position that the loss of the car was not due to theft but rather due to cheating by impersonation, hence they were not liable under the exception. The Court was of the view that there was sufficient doubt or ambiguity as to whether the exception applied when the insured is not implicated in any cheating and is in fact a victim of cheating. Hence, the Court held that the exception clause in the policy is to be construed contra proferentem against the insurer and did not apply as this was a case of theft. That being said, the plaintiff’s claim in this case was ultimately dismissed by the Court as it was barred by limitation by virtue of section 6 of the Limitation Act 1953.
The contra proferentum rule has also been affirmed by Alizatul Khair Osman FCJ in the Federal Court case of Malaysia Motor Insurance Pool v Teirumeniyar Sinagara Vella [2019] 10 CLJ 731 as follows:
[98] Coming to the contra proferentum rule, it provides that where a term is ambiguous, such ambiguity ought to be construed against the party who prepared it. In general contracts, common law courts have been quick to apply against 'unfair terms' like exclusion or exemption clauses. But the rule sees particular application in insurance contracts. This point is aptly summarised in MacGillivray on Insurance Law (12th edn), at pp. 317-318:
The common law rule of construction, that verba chartarum forties accipiuntur contra proferentum, means that ambiguity in the wording in a policy, or slip, is to be resolved against the party who prepared it. It has been said that a party who proffers an instrument cannot be permitted to use ambiguous words in the hopes that the other party understand them in a particular sense and that the court which has to construe them will give them a different meaning, but the ambiguity usually arises inadvertently from including conflicting standard printed clauses in the same policy.”
A similar position in the UK can be seen in the English Court of Appeal case of English v Western [1940] 2 KB 156, where it was held that when an exclusion provision was capable of two possible constructions, the construction in an insured’s favour should be adopted.
It was also held in the English Court of Appeal case of Re Bradley and Essex and Suffolk; Accident Indemnity Society Ltd [1911-13] All ER Rep 444 that:
Contracts of insurance are contracts in which uberrima fides is required not only from the assured but also from the company insuring. It is the universal practice for the companies to prepare both the forms of proposal and the form of policy. Both are issued by them on printed forms kept ready for use. It is their duty to make the policy accord with and not exceed the proposal, and to express both in clear and unambiguous terms
It is especially incumbent on insurance companies to make clear both in their proposal forms and in their policies the conditions which are precedent to their liability to pay. For such conditions have the same effect as forfeiture clauses and may inflict loss and injury on the assured and those claiming under him out of all proportion to any damage that could possibly accrue to the company from non-observance or non-performance of the conditions. Accordingly, it has been established that the doctrine that policies are to be construed contra proferentes applies strongly against the company: see Re Etherington and Lancashire and Yorkshire Accident and Insurance Co (3).”
However, it is interesting to note that the UK courts are taking a turn on the contra proferentum rule. The modern view is now to recognise that commercial parties are free to make their own bargains and allocate risks as they think fit, and that the task of the court is to interpret the words used fairly applying the ordinary methods of contractual interpretation. Although the contra proferentem rule may still be useful to resolve cases of genuine ambiguity, it ought not to be taken as the starting point.
The contra proferentem rule, particularly as it applies to the interpretation of insurance policies, has been watered down considerably by recent English authorities and is only used as a last resort where there is significant ambiguity in the terms of an insurance clause. The English High Court in Financial Conduct Authority v Arch Insurance (UK) Ltd & Ors [2020] EWHC 2448 (Comm) (“Arch Insurance”) held that “[the contra proferentem] principle, if it still has any validity, can only apply if there is genuine ambiguity, which cannot otherwise be resolved by applying the ordinary principles of construction. In other words, it should not be relied on to create ambiguity where there is none”.
Amongst others, the Court in Arch Insurance referred to Crowden v QBE Insurance (Europe) Ltd [2017] EWHC 2597 (Comm) (“Crowden”) where it was held as follows:
“…the Court must adopt an approach to the interpretation of insurance exclusions which is sensitive to their purpose and place in the insurance contract. The Court should not adopt principles of construction which are appropriate to exemption clauses - i.e. provisions which are designed to relieve a party otherwise liable for breach of contract or in tort of that liability - to the interpretation of insurance exclusions, because insurance exclusions are designed to define the scope of cover which the insurance policy is intended to afford. To this end, the Court should not automatically apply a contra proferentem approach to construction. That said, there may be occasions, where there is a genuine ambiguity in the meaning of the provision, and the effect of one of those constructions is to exclude all or most of the insurance cover which was intended to be provided. In that event, the Court would be entitled to opt for the narrower construction.”
The approach in recent insurance cases in the English courts is therefore only to rely on the contra proferentem rule as a means of last resort in cases of real doubt or ambiguity. The court will first examine the background and commercial purpose of the contract through the lens of contextual interpretation before concluding that any ambiguity exists. Contra proferentem alone is rarely used to justify a particular interpretation. This approach is demonstrated in the Supreme Court decision of Rainy Sky SA v Kookmin Bank [2011] UKSC 50 where the court held that "if there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other".
To date, no Malaysian case has referred to the UK decisions of Arch Insurance or Crowden as to the application of the contra proferentum rule in insurance cases. It will be interesting to see whether the Malaysian courts will adopt the narrow approach presently favoured by the UK courts in applying the contra proferentum rule only as a last resort in interpreting insurance contracts or will continue with the approach laid down in more than four decades of case law.
Article prepared by Loo Peh Fern (Partner) and Tan Yng Yiin (Associate) of the Dispute Resolution (Medical Negligence) Practice of Skrine.

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