Contract Perfection and the Despair of Getting the Consumer to Read the Insurance Contract

From the May 2012 issue of the PLUS Journal – Author Harold Weston looks at the difficulties in getting consumers to read the fine print of insurance contracts. From the article:

Unexpected Reasonable Expectations

Recognizing reality that consumers do not read their contracts, courts have long had to interpret a contract that was not read by one party. Starting with the rule that insurance contracts are to be read like any other contract and their terms enforced if clear, [xiv] courts have flexibility to construe ambiguous terms against the maker of the instrument, meaning here the insurer, under the rule of contra proferentem.

Another rule is reasonable expectation of the insured, what the insured might reasonably have expected the contract to cover if he/she thought about it, or at least what would have been unobjectionable to the insured. [xv] This is the position of the Restatement (Second) of Contracts, section 211, and used in the majority of the jurisdictions, as an objective standard, to construe the particular contract provisions. [xvi]

A recent case shows how insureds do not read the policies yet claim they expected some particular coverage. In First Financial Ins. Co. v. Scotch 80’s Limited, Inc.,[xvii] the court stated that the insured was deemed to have known that the policy it bought did not have assault and battery coverage because, under Nevada law (citation omitted here), an insured has a duty to read their insurance policy.  In this case, the insureds admitted that they did not read the policy carefully or only glanced at it.  Here the relevant exclusion “appeared separately in the table of exclusions in a plain and simple manner. Further, it was the only exclusion on its specific page and appeared in large, bolded font, in essence, jumping off the page.  Any person who read the policy would have known that assault and battery was excluded from the policy.”  Indeed, the insured even admitted that “[a]fter reading it, I would assume that we were not covered.”  Therefore, the court concluded, the insured “should have known that it did not have assault and battery coverage and if it desired such coverage it should have specifically requested it after seeing the policy.” And this was a commercial insured.

Can such an insured be said to have any reasonable expectations if she has not read the policy? Here the courts use the legal fiction of objective reasonable expectations for particular provisions, rather than subjective, but is that reasonable at all?  Some commentators have argued that “reasonable expectations” leads to a circularity. “The law is supposed to protect reasonable expectations that are themselves aroused by the law,” while others contend it provides a “feedback mechanism. The law informs reasonable expectations and reasonable expectations inform the law.” [xviii] That is, the law tries to find some objective reasonable expectation, even knowing that the insured probably had no expectation at all. But courts doing this sort of thing are probably doing more to create expectations than to discover them. Regardless of this circularity, the law uses reasonable expectations, and it works more or less in practice, or at least everyone knows how it works and how to make it work. [xix]

PLUS members can read this entire article in the PLUS Journal archive.

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The Professional Liability Underwriting Society (PLUS) was founded in 1986 by industry professionals who recognized the need for a forum for individuals involved in the field of professional liability. The Society is a non-profit organization with membership open to persons interested in the promotion and development of the professional liability industry. Membership consists of over 6,500 individuals, representing over 1,000 companies active in the many fields of professional liability. PLUS currently receives the support of more than 200 companies through corporate membership. PLUS is recognized as the primary source of professional liability educational programs and seminars, assistance to its members to help serve clients, and information regarding professional liability. The Society is continually seeking new means to fulfill its mission statement and better serve its members.

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