Prof. Bill Long 1/24/05
A Pro-Insured Doctrine
The doctrine of "reasonable expectations" is sometimes called a "corollary" of contra proferentem, but is only employed to aid the insured when the insurer wants to deny coverage.*
[*We saw in the previous essay that contra proferentem usually, but not always, favors the insured.]
Ambiguity does not have to be present for a court to find that the insured had a reasonable expectation of coverage, though most jurisdictions hold that either ambiguity or inconspicuousness of the provision is the key to the doctrine. All of the nine 9th Circuit states, except Utah and Idaho (and one other the court doesn't mention), have adopted the doctrine; and only about five states nationally (Ohio and Illinois also) have refused to adopt it. It might be helpful to explore the doctrine through brief consideration of a 9th Circuit case.
McHugh v. USAA (1998)
This case had to do with that most real of Northwest realities, a mudslide. The McHugh's owned a beach home near Seattle and insured it through a standard flood insurance policy through USAA. Covered in the policy are "mudslides;" but "landslides" were not. How to distinguish? "Mudslides (i.e., mudflows) are akin to a river of liquid and flowing mud on the surfaces of normally dry land areas, inclouding your premises, as when earth is carried by a current of water and deposited along the path of the current." In contrast, a non-covered landslide is not defined except by saying that it is not a mudslide.
Well, what do you think happened? After several weeks of storms, the McHugh's beach house was significantly damaged by flood waters. It was located at the base of a steep sloping hill and was knocked off its foundations after being hit by a "saturated mixture of soil, gravel, vegetation, and rock." In reporting their loss the McHugh's said it was because of a "mudslide" (the case never says whether an attorney told them to so characterize it...but it would have been YOUR advice, I am sure) that the house was destroyed.
Not unexpectedly, experts were called in to make reports and, relying on one of the reports, which charaterized the flow as a "landslide," USAA denied coverage. The case centered on whether there should be coverage.
Reasonable Expectations Enter In
The court first explored whether the policy was ambiguous. Even though a majority (2-1, Graber, an Oregon judge, dissented) found the definitions ambiguous, they didn't rest their decision on the ambiguity/contra proferentem doctrine. They decided to explore the relevance of reasonable expectations. The court said, "In recent years, an important corollary of the doctrine of ambiguity has developed in the common law...Under the doctrine of reasonable expectation, 'the objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations' (quoting Keeton's classic 1970 law review article on the issue)."
Under the reasonable expectations doctrine, the court listed several factors to consider: (1) the actual terms of the policy; (2) presence of ambiguity; (3) language which operates as a hidden exclusion; (4) oral communications from the insurer explaining important but obscure conditions or exclusions, and (5) whether the provision in a contract are known to the public generally. As mentioned above, Judge Graber, in dissent, collapsed this list into the two factors of ambiguity and/or inconspicuousness.
The 2-1 majority unequivocally adopted the doctrine.
"Sound policy readsons lie behind the growing acceptance of the reasonable expectations doctrine. Insurance policies are lengthy complicated documents that frequently are not read by the insured. These policies are classic examples of adhesion contracts because they are drafted by the insurer and allow the consumer no bargaining power. Additionally, protecting reasonable expectations of the insured often can prevent an unconscionable result when interpreting the contract."
In contrast to the ambiguity doctrine, which requires the court to make a conclusion of law about a contract, the doctrine of reasonable expectations is a fact issue to be resolved by the trier of fact (often a jury). Thus, the issue at trial (and on remand in this case) was "whether the plaintiff had reasonable expectations of coverage. Reasonable expectations of coverage are what the average policyholder would anticipate as the scope of the coverage."
Conclusion--Thinking about Reasonable Expectations
The fact that the court split 2-1, where Judge Graber argued that the definitions were unambiguous and that the provision was conspicuous, means that a lot of disagreement exists in reading a policy as to what is ambiguous and what is conspicuous. Nevertheless, the doctrine is both strange but gives us an interesting window into the world of insurance law.
It is strange because it is the only doctrine I know where the precise opposite of what a contract provides can be held to be the operative reality. If a reasonable person would have had reasonable expectations of coverage, there may indeed be coverage. But, the larger question is why such a doctrine would even have developed. I think that its development is another chapter in the war (which we are just beginning to discover) between insureds and insurers. Each wants to get the "upper hand" on the other, and reasonable expectations is a doctrine to help the "little guy" against the "big bad insurer." But, if truth be told, insurance policies have a habit of being obscure documents (as shown by an indication of how many of you have even read your policies), and reasonable expectations is a judge-made doctrine that had grown up to "level the playing field." My only surprise is in an era of more literal statuory/contract interpreation, one would have thought that reasonable expectations would suffer a setback. Not yet, apparently.
Copyright © 2004-2007 William R. Long