Insurers love to invoke the phrase “the regulator approved this language” as though it were a magical incantation that transforms every policy term into a fair, reasonable, and democratically blessed command. It is a familiar refrain in insurance coverage disputes, especially when an exclusion or limitation leads to an outcome that would make any reasonable policyholder think the insurer sold a hollow promise. But the assumption that regulatory approval equals meaningful analysis is usually fragile at best.
Insurance law professor Daniel Schwarcz’s article, Narrowing the Frame: Consumer Insurance Policies and the Limits of the Restatement of Consumer Contracts, 1 published by the Harvard Business Law Review this summer, provides a passage that stopped my reading while I contemplated my experiences regarding insurance regulators approving without any question or challenge changes to insurance company policies. He writes:
Third, while the extent of ex-ante state regulatory oversight is critical in determining the appropriateness of ex-post judicial regulation of insurance policies, courts face significant challenges in accurately evaluating the effectiveness of this oversight. If state insurance regulators have specifically assessed the reasonableness of a particular coverage term, then there is little justification for courts to invalidate such terms using doctrines like reasonable expectations or unconscionability. Regulators possess greater expertise regarding insurance markets than judges and are often more democratically accountable. Yet courts have limited insight into the robustness of such regulatory oversight, particularly with respect to whether state approval of an insurance policy accounted for a specific type of coverage dispute before the court. Lacking such information, it may be reasonable for courts to presume that state oversight operates effectively, and to rely on democratic mechanisms to address any regulatory shortcomings.
There are, of course, many compelling arguments pointing in the opposite direction, suggesting that courts should aggressively police the terms of consumer insurance policies. For example, these contracts are unusually opaque: insurers often fail to make them readily accessible online, and the policies are significantly more complex than most consumer contracts. Furthermore, the historical standardization of insurance policies has led to regulatory mechanisms and market institutions that are structured around the erroneous assumption that competing insurers’ coverage terms are uniform.
Schwarcz is right to identify this tension. But the real-world problem runs deeper than academic nuance. Professors and judges may cautiously presume regulatory oversight is effective. Those of us who have worked and spoken with state regulators know better.
In many jurisdictions, a single reviewer may be responsible for hundreds of form filings, with neither the time nor the staffing to dissect modern property policy language. Regulators often come from the very industry they oversee and quite often return to it, creating the quiet but powerful gravitational pull of the revolving door. Some State departments of insurance may have expertise in life, health, and auto policies but little with respect to property insurance policies. Finally, even in the best circumstances, regulators review forms at a high level, not through the lens of the specific loss scenarios that lead to litigation.
I think this is where Professor Jeffrey Stempel’s insight that an insurance policy is a product and not merely a contract becomes critical, as noted in my previous two articles, The Insurance Policy as a “Thing” – Why Jeffrey Stempel Still Has the Insurance World Thinking, and A “Vacant” Building Isn’t Vacant at All: What Stempel Teaches Us About Real-World Insurance Promises.
Rarely do regulators test the product in real-world conditions based on hypothetical challenges and question insurers proposing policy wording changes. They do not model fact patterns. They do not evaluate how a vacancy clause plays out when a building is mid-renovation or how an anti-concurrent causation clause affects a family after a windstorm breaks their home open to rain. Courts do. Courts see the defect in operation, not just the schematic drawing.
When insurers insist that courts defer to regulatory approval, they are effectively asking judges to assume that an inspector inspected the product, even when the inspector may have only glanced at the packaging. Many states never ask whether the policy language actually works in practice. They do not ask whether it aligns with consumer expectations, whether the drafting is misleading, or even whether the filing deviates materially from long-standing industry norms. Approval is often nothing more than an administrative acknowledgement that the filing arrived on time and satisfies formatting rules.
Should courts reject insurer arguments that regulatory approval is dispositive unless the regulator actually evaluated the scenario before the court? Absolutely. Anything less gives insurers an unwarranted shield and strips courts of their essential role in ensuring the insurance product performs as advertised. Courts must insist on evidence that the regulator evaluated not only the words but the function of the provision. And where the regulator did not or could not perform that task, courts must interpret the policy as a functioning risk-transfer product, not merely a set of approved clauses.
This is not judicial activism. It is judicial responsibility. Courts exist to ensure promises are honored, especially when the promise is sold as protection and the buyer has no ability to bargain over its terms. Regulators serve an important role, but they do not absolve courts of theirs. The judiciary is the last line of defense when the engineered product of insurance fails in the field.
I appreciate that today’s blog is for those profoundly afflicted with “property insurance coverage nerd syndrome.” 2 It is not often we question deeply where policy language comes from and the regulatory approval process. The Thanksgiving holiday can certainly spark deeper reflection on ideas and life.
Hope everyone had a wonderful and meaningful Thanksgiving.
Cheers!
Thought For The Day
“It is the duty of the courts to be watchful for the constitutional rights of the citizen, and against any stealthy encroachments thereon.”
Justice John Marshall Harlan, Supreme Court of the United States, Boyd v. United States (1886)
1 1 Daniel Benjamin Schwarcz, Narrowing the Frame: Consumer Insurance Policies and the Limits of the Restatement of Consumer Contracts, 15 Harv. Bus. L. Rev. 439 (2025).
2 Property Insurance Coverage Nerd Syndrome: A chronic and incurable condition marked by involuntary excitement upon discovering new policy language, spontaneous debates about anti-concurrent causation, compulsive rereading of endorsements “just to be sure,” and a disturbing tendency to read ISO circulars the way normal humans read beach novels. Symptoms may include arguing about insurance at dinner, correcting adjusters for sport, hoarding old policy forms like fine wines, and the inability to see a damaged building without diagnosing coverage issues out loud. While rarely fatal, the syndrome is known to destroy weekends, bewilder spouses, and make the afflicted inexplicably happy whenever a new property coverage dispute arises.
