There was once a very nerdy and in-the-library-stacks 22-year-old law student who wrote about the reasonable expectations doctrine. Yesterday on my Tuesday at 2 With Chip livestream, I provided our attendees with an explanation about why insurance contract interpretation is so important to the insurance claim community. I also noted a paper I wrote nearly 39 years ago—long before all the experiences I have had with judges and academics about how insurance contracts should be interpreted.

That 22-year-old wrote a paper, Fraudulent Claims and the Innocent Spouse: A Calling for Reasonable Expectations,1 which had the following conclusion:

The fraudulent insurance loss is a problem of great concern to insurers and the public. New techniques detecting fraudulent claims are increasingly being developed by state agencies and the insurance community to stop this epidemic. Unfortunately, the spreading discovery and prosecution of fraudulent insureds has not resulted in just results to innocent spouses who did nothing to defraud the insurer. A traditional analysis strictly construing the policy’s technical language or developing tests which use inappropriate principles to convey coverage do not adequately confront the innocent spouse’s expectations of insurance protection. By judicial recognition of the reasonable expectations doctrine, insurers will be coerced into providing spouses with information concerning their insurance policies. In return, spouses, especially those separated or divorced, could knowingly protect their financial interests from another’s wrongdoing.

Seventeen years later, different and more experienced lawyers wrote that the insurance product was defective and that the insurance consumers reasonable expectations of coverage should be upheld:

Insurance industry employees and executives are indoctrinated with the philosophy that insurance is good and that policyholders, claimants and lawyers are bad. According to the insurance industry, nearly 50% of policyholders are actual or potential crooks. One recent article, written by the President of the Insurance Information Institute, finds that the perpetrators of insurance fraud are … ‘for the most part, the people we live and work among–our neighbors….’ Moreover, the ‘rampant’ corruption of otherwise honest, ‘seemingly law-abiding people’ is something that those in the insurance industry ‘have known for some time.’ Insurance company claims adjusters view themselves as underpaid, overworked vigilantes protecting an unappreciative American public from a horde of thieving, conniving robbers intent on pillage and plunder.

In order to deal with the insurance system, one must accept the fact that insurance company adjusters believe what they say they believe. They may be wrong, but they think they are right and must be dealt with on that basis. It goes without saying that there are crooked policyholders and crooked claimants and there are crooked lawyers, but there are also crooked insurance companies.

Is the insurance industry selling matches to arsonists? Fifty percent of the people who go to church do not steal from the collection plate and 50% of the people who go to the market do not shoplift. The fault may not be with the premium-paying policyholders. The fault may be with the insurance product. Any other product which turned its customers into antisocial cheats and thieves would be condemned and banned from the market.

Most of the problem is with the insurance product and not with the customer. But rather than take responsibility for a defective product, many insurance companies have decided to blame the frequent victims of insurance fraud–their policyholders. John G. DiLiberto, president and chief executive officer of the National Insurance Crime Bureau, warned insurance companies that they are “in a shootout with the con men. This says that the people who pay the premiums and who are the beneficiaries of insurance are evil.

In the past, insurance policies were treated as contracts. Today, more and more they are treated like products. When Professor Keeton wrote his famous articles, there were few remedies for opportunistic breach of contract. Today, contract law and insurance law are in evolution. Policyholders seeking insurance coverage are not limited to the literal terms–often hidden or unclear–of their policies.

The reasonable expectations doctrine protects policyholders from the inadequacy of contract remedies and the temptations of opportunistic breach. By going beyond the written language of the policy, the doctrine attempts to fully fulfill a policyholder’s objectively reasonable expectations of insurance coverage. This approach is supported by the unique nature of the insurance product and the business of insurance.

It cannot be ignored that the insurance companies are in the best position to address a policyholder’s reasonable expectations of insurance coverage. Striving for clarity in policy language, openness in sales negotiations and fair claims handling reduces the risk that the insurance company will fail to satisfy the reasonable expectations of their policyholder. Disclosure of potential gaps in insurance coverage should occur at the point of sale rather than after a claim is made. Policyholders genuinely apprised of the extent of their insurance coverage from the outset are less likely to feel abused and abandoned by their insurance company when a claim is denied. Correspondingly, insurance companies’ willingness to share this type of information should proceed at speeds greater than slow, stop and reverse. By training their agents and employees to honor the duty of good faith and fair dealing, insurance companies ultimately save money for the policyholder and themselves. Such conduct engenders good will and trust. It is simply good business.2

After all these years, I still hear the same thing from insurance company executives in the halls of legislatures and their lawyers in courtrooms: “Our customers are ripping us off.” I never hear that their underpayment of claims is a problem and a much worse scam deserving of closer look as insurance fraud.

But in the end, the innocent customer—the non-fraudulent one—how is that person to be treated? What insurance contract interpretation rules should apply?

I still think that after all these years, a customer who is free from fraud should have their reasonable expectations considered and benefits paid. To me, it just seems a matter of good faith to do so.

Thought For The Day

I grew up with J. Edgar Hoover. He was the G-man, a hero to everybody, and the Federal Bureau of Investigation was the big, feared organization. He was ahead of his time as far as building up forensic evidence and fingerprinting. But he took down a lot of innocent people, too.
—Clint Eastwood
1 Merlin, W. F., Jr. (1981). Fraudulent Claims and the Innocent Spouse: A Calling for Reasonable Expectations. [Unpublished doctoral dissertation]. University of Florida School of Law.
2 Eugene R. Anderson and James J. Fournier. Why Courts Enforce Insurance Policyholders’ Objectively Reasonable Expectations of Insurance Coverage. 5 Conn. Ins. L.J. 335 (1998-1999).