A theory of insurance policy interpretation

Michigan Law Review

Volumn 95, Issue 3, 1996, Pages 531-567

  Abraham, Kenneth S ^a  

^a UNIVERSITY OF VIRGINIA   (United States)

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EID: 0005169845     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: 10.2307/1290161     Document Type: Article

References (79)

1. See KENNETH S. ABRAHAM, INSURANCE LAW AND REGULATION: CASES AND MATERIALS 38-47 (2d ed. 1995)
2. [hereinafter ABRAHAM, INSURANCE LAW]; 3 ARTHUR L. CORBIN, CORBIN ON CONTRACTS § 559 (1960 & Supp. 1996) ;
3. E. ALLAN FARNSWORTH, CONTRACTS 518-19 (2d ed. 1990); ROBERT H. JERRY, II, UNDERSTANDING INSURANCE LAW § 25C, at 105 (1987); ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW § 6.3(a)(2) (Practitioner's ed. 1988); JEFFREY W. STEMPEL, INTERPRETATION OF INSURANCE CONTRACTS: LAW AND STRATEGY FOR INSURERS AND POLICYHOLDERS § 5.2, at 180-81 (1994).
4. In fact, insurance policies are so commonly drafted by insurance companies that the principle is routinely transformed into a rule that ambiguities in an insurance policy are to be interpreted in favor of coverage. See KEETON & WIDISS, supra note 1, § 6.3(a)(2), at 630 n.6 (" '[W]here semantically possible the policy will be construed to achieve its manifest objective of indemnifying the insured against the type of losses to which the policy relates.' " (quoting Spaid v. Cal-Western States Life Ins. Co., 182 Cal. Rptr. 3, 5 (Cal. Ct. App. 1982))); James M. Fischer, Why Are Insurance Contracts Subject to Special Rules of Interpretation?: Text Versus Context, 24 ARIZ. ST. L.J. 995, 1003 (1992) ("[T]o the general rule that the contract should be construed as a whole . . . we add the insurance rule that 'where two interpretations equally fair may be made, that which affords the greatest measure of protection to the insured will prevail.' " (quoting Maxon v. Security Ins. Co., 29 Cal. Rptr. 586, 590 (Cal. Ct. App. 1963)));
5. Peter Nash Swisher, Judicial Interpretations of Contract Disputes: Toward a Realistic Middle Ground Approach, 57 OHIO ST. L.J. 543, 567 (1996);
6. Stephen J. Ware, A Critique of the Reasonable Expectations Doctrine, 56 U. CHI. L. REV. 1461, 1464-65 (1989) ("Virtually all courts follow this rule and construe ambiguities in an insurance contract against the insurer, in favor of coverage."); see also STEMPEL, supra note 1, § 5.2, at 184 (noting that the goal of risk spreading weighs in favor of finding coverage "absent clear language to the contrary" when invoking contra proferentem).
7. See KEETON & WIDISS, supra note 1, §§ 6.1(a)-(b), at 614-21.
8. To make a rough estimate of just how frequently contra proferentem alone is invoked, I performed a Westlaw search within the "Insurance" topic, in the state database alone, for opinions containing the term "ambig!" in the same paragraph as "policy" or "language" or "provision" or "provisions." The search disclosed 4416 opinions containing this language decided between 1980 and 1995.
9. See KEETON & WIDISS, supra note 1, §§ 6.1(a)-(b), at 614-15.
10. See, e.g., Vargas v. Insurance Co. of N. Am., 651 F.2d 838, 841 (2d Cir. 1981).
11. Technically speaking, the optimal degree of clarity would minimize the sum of maldrafting costs plus maldrafting avoidance costs. Maldrafting costs consist primarily of the losses resulting from reliance by policyholders on the "false" promise of coverage afforded by ambiguous policy provisions. Maldrafting avoidance costs consist primarily of the drafting costs necessary to reduce or eliminate ambiguities.
12. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 107 (4th ed. 1992) (noting that contra proferentem assures policyholders that they have coverage if they misinterpret an ambiguous policy provision).
13. One might also understand the invocation of contra proferentem as ordering specific performance. Like expectation damages, specific performance is intended to compensate the expectation interest of the promisee. See L.L. Fuller & William R. Perdue, Jr., The Reliance Interest in Contract Damages (pt. 1), 46 YALE L.J. 52, 54 (1936) (arguing that both specific performance and expectation damages protect the expectation interest by seeking to "put the plaintiff in as good a position as he would have occupied had the defendant performed his promise");
14. Alan Schwartz, The Case for Specific Performance, 89 YALE L.J. 271, 272 (1979) (noting that specific performance is ordered when damages are inadequate to protect the expectation interest). Of course in the insurance context the two remedies are not merely equivalent - they are identical.
15. See Fuller & Perdue, supra note 9, at 60 (noting, in reference to the reliance interest in foregone opportunities, that "the impossibility of subjecting this type of reliance to any kind of measurement may justify a categorical rule granting the value of the expectancy as the most effective way of compensating for such losses"); Michael B. Kelly, The Phantom Reliance Interest in Contract Damages, 1992 WIS. L. REV. 1755, 1761;
16. Stewart Macaulay, The Reliance Interest and the World Outside the Law Schools' Doors, 1991 WIS. L. REV. 247, 249-50;
17. W. David Slawson, The Role of Reliance in Contract Damages, 76 CORNELL L. REV. 197, 220-22 (1990).
18. See George M. Cohen, The Fault Lines in Contract Damages, 80 VA. L. REV. 1225, 1249-50 (1994) ("Both advocates and critics of the reliance measure have pointed to the fact that the expenditure measure courts most often use when awarding reliance damages only imperfectly compensates the promisee's 'reliance interest' because lost opportunities are not included . . . ."); Slawson, supra note 10, at 219 ("Even by their own measure, reliance damages undercompensate in practice . . . . [The plaintiff] is actually compensated only for his out-of-pocket expenses and receives nothing for his lost opportunities."). Even expectation damages frequently do not achieve the compensation goal. See Macaulay, supra note 10, at 250 ("[R]equiring damages to be foreseeable and proved with reasonable certainty means that courts often will not protect all of a person's reasonable expectations."); Schwartz, supra note 9, at 274-78 (arguing that all contract damages are so often undercompensatory that the availability of specific performance should be greatly expanded). For a criticism of this concern with undercompensation, see Cohen, supra, at 1310-11 (arguing that "damages are undercompensatory when undercompensation is necessary to provide the parties with better incentives to take precautions or to mitigate; that is, compensation is an incidental concern").
19. See, e.g., Michie v. Great Lakes Steel Div., 495 F.2d 213, 218 (6th Cir. 1974) (finding that when a plaintiff cannot reasonably be expected to prove the portion of a single harm caused by each independent tortfeasor, defendants will be held jointly and severally liable unless a defendant can prove the portion of harm for which it is responsible); Sindell v. Abbott Labs., 607 P.2d 924 (Cal. 1980) (holding that when a plaintiff could not identify the individual manufacturer of the DES that caused her injury, each individual defendant would be liable for a share of the judgment proportional to its market share unless it could disprove causation).
20. See Michie, 495 F.2d at 218; Summers v. Tice, 199 P.2d 1, 4 (Cal. 1948); Ybarra v. Spangard, 154 P.2d 687, 690 (Cal. 1944). In Summers v. Tice, the court held that when two defendants acted negligently and the act of one caused the plaintiff harm, each defendant bore the burden of disproving causation, and in the absence of such proof they were jointly and severally liable: When we consider the relative position of the parties and the results that would flow if plaintiff was required to pin the injury on one of the defendants only, a requirement that the burden of proof on that subject be shifted to defendants becomes manifest. . . . Ordinarily defendants are in a far better position to offer evidence to determine which one caused the injury. Summers, 199 P.2d at 4.
21. See Guido Calabresi, Concerning Cause and the Law of Torts: An Essay for Harry Kalven, Jr., 43 U. CHI. L. REV. 69, 85 (1975);
22. Steven Shavell, An Analysis of Causation and the Scope of Liability in the Law of Torts, 9 J. LEGAL STUD. 463, 465-66 (1980).
23. See STEMPEL, supra note 1, § 5.3, at 186.
24. Drawing on the work of Lon Fuller, Professor James Henderson has described problems of this type as "polycentric," in that they "present innumerable analytical permutations to which the parties would logically be required to address themselves." As a consequence, "[m]eaningful participation in the [judicial] decision through formal proofs and argument . . . would be impossible. . . . Whatever the court might decide, its decision would not deserve to be called principled." James A. Henderson, Jr., Judicial Review of Manufacturers' Conscious Design Choices: The Limits of Adjudication, 73 COLUM. L. REV. 1531, 1536 (1973).
25. See, e.g., Liggans R.V. Center v. John Deere Ins. Co., 575 So. 2d 567, 571 (Ala. 1991) (stating that insurance policy unambiguously distinguished between losses due to theft and losses due to false pretenses when "theft" is read as an ordinary person of average understanding would read the term); McGreehan v. California State Auto. Assn., 1 Cal. Rptr. 2d 235, 238 (Cal. Ct. App. 1991) (using the understanding of the ordinary person in construing insurance contracts); Allstate Ins. Co. v. Willison, 885 P.2d 342, 344 (Colo. Ct. App. 1994) (stating that an insurance contract must be interpreted from the perspective of the ordinary reader); Nugget Oil, Inc. v. Universal Sec. Ins. Co., 584 So. 2d 1068, 1070 (Ra. Dist. Ct. App. 1991) ("We are bound to assign to contract provisions the meaning that would be attached to them by an ordinary person of average understanding."); West Trucking Line, Inc. v. Northland Ins. Co., 459 N.W.2d 262, 264 (Iowa 1990) (noting that because policyholders' underinsured motorist coverage unambiguously excluded property damage, the "policy language expressly limits the coverage to bodily injury damages and is easily understandable to an ordinary person"); Meiners v. Aetna Casualty & Sur. Co., 645 A.2d 9, 10 (Me. 1994) (" 'A[n insurance] policy is ambiguous if an ordinary person in the shoes of the insured would not understand that the policy did not cover claims such as the [one being] brought.' " (quoting Allstate Ins. Co. v. Elwell, 513 A.2d 269, 271 (Me. 1986))); Sellie v. North Dakota Ins. Guar. Assn., 494 N.W.2d 151, 157 (N.D. 1992) (holding that in a dispute between insurer and insured a court is concerned with what the "ordinary person's understanding of the policy would be" (quoting Sparks v. Republic Natl. Life Ins. Co., 647 P.2d 1127, 1135 (Ariz. 1982))); Pressman v. Aetna Casualty & Sur. Co., 574 A.2d 757, 760 (R.I. 1990) ("[T]he terms should be read in the same sense that the insurer had reason to believe would be the way they would be interpreted by the ordinary reader and purchaser.").
26. For example, courts occasionally employ the maxim "inclusio unius est exclusio alterius" or "expressio unius est exclusio alterius" (the inclusion or expression of one is the exclusion of another) to determine the meaning of ambiguous policy language. See, e.g., Chicago Bd. Options Exch., Inc. v. Connecticut Gen. Life Ins. Co., 713 F.2d 254, 258 (7th Cir. 1983) (finding that under the maxim expressio unius, the omission of contractholders from a list of parties who need not consent to a contract term amendment, together with a provision apparently granting to the insurer an absolute right to amend, created an ambiguity in the policy); Fidelity & Casualty Co. of New York v. Commander, 231 F.2d 347, 351 (4th Cir. 1956); Hensley v. Erie Ins. Co., 283 S.E.2d 227, 230 (W.Va. 1981) ("Not only does the rule of strict construction against the insurance company apply but the familiar rule that the specific inclusion of one subject excludes all others is also applicable."); cf. Steven v. Fidelity & Casualty Co. of New York, 27 Cal. Rptr. 172, 177-78 (Cal. 1962) (en banc) (noting that the invocation of expressio unius amounts to recognition of an ambiguity in the contract, but that the maxim should not be invoked to defeat the rule that ambiguous terms should be construed against the insurer because it is a legalistic concept that does not enter the understanding of the ordinary layman); Marcolini v. Allstate Ins. Co., 278 A.2d 796, 799 (Conn. 1971) (holding the maxim expressio unius "should not be used to create an ambiguity").
27. See, e.g., Taylor v. State Farm Mut. Auto. Ins. Co., 854 P.2d 1134, 1140-41 (Ariz. 1993) (en banc); Pacific Gas & Elec. Co. v. G.W. Thomas Drayage & Rigging Co., 442 P.2d 641, 645-46 (Cal. 1968); Fire Ins. Exch. v. Rael, 895 P.2d 1139, 1143 (Colo. Ct. App. 1995); Denny's Restaurants, Inc. v. Security Union Title Ins. Co., 859 P.2d 619, 626 (Wash. Ct. App. 1993) (citing Continental Ins. Co. v. Paccar, Inc., 634 P.2d 291 (Wash. 1981)). In Pacific Gas, the court stated: The fact that the terms . . . appear clear to a judge does not preclude the possibility that the parties chose the language of the instrument to express different terms. . . . Accordingly, rational interpretation requires at least a preliminary consideration of all credible evidence offered to prove the intention of the parties. . . . If the court decides, after considering this evidence, that the language of a contract . . . is 'fairly susceptible of either one of the two interpretations contended for,' extrinsic evidence relevant to prove either of such meanings is admissible. Pacific Gas, 442 P.2d at 645-46 (citations omitted).
28. Such problems exist in the general contract context as well. See Charles J. Goetz & Robert E. Scott, The Limits of Expanded Choice: An Analysis of the Interactions Between Express and Implied Contract Terms, 73 CAL. L. REV. 261, 268-69 (1985). It is worth noting, however, that a number of prominent courts in recent insurance cases have consulted extrinsic evidence in an effort to discern the meaning of disputed policy provisions. See, e.g., Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.2d 878, 891 (Cal. 1995) (en banc) (using evidence of drafting history); Morton Intl., Inc. v. General Accident Ins. Co. of Am., 629 A.2d 831, 847-48 (NJ. 1993) (using evidence of representations made in the course of effort to secure regulatory approval of a provision).
29. See ABRAHAM, INSURANCE LAW, supra note 1, at 448.
30. Comprehensive Environmental Response, Compensation and Liability Act of 1980, Pub. L. No. 96-510, 94 Stat. 2767 (codified as amended in scattered sections of 26, 33, 42, and 49 U.S.C.).
31. See, e.g., AIU Ins. Co. v. Superior Court, 799 P.2d 1253, 1278 (Cal. 1990); United States Fidelity & Guar. Co. v. Specialty Coatings Co., 535 N.E.2d 1071, 1080 (Ill. App. Ct. 1989); Hazen Paper Co. v. United States Fidelity & Guar. Co., 555 N.E.2d 576, 583 (Mass. 1990); Minnesota Mining & Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 179-81 (Minn. 1990); C.D. Spangler Constr. Co. v. Industrial Crankshaft & Engg. Co., 388 S.E.2d 557, 569 (N.C. 1990).
32. This test lies about midway between strict liability and negligence in the tort-law sense. The former does not require perfectibility, as does the hindsight-perfectibility test, but neither does the hindsight test require foresight, as does a pure negligence test.
33. Pan American World Airways, Inc. v. Aetna Casualty & Sur. Co., 368 F. Supp. 1098, 1118 (S.D.N.Y. 1973), affd., 505 F.2d 989 (2d Cir. 1974).
34. Similarly, when multiple CGL policies issued in different years potentially cover the same loss, insurers sometimes argue that the insured can claim coverage under only one of these policies or - if there are not only primary, but also excess policies - one of these years. There is evidence in the drafting history of the 1966 revision of the CGL policy, however, that insurers anticipated this issue and consciously decided not to address it in the revised version of the policy. See Montrose Chem. Corp. v. Admiral Ins. Co., 913 P.2d 878, 891 (Cal. 1995) (en banc). The fact that the drafters anticipated this problem would of course be highly relevant under a foresight approach, but irrelevant under a hindsight approach.
35. 707 F.2d 775 (3d Cir. 1983).
36. 707 F.2d at 779. The policy at issue in Vlastos provided, "Warranted that the 3rd floor is occupied as [a] Janitor's residence." 707 F.2d at 776. The insurer denied coverage of a fire loss because the evidence showed that a massage parlor occupied a portion of the third floor along with the Janitor's residence. The court suggested that the addition of the word "solely" between "occupied" and "as" could easily have rendered the provision unambiguous. See 707 F.2d at 779.
37. The standard CGL insurance policy provides: We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or "property damage" to which this insurance applies. . . . We will have the right and duty to defend any "suit" seeking those damages. INSURANCE SERVICES OFFICE, INC., COMMERCIAL GENERAL LIABILITY POLICY (1984),
38. reprinted in ABRAHAM, INSURANCE LAW, supra note 1, at 440 (emphasis added).
39. The most common such example involves cases in which the insured is alleged to have acted negligently (a covered liability) but in fact acted expecting or intending harm (for which coverage of liability is excluded). See, e.g., Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153 (Cal. 1993) (en banc).
40. See KENNETH S. ABRAHAM, DISTRIBUTING RISK: INSURANCE, LEGAL THEORY, AND PUBLIC POLICY 195-203 (1986). The actual content of these rules appears to be determined at least as much by the policyholder-demand considerations that I describe in the next section as by the perfectibility standard. My point here is that strict liability is typically rejected as the governing standard.
41. I have borrowed this term from default-rule theory in the contract-law literature. The term seems to have been used first in Ian Ayers & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 91 (1989).
42. 387 N.W.2d 642 (Minn. 1986).
43. 387 N.W.2d at 643.
44. 387 N.W.2d at 643 (emphasis added).
45. See 387 N.W.2d at 644.
46. See 387 N.W.2d at 644-45.
47. See STEMPEL, supra note 1, § 5.9, at 206-07; Mark C. Rahdert, Reasonable Expectations Reconsidered, 18 CONN. L. REV. 323, 327-28 (1986).
48. For discussion and extensive references, see generally Symposium on Default Rules and Contractual Consent, 3 S. CAL. INTERDISCIPLINARY L.J. 1 (1993).
49. See Ayers & Gertner, supra note 32, at 93.
50. For discussion of this notion, see Ayers & Gertner, supra note 32, at 87-91. For a similar argument in the insurance context, see Fischer, supra note 2, at 1001.
51. A prominent example is the body of rules that has developed the insurer's duty to settle claims against its insured under a liability insurance policy. See Kent R. Syverud, The Duty to Settle, 76 VA. L. REV. 1113 (1990).
52. See KEETON & WIDISS, supra note 1, § 6.3(a)(4), at 636.
53. See Roger C. Henderson, The Doctrine of Reasonable Expectations in Insurance Law After Two Decades, 51 OHIO ST. L.J. 823, 835-36 & n.72 (1990).
54. See KEETON & WIDISS, supra note 1, § 6.3(a)(2), at 628 n.4 ("It seems likely that there has always been an implicit understanding that ambiguities, which in most cases might be resolved in more than just one or the other of two ways, would be resolved favorably to the insured's claim only if a reasonable person in the insured's position would have expected coverage.").
55. See Rusthoven v. Commercial Standard Ins. Co., 387 N.W.2d 642 (Minn. 1986).
56. See Minnesota Mining and Mfg. Co. v. Travelers Indem. Co., 457 N.W.2d 175, 181 (Minn. 1990).
57. See Cooper Cos. Inc. v. Transcontinental Ins. Co., 37 Cal. Rptr. 2d 508, 515 (Cal. Ct. App. 1995).
58. See Great Lakes Chem. Co. v. International Surplus Lines Ins. Co., 638 N.E.2d 847, 851 (Ind. Ct. App. 1994).
59. An insurer faced with a judicial finding of ambiguity in a case in which the majoritarian standard is satisfied - i.e., where policyholders already are likely to be paying for the coverage in question - has the same three choices noted earlier: (1) retain the provision as written and risk future liability; (2) redraft; or (3) in some jurisdictions, remedy the ambiguity by dispelling policyholders' expectations regarding the meaning of the provision.
60. 650 A.2d 974 (N.J. 1994).
61. In the language of this field, a CGL insurance policy is "triggered" if bodily injury or property damage falling within the terms of coverage occurred "during the policy period." See KENNETH S. ABRAHAM, ENVIRONMENTAL LIABILITY INSURANCE LAW 91-102 (1991)
62. [hereinafter ABRAHAM, ENVIRONMENTAL LIABILITY].
63. Owens-Illinois, 650 A.2d at 988-96.
64. Whether the error costs generated by the traditional conception are higher under these circumstances still depends, however, on the error rate associated with each of the other approaches. The traditional conception may still be superior on this score, even when the vast majority of disputed provisions are not perfectible or desired by most policyholders, if the other approaches also are very inaccurate.
65. I once argued that this is precisely what occurred in connection with the so-called qualified pollution exclusion in CGL insurance policies written between about 1970 and 1985. See Kenneth S. Abraham, Environmental Liability and the Limits of Insurance, 88 COLUM. L. REV. 942, 961-66 (1988).
66. That exclusion contained an exception for discharges of pollutants that were "sudden and accidental." Some courts held this phrase to be ambiguous and (under the traditional conception) therefore interpreted it to cover unexpected, gradual discharges. I argued that these interpretations resulted in the insurance industry's revision of the standard-form policy to remove virtually all pollution coverage from all CGL policies written beginning in 1986. In effect, insurers seem to have concluded that if they could not rely on policy provisions that they believed limited coverage to liability for short-term, abrupt pollution, they would not insure against pollution liability at all. I implied that the judicial decisions holding the "sudden and accidental" exception to the pollution exclusion to be ambiguous were incorrectly decided. In retrospect, I continue to think that I accurately described the attitude and motives of the insurance industry, but I have since concluded that the proper interpretation of the pre-1986 pollution exclusion is a more complicated question than I thought at the time. This view is based in part on the representations that the insurance industry made to state insurance commissioners when it sought approval of the exclusion in the early 1970s. For discussion of the timing and nature of these representations, see ABRAHAM, ENVIRONMENTAL LIABILITY, supra note 52, at 145-60.
67. Cf. Michael B. Rappaport, The Ambiguity Rule and Insurance Law: Why Insurance Contracts Should Not Be Construed Against the Drafter, 30 GA. L. REV. 171, 237 (1995).
68. See Robert E. Keeton, Insurance Law Rights at Variance With Policy Provisions (pt. 1), 83 HARV. L. REV. 961, 961-63 (1970); see also KEETON & WIDISS, supra note 1, § 6.1 (a), at 614-16.
69. See KEETON & WIDISS, supra note 1, § 6.1(a), at 615 (stating that these doctrines represent "concepts that have continued to become increasingly significant in the resolution of insurance disputes involving claimants who seek to assert rights which are not in accord with the provisions of the applicable insurance contract"). Although the validity of this kind of distinction between mere interpretation and the giving of legal effect to policy language is open to question, I believe that my analysis does not depend on whether such a distinction is valid.
70. See KEETON & WIDISS, supra note 1, § 6.1(b), at 617-18.
71. See Henderson, supra note 44, at 825.
72. See, e.g., Gordinier v. Aetna Casualty & Sur. Co., 742 P.2d 277, 285 (Ariz. 1987) (stating that "[t]he possibility remains that these [exclusions] limitations were called to [the insured's] attention" and that "[i]f Aetna can prove this, we will enforce the limitation of coverage"); State Farm Mut. Auto. Ins. Co. v. Bogart, 717 P.2d 449, 457 (Ariz. 1986) (en banc) ("Such an eventuality is certainly one that should be clearly called to the attention of the insured."); Gray v. Zurich Ins. Co., 419 P.2d 168, 174 (Cal. 1966) (en banc) (limitation on duty to defend would defeat the insured's reasonable expectations because the limitation "is not 'conspicuous' since it appears only after a long and complicated page of fine print, and is itself in fine print"); C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169, 177 (Iowa 1975) (substance of an exclusion was not explained to plaintiff); Simon v. Continental Ins. Co., 724 S.W.2d 210, 212-13 (Ky. 1986) (automobile policy's underinsured motorist limits, buried in a lengthy definitions section, defeated the reasonable expectations of the insured absent a clear and conspicuous manifestation of excluded coverage); DiOrio v. New Jersey Mfrs. Ins. Co., 398 A.2d 1274, 1280 (N.J. 1979) (automobile policy coverage provisions and definitions regarding nonowned automobiles were placed clearly and conspicuously on the first page, and thus the insured could have no objectively reasonable expectation of the coverage sought); Gerhardt v. Continental Ins. Co., 225 A.2d 328, 333 (N.J. 1966) ("If the company had acted fairly in the effort to exclude coverage . . . it would have given the insured clear notice to that effect on the face page . . . or by a slip attached to the face page . . . ."); Lehrhoff v. Aetna Casualty & Sur. Co., 638 A.2d 889, 892 (N.J. Super. Ct. App. Div. 1994) ("[R]easonable expectations of coverage raised by the declaration page cannot be contradicted by the policy's boilerplate unless the declaration page itself clearly so warns the insured."); Hionis v. Northern Mut. Ins. Co., 327 A.2d 363, 365 (Pa. Super. Ct. 1974) ("Even where a policy is written in unambiguous terms, the burden of establishing the applicability of an exclusion or limitation involves proof that the insured was aware of the exclusion or limitation and that the effect thereof was explained to him.").
73. For example, some courts have held that an insured's reasonable expectations survive coverage limitations despite the insured's apparent knowledge of the limitations. See, e.g., Smith v. Westland Life Ins. Co., 539 P.2d 433, 441-42 (Cal. 1975) (en banc) (when reasonable expectation of coverage was created by the insurer's acceptance of a premium with the application for coverage, if the insurer wishes to counter the expectation "it must not only use clear and unequivocal language evidencing its intent to limit temporary coverage . . . [and] call such limiting condition to the attention of the applicant," but must also return the tendered premium); Sparks v. St. Paul Ins. Co., 495 A.2d 406, 414-15 (N.J. 1985) (in most insurance contracts "consent can be inferred only to the extent that the policy language conforms to public expectations and commercially reasonable standards"; absent "proof of factual circumstances that would render such limited . . . coverage both reasonable and expected," the policy limitation did not satisfy the objectively reasonable expectations of the purchaser). 63. See supra text accompanying notes 58-59.
74. See, e.g., Gerhardt, 225 A.2d at 333; Lehrhoff, 638 A.2d at 892.
75. See, e.g., Gordinier, 742 P.2d at 285; C & J Fertilizer, 227 N.W.2d at 177 (rejecting defendant's assertion that contra proferentem does not apply because plaintiff knew the policy contained the provision, and observing that the "escape clause . . . was never read to or by plaintiff's personnel, nor was the substance explained by defendant's agent").
76. See, e.g., Steven v. Fidelity & Casualty Co. of New York, 377 P.2d 284, 288, 293-94 (Cal. 1962) (en banc) (holding that when airline trip insurance policy was marketed through a vending machine close to the time of departure, required the insured to mail the policy to the beneficiary prior to departure, and did not provide a duplicate copy, the insured had a reasonable expectation that substituted emergency transportation would be covered absent a clear manifestation of the limitation to the purchaser).
77. Occasional exceptions to this generalization include cases involving particular acts of negligence, such as an agent who fails to follow a directive that an unexpected exclusion be pointed out.
78. It is not necessarily inconsistent for a court that has implicitly held a policy provision to be sufficiently clear under all relevant circumstances - i.e., nonnegligently drafted - to also hold that the insurer's marketing behavior is nonetheless negligent. Under some circumstances the optimal approach to communicating the policy's meaning may well be to leave the policy language as it stands but to clarify its meaning by some extracontractual method of explanation.
79. If the insurance market has declined (albeit ambiguously) to provide a particular form of coverage, then one of three possibilities obtains: the majority of policyholders would not in fact want the coverage at an accurate price; the market has failed to take advantage of an available gain from trading expanded coverage for higher premiums; or policyholders have inaccurately assumed that the ambiguous policy provision is already providing them with the coverage in question.