How To Avoid Getting Whacked By The Doctrine Of Reasonable Expectations

Introduction

Since Professor (later Judge) Robert Keeton first put a name

to the reasonable expectations doctrine in 1970, it has

generally been regarded as strongly pro-policyholdera

counterbalance to the adhesive nature of insurance contracts

and the negotiating advantage insurers typically have over

insureds. While forms of the doctrine widely persist,

Keeton's formulation, under which an insured's

reasonable expectations of coverage may trump unambiguous

policy language negating coverage, has little continued

support. What remains is often little more than a convenient

justification for whatever result a court is inclined to favor.

Moreover, contrary to the doctrine's underlying rationale,

courts have increasingly invoked the doctrine in favor of

insurers, in some instances negating coverage even where strict

adherence to the policy language, or at least straightforward

application of the rule of contra-proferentem, would

have compelled the opposite result. Thus, as the examples

explored below indicate, the reasonable expectations doctrine

as it currently exists can do policyholders more harm than

good.

The Reasonable Expectations Doctrine's Development And

Rationale

Although Keeton denied that the phenomenon he dubbed

"reasonable expectations" was necessarily

pro-policyholder, in light of his formulation of the doctrine,

and its underlying rationale, it is hardly surprising that the

reasonable expectations doctrine is widely recognized as such,

and that it has, as a result, met with stiff resistance and

criticism from insurers. Under Keeton's formulation:

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.

Robert E. Keeton, Insurance Law Rights at Variance with

Policy Provisions, 83 HARV. L. REV. 961, 967 (Part I)

(1970).1 So stated, it is clear that

Keeton's version of the doctrine is no mere adjunct to

ambiguity analysis: even unambiguous coverage

limitations may be ineffective if contrary to the insured's

objectively reasonable expectation of coverage. In other words,

Keeton's reasonable expectations doctrine operates to

create contractual rights not reflected in, or even

contrary to, express contract language.

Although the principle that a policyholder's

expectations can trump unambiguous policy language may seem

extreme at first glance, the reasonable expectations doctrine

has been justified as an appropriate safeguard in light of the

realities of insurance sales, where one party (the insurer)

ordinarily has near control of the transaction. Policy language

(typically offered on a take it or leave it basis) is so

complicated as to be beyond comprehension for most insureds.

Moreover, because policyholders typically receive their

insurance contracts only after completion of the

insurance transaction, policyholders' reasonable

expectations of the coverage to be provided often form the

entire basis for their insurance purchasing

decisions.2

Arguably, these justifications apply with more force for

individual consumers and small businesses than for large

commercial insureds. As a consequence, large commercial

concerns have seldom enjoyed the reasonable expectations

doctrine's benefits, with some notable exceptions. See,

e.g., Keene Corp. v. Ins. Co. of N. Am., 667 F.2d

1034 (D.C. Cir. 1981). Although such organizations have

benefited least from the reasonable expectations doctrine's

coverage-enhancing effects, to the extent Keene's doctrine

has mutated into a tool for insurers to defeat coverage (as

later discussed), these organizations are the doctrine's

most frequent target.

Even with respect to non-commercial insureds, the doctrine

of reasonable expectations has been considerably watered down

despite its underlying justifications. Although most

jurisdictions have recognized the reasonable expectations

doctrine in one form or another, or at least use

"reasonable expectations" terminology, ever fewer

follow Keeton's formulation. Most jurisdictions look to the

insureds' reasonable expectations only where there has been

an initial finding of ambiguity or to counterbalance hidden

policy provisions. See, e.g., Bd. of Regents of

the Univ. of Minn. v. Royal Ins. Co., 517 N.W.2d 888

(Minn. 1994). Parting still further from the doctrine's

underpinnings, other jurisdictions seek to enforce the

reasonable expectations of insurers, not just their

insureds. See, e.g., State Farm Auto. Ins. Co. v.

Roberts, 697 A.2d 667, 672 (Vt. 1997) (looking to the

"reasonable expectations of the parties" to

"avoid binding insurers to coverage that the parties did

not reasonably contemplate") (emphasis added).

Whatever form the reasonable expectations doctrine takes, in

typical practice, the doctrine has come to provide a

justification for results-oriented decisions that reflect

courts' own perception of fairness. As one commentator

notes:

There are in fact no expectations, and no real

policyholders whose expectations are plumbed by the legal

equivalent of a 'Vulcan mind-meld,' except in the

mind of those who resolve the dispute, which will be judges

since the matter involves construction of a contract . . .. A

public policy base for altering and modifying contract

obligations is simply a more honest and accurate statement of

what [the doctrine of reasonable expectations] does. Public

policy creates coverage when a court believes it is fair,

just, and reasonable to do so, notwithstanding the contrary

position of the contract terms. A policyholder's

expectations have nothing to do with the result, unless they

happen to coincide with those of the court.

James M. Fischer, The Doctrine of Reasonable

Expectations is Indispensable, If We Only Knew What For?,

5 CONN. INS. L. J. 151, 164 (1998). Indeed, the reasonable

expectations of policyholders (or insurers for that matter) are

typically deemed not to involve questions of fact, but are

determined by courts as a matter of law. See id.

Inasmuch as the reasonable expectations doctrine operates as a

doctrinal hook on which to hang results perceived to be fair,

perhaps inevitably, it has come to provide the basis for

pro-insurer decisions, notwithstanding its

pro-policyholder origins and underpinnings.

Coverage-Defeating "Expectations"

Reasonable expectations as a means to construe

ambiguity against insureds

Whereas Keeton's formulation of the reasonable

expectations doctrine provides that a policyholder's

expectations of coverage can prevail even over

unambiguous policy language the majority of

jurisdictions that continue to recognize some form of the

doctrine employ it only as a means to resolve disputes over

ambiguous provisions. It may appear that in such

jurisdictions the...