Should Insurers Be Sued For Bad Faith For Drafting Hard-To-Decipher Policies?

Last week I posted about Harvard 3L Chris Robertson’s post regarding ambiguity in insurance contracts.  I didn’t buy his analysis that insurers intentionally make them vague as a form of consumer deception. When you’re up against a rule, as insurers are, that ambiguities will be decided against you, what sense does it make to place them in your policies intentionally?  That’s like me throwing a punch at Superman.  If I connect, all I do is break my hand.   

Now Chris has a Part II out, about which he was kind enough to e-mail me earlier this week, so I took a read.   Regrettably, I also fail to buy this post, but the thing I buy the least is the argument that ambiguities are present in insurance policies because insurers left them ambiguous when they couldn’t get their harsher terms past state regulators, who have to approve the language of insurance contracts sold in the state.  In almost every coverage dispute I can think of, the ambiguity did not stem from any differences between the way the clause read in one state as opposed to another.

There simply are limits to human expression, especially when you have lawyers billing by the hour going over a policy trying to find ambiguity any way they can.  I do this myself.  When I represent policyholders and make an ambiguity argument, what I need to do is present an interpretation that is reasonable in the totality of the policy and contradicts the insurer’s interpretation. To win, my interpretation doesn’t have to be better or even as good.  It just has to be reasonable.  Then there is ambiguity, and it is decided against the drafter.  What I see being found ambiguous are terms that are standard terms. I’m open to other evidence, but I simply have not seen it.   

As far as things I don’t buy about the post, in a very close second place is the concept that the tort of bad faith should be extended to drafting of policies, because insurers know consumers may think they are covered but they really are not.  This has some resemblance to the doctrine of reasonable expectations, which in the insurance coverage field has pretty much been bounced around like a Bobo doll.  Instead of this reasonable expectations standard, courts say policies have some objectively reasonable meaning whether you read them or not, or whether you understand them or not.  What, now bad faith is going to be extended to some undocumented, subjective belief people may have?  What if they haven’t thought about it at all, does that mean the insurer acted in good faith, bad faith or in-between faith?


Filed under Bad Faith, Liability Policies

9 Responses to Should Insurers Be Sued For Bad Faith For Drafting Hard-To-Decipher Policies?

  1. David: While I agree with your logic, and the basis of your arguement, I have noticed a very distrubing trend among insurers, which is to disguise overt exclusions in innocuous endorsements. I have found three examples in the last several weeks. It’s to the point where you have to read every endorsement, irrespective of it’s title. That is sneaky! Chris is onto something, carriers are dumb like a fox.
    I would be happy to provide you examples if you wish. Keep up the excellent work.
    Insurance Mike

  2. Mike, thanks for the thoughtful comment. As you point out, from the policyholder’s standpoint, there are a lot of pitfalls in policies. Endorsements get added for all kinds of things, some of them obvious like mold, but some the implications are not so obvious, even if the policyholder bothers to read them. Sometimes endorsements even confuse insurers — I had one case where a securities plaintiff I represented won at trial, which gave him the right as a judgment creditor to sue on the broker’s errors and omissions policy. I had been pointing out for months that the insurer’s interpretation of the policy was flat out wrong because they themselves did not read to the last page, where a specially negotiated endorsement had removed what amounted to an exclusion. Imagine their surprise when they finally read it. They gambled we would not prevail at the underlying trial, but we did, so they finally had to pay up.
    I would welcome your further thoughts on this issue, if you have time send them to me in an e-mail with examples and I’ll publish them in another post, it will get more attention than posting them in another comment.

  3. David:
    Will do, I’ll put together some examples. I like feritting out both the sly and the stupid carriers. This medium is ideal for keeping them in line, we just need enough momentum and readers to have a real impact without always taking them to court. You know how that goes. Win and seal it up.
    I enjoy your musings.

  4. Fred

    As an low income consumer I’d like to present a thought about your comment.
    “”When you’re up against a rule, as insurers are, that ambiguities will be decided against you, what sense does it make to place them in your policies intentionally?””
    When Millions of consumers do not have the time, knowledge, and/or financial ability to pursue legal action, those ambiguous clauses will deter the average [legally uneducated] consumer from even considering legal action.
    Can you imagine how much that could reduce an insurer’s claims expense in a year. I would guess enough to make the occasional “hand slapping” of the few that actually make it to Court, very insignificant.

  5. Fred, I can see your argument, but since insurers draft these things in the first place, it would make more sense from their perspective, if their aim was to cheat people, to write them unambiguously not to cover the things they later claim are not covered.

  6. Fred

    Thanks for the response.
    I agree, But, if Insurer’s used clear, easily understood, statements about what they would actually cover and how claims would be handled… Could they maintain market share competing against those with misleading language??
    And remember, a consumer is likely to send those premiums for decades before they have a serious claim and discover the truth.

  7. Fred, I would say the loss of market share would not be a concern because so few people read their insurance policies anyway. Most of the difficulty in reading policies come from specific responses to case law and trying to circumvent the language of those cases, so I don’t see that changing on the part of any company. Clear language that doesn’t specifically address the language of prior court decisions would likely create more problems than it would solve, in my view.

  8. Fred

    Sadly, your right most people just sign and send the Checks.

  9. Mark Linder

    I am not sure that I would favor recognizing an immediate bad faith remedy for insurers drafting ambiguous policy provisions. However, I would support an approach under which insurers were prohibited from litigating coverage in regard to their duty to defend/indemnify, particularly in the context of policies issued to consumer policyholders.
    The insurance industry seems at the same time to be one of unparalleled privilege and yet also equally beleaguered by the magnitude its responsibilities. Congress has smiled upon the insurance industry with the McCarran-Ferguson Act, and in turn, the industry has smiled on itself by taking advantage of their privileged status by essentially marketing the same products to insureds on mostly identical terms. On the other hand, the principles of moral hazard and adverse selection stand as a constant shadow over the shoulder of the industry, affecting its ability to accurately gauge the various risks it is assuming by issuing policies. The result is an insurer-insured relationship that is unique in its complexity, and as a result of this somewhat unequal (if not unnatural) relationship, I would suggest that insurers faced with the duty to defend/indemnify their consumer-insureds should be held to capably interpret their own policies and, thus, be limited to a “yes” or “no” decision, rather than being able to, in effect, oppress their insureds by litigating coverage.
    Several aspects of the consumer insured-insurer relationship support this result. First, an insured’s ability to sit down and write out a policy that meets their exact specifications and with which they wholeheartedly agree is something of a myth. Thanks to the combination of McCarran-Ferguson and ISO forms (including those “customized” endorsements), the insured’s ability to bargain is automatically restricted by the standardized coverage provisions of the ISO-developed policy terms. Of course, insureds may buy different coverage options, but it is doubtful that the policy that results will in any way fit the insured as if they had written the policy for themselves (the obvious and well-taken counter-argument being: who really wants to write their own policy anyway?).
    Second, also complicating the already awkward insurer-insured relationship is what I might call the “fourth party,” i.e., the insurer’s shareholders (this phrase assumes that an injured plaintiff, the insured, and the insurer comprise the other three parties). The insurer owes a contractual duty to the insured via the insurance contract, but the insurer also owes higher fiduciary duties to its shareholders to maximize the return on their investments. While this might not necessarily mean that insurers are conspiring to draft deficient policies, the fact that they themselves are unable (or, worst case scenario, unwilling) to determine what coverage they have sold to their policyholder should not be the fault of the policyholder, and in turn, insureds do not deserve to serve as unprotected pawns to be sacrificed, at times, for the good of the insurer’s shareholders.
    As has been suggested of insurance contracts on this blog, maybe “[t]hese things are written about as well as they can be written,” but if this is the case and if insurers simply cannot better capture coverage provisions with inherently imprecise language (as might be the case), it seems fair to suggest that they should at least know how to interpret their own contracts. In other words, the insurer should be an expert on their own policy and should be able to determine when the duty to defend or indemnify arises. If nothing else, this incentive to know their potential liabilities with greater certainty would help avoid the litigation costs associated with challenging coverage and avoid potentially large bad faith judgments in favor of insureds that might harm the health and investment potential of the company. As a result, investor confidence would increase, along with share values.
    Like you, I tend to assume that insurers are out there to provide a legitimate service and not to simply abuse their customers. Thus, it should be the nature and dynamic of the relationship that require my suggested result, not necessarily the intent of the insured. Here in Texas, as in other states, we have insurance code provisions to punish insurers for deliberate misrepresentations of policy terms by insurers, and these provisions have teeth. But even without automatically assuming the worst in insurance companies, this all comes down to bargaining power. The insurer knows that it will be liable only within the policy limits. This is a massive advantage when weighing their duty to defend or indemnify. The insured has no guarantee of such a limit on their personal liability. Thus, the issue should be less about a windfall to the insured and more about risk assessment and management (in other words, the insurer’s chosen business, not to mention the business in which shareholders have chosen to risk their investment). There is room here for rightful coverage and rightful denial. There is also room for wrongful denial, in which circumstance the insurer would be subject to a bad faith remedy. However, the insurer should not be allowed to drag its consumer policyholder through the labors of the coverage litigation process. Anything else allows insurers to reap all of the benefit and none of the detriment (other than performing their end of the contract, if you want to call that detriment).
    I understand that my above suggestion is wide open to the critique that the effect of insurers paying out more in defense costs or in indemnification would be to send premiums through the roof. But, as stated above, I believe there is room for financial benefit to insurers and shareholders through this approach. Thus, while cost is certainly a factor in the analysis, it reminds me of those stories of diamond miners hiding away most of the world’s diamonds in a vault in order to regulate supply and send prices up: even if it’s real, any price increase would also be somewhat speculative and artificial.
    The bottom line is that insurers have all the power once a policy is issued. Thus, in the consumer context, I would argue that insurers should not be entitled to litigate coverage or defend their consumer-insureds under a reservation of rights. The insurer should know the policies that they issue and should know what events should be covered, even unforeseen events that lurk at the margins or between the cracks of policy terms. Insurers voluntarily participate in the business of risk transfer, and thus, they are in the best position to know and bear such risks.