The Unpredictability of Insurance Interpretation

By Boardman, Michelle E. | Law and Contemporary Problems, Fall 2019 | Go to article overview

The Unpredictability of Insurance Interpretation


Boardman, Michelle E., Law and Contemporary Problems


I

INTRODUCTION

Courts engaged in the interpretation of insurance contracts often make implicit reference to the effect the interpretation will have on a multitude of other policyholders and insurers. Judges may be unusually aware of this future effect in the insurance context because they see the same policy language in contracts offered to millions of policyholders by diverse insurers. This Article examines the unpredictable, downstream effects of one of the most-used interpretive tools in insurance--contra proferentem--under which ambiguities are interpreted against the drafter. (1)

The doctrine is partially forward-looking; it assumes that judges will use their power to induce a rewrite of unsatisfactory contract terms in future contracts with policyholders not before the court. (2) This broad reach of a single judicial opinion may be evaluated as form of the "butterfly effect," to borrow a concept from chaos theory. "Just as a butterfly flapping its wings in Tokyo can change the weather in London, so too can a judicial decision interpreting contract boilerplate change the meaning of the language in thousands of other contracts governed by the same law." (3) The concept of a small, discrete action (a court ruling) having a vast effect on countless unrelated parties (as controlling or persuasive legal authority) is a useful concept by itself. But the concept within chaos theory offers more.

When scientist Edward Lorenz asked the question--"Does the flap of a butterfly's wings in Brazil set off a tornado in Texas?"--the purpose of the question was not simply whether a small act can cause a big effect. (4) The purpose, according to Lorenz, "was to illustrate the idea that some complex dynamical systems exhibit unpredictable behaviors such that small variances in the initial conditions could have profound and widely divergent effects on the system's outcomes." (5) In other words, the unpredictability of the outcome is central to the effect. This Article explores both the specifics of the butterfly effect in insurance contract interpretation and the unpredictability of the effect.

In many forms of insurance, courts seem well aware of the downstream ramifications of their decisions, both as to expected insurer behavior and as to interpretive precedent. But there is reason to think this awareness is incomplete. Courts cannot accurately predict if insurers will decide to redraft a term or how it will be redrafted. Nor can they predict whether an increase in coverage, made in response to contra proferentem, is genuinely desired by most consumers.

Of what are courts aware? First, courts understand the collective drafting of contract language that takes place in many parts of the insurance industry; many insurers use the same or similar language. (6) And, of course, courts know that each insurer enters into substantially the same contract with hundreds of thousands of consumers. A consumer policy term can come to resemble a statutory term in its wide, common application that is not specific to any given party. (7) The same is true for the widely-used Commercial General Liability policy.

Second, courts are aware that interpreting a disputed insurance term against the drafter--here, the insurer--in favor of coverage provides an incentive for the insurer to redraft. (8) Indeed, one of the two main functions of contra proferentem is to encourage insurers to make a change that will have no effect in the litigation at hand but a widespread effect in future contracts with other parties. (9) In short, courts realize that (1) they are interpreting a term for countless other parties not before the court and (2) a contra-insurer interpretation could lead to a change in countless current and future contracts.

Of what downsides do courts seem unaware? This Article considers three possibilities. First, contra proferentem may enshrine a term rather than banish it. Next, insurers may make redrafts that are harmful to policyholders. …

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