The Butterfly Effect in Interpreting Insurance Policies

By French, Christopher C. | Law and Contemporary Problems, Fall 2019 | Go to article overview

The Butterfly Effect in Interpreting Insurance Policies


French, Christopher C., Law and Contemporary Problems


I

INTRODUCTION

In resolving contract disputes, one might think a court's interpretation of the contract at issue would impact only the parties in the case. In the vast majority of contract cases today, however, that is not true because more than ninety-nine percent of the contracts entered today are standard form contracts. (1) When a court interprets a standard form contract, the court's interpretation of the language impacts all of the entities who are using, or will be using, the contractual language at issue, not just the parties in the case. (2) The court's interpretation also impacts how other courts will interpret the same language even if the courts are in different jurisdictions. Because the drafters of standardized contract language often understand the far-reaching impact of courts' interpretations, they respond to the courts' interpretations of their language when drafting or redrafting standardized contracts. Courts' interpretations of standardized contract language also impact the behavior of repeat users of such language in seeking or avoiding judicial interpretation of the contract language. These ripple effects of courts' interpretations of standardized contract language are commonly referred to as the "butterfly effect." (3)

As the first type of standardized contract described as a contract of adhesion one hundred years ago, one can intuit that courts' interpretations of insurance policies would have a butterfly effect on parties not involved in the litigation. (4) Indeed, much of the language found in insurance policies today has been recycled in policies decade after decade. (5) And, for some lines of insurance, many insurers use identical or nearly identical policy forms. (6) Consequently, the courts' interpretations of the standardized policy language in insurance policies is fertile ground for the butterfly effect.

One pronounced butterfly effect occurs as a result of the first court's interpretation of the policy language because the interpretation impacts all users of the policy language. (7) The initial interpretation also impacts how other courts will interpret the same language. Indeed, the mere prospect of a court interpreting policy language impacts insurers' litigation conduct because they, unlike most policyholders, are repeat players in litigation regarding the meaning and application of policy language. The butterfly effect from the initial court's interpretation of policy language incentivizes insurers, as repeat players, to seek or avoid judicial interpretation of policy language in order to generate or avoid the creation of such precedent. (8)

Insurers also seek to counteract the butterfly effect of courts' adverse interpretations of policy language when drafting the policy language. Insurers are aware that a court's interpretation of a single word or the placement of a comma or semicolon in a sentence in a policy can result in the creation of billions of dollars of insurer liabilities to policyholders in the event of a significant coverage event. Consequently, to minimize the butterfly effect of adverse court interpretations of policy language, a drafting feedback loop can result. Insurers react to judicial interpretations by creating exclusions and/or redrafting existing policy language to avoid the application of courts' interpretations with which insurers disagree.

To examine the butterfly effect in the interpretation of insurance policies, this Article proceeds in five parts. Part II explains how insurance policies became prototypical standardized contracts. Part III addresses how courts' interpretations of policy language impact insurers' decisions whether to settle or litigate in order to obtain or avoid creating precedent regarding the meaning of standardized policy language due to the interpretation's butterfly effect. Part IV addresses insurers' efforts to counteract the butterfly effect by redrafting policy language or creating exclusions to nullify adverse court interpretations of policy language. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Butterfly Effect in Interpreting Insurance Policies
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.