Court Opinion

ID: 8989069
Source: CourtListenerOpinion
Date Created: 2022-11-27 12:02:58.359434+00
Date Added: 2024-06-11T17:10:51.931949
License: Public Domain

HEANEY, Senior Circuit Judge,
dissenting.
I respectfully dissent. In particular, I disagree with the majority’s reasoning in Section III of its opinion. The doctrine of reasonable expectations should be applied in this case, and thus the district court’s summary judgment should be reversed because the homeowners have raised genuine *1292issues of material fact regarding their reasonable expectations.
Whether the rule of honoring reasonable expectations should be applied to policies issued pursuant to the National Flood Insurance Program (NFIP) is a question of first impression for this court. The merits thus deserve more scrutiny than the majority has offered.
The policy expressly provides, and courts have repeatedly held, that federal common law governs the interpretation of the policy. See, e.g., Sodowski v. National Flood Ins. Program, 834 F.2d 653, 655 (7th Cir.1987). Courts have further recognized that “in enacting the NFIP, Congress did not intend to abrogate standard insurance law principles.” Atlas Pallet, Inc. v. Gallagher, 725 F.2d 131, 135 (1st Cir.1984) (citation omitted). Instead, Congress intended courts to utilize the traditional common law approach and draw upon standard insurance law principles to inform the judiciary’s resolution of NFIP cases. Id. Here, the majority refuses to apply — indeed, it summarily rejects — what is quickly becoming the standard insurance law principle of honoring reasonable expectations.
I.
The relevance of this doctrine arises from the tension between what the majority labels the unambiguous language of the policy and the homeowners’ conflicting understanding of this language. According to the majority, the policy unambiguously defined “basement.” The homeowners argue otherwise and have strongly supported their contention that they believed the insurance policy applied to their walkout basements. The homeowners’ maintenance of flood insurance for many years suggests the legitimacy of this belief. Presumably, because floods pose the greatest likelihood of damage to the lowest floor, the primary objective of homeowners who seek flood insurance is to insure their basements against flood damage.
The basements at issue here are undeniably walkout basements. Because of their accessibility, walkout basements acquire a character different from ordinary basements, and due to this character, many people would not even consider a walkout to be a basement. It was entirely reasonable for the homeowners to assume that their walkout basements were not included in the policy’s definition of basement. The operative word in this definition, “sub-grade,” conjures up an image of the classic basement, an area of a building which is primarily below the ground level. Ironically, even the government adjuster who first inspected the flooding of the homeowners’ walkouts indicated that the damage would be covered. Here, rather than applying a common sense definition of “subgrade,” the majority invokes a technical interpretation, which carried to a logical extreme could define the first story of a home as a basement.1
Whether the language is given its common sense meaning or interpreted technically, the policy is ambiguous. When such an ambiguity exists, the doctrine of reasonable expectations should be applied. Indeed, an acknowledged expert in insurance law, Judge Robert Keeton, has identified the confusion such as that caused by the basement exclusion in this case as the very reason the doctrine exists:
As an ideal this principle incorporates the proposition that policy language will be construed as laymen would understand it and not according to the interpretation of sophisticated underwriters.
Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L. Rev. 961, 967 (1970). After explaining that the doctrine of honoring reasonable expectations is an extension of the principle of resolving ambiguities against the insurer, Keeton outlined the essence of the doctrine:
Arguably [honoring reasonable expectations] should be regarded as a corollary of the principle of resolving ambiguities *1293against the insurer. The principle of honoring reasonable expectations should be extended further, protecting the policyholder’s reasonable expectations as long as they are objectively reasonable from the layman’s point of view, in spite of the fact that had he made a painstaking study of the contract, he would have understood the limitation that defeats the expectations at issue.

Id.

II.
The doctrine of reasonable expectations is rapidly becoming standard insurance law. At least twenty states have adopted the rule of reasonable expectations.2 Moreover, although a federal court should not selectively adopt doctrines into the federal common law merely to reflect the law of the state in which the court sits, it is important to note that a majority of the states in this circuit have adopted the reasonable expectations doctrine.3
Scholars have embraced the doctrine as well. See, e.g., R. Keeton & A. Widiss, Insurance Law § 6.3 (1988); Abraham, Judge-Made Law and Judge-Made Reasonable Expectations of the Insured, 67 Va.L.Rev. 1151 (1981). Abundant policy reasons support the adoption of the doctrine of honoring reasonable expectations. First, insurance policies are lengthy, complicated documents, which frequently are not read by the insured. Second, insurance policies are classic examples of adhesion contracts, leaving the consumer with minimal bargaining power. Third, protecting reasonable expectations frequently prevents an unconscionable result. Fourth, if insurance is procured for a specific reason and the insurance company could reasonably ascertain this reason, the expectations of the insured should be protected.
Each of these policy factors is relevant to this case. First, the policy at issue is an eight-page document with two columns of fine, single-spaced print on each page. Further, the pivotal policy language is located in two separate sections of the document: the “basement exclusion” appears in an eighteen-line sentence in Article V of the policy, while “basement” is defined several pages earlier in Article II of the policy.
Second, the government created the NFIP to fill a void in the marketplace, leaving the homeowner with little alternative but to deal with the government and accept the terms of the government’s contract. Throughout its opinion, the majority suggests that adopting the reasonable expectations doctrine in this case would not be appropriate because the language of the policy is a product of regulatory directive. If anything, this origin highlights the adhesive nature of the policy; and as will be discussed shortly, the source of the policy language should not inhibit the application of the reasonable expectations principle.
*1294Finally, two of the homeowners had maintained flood insurance continuously for ten and thirteen years, respectively. Undoubtedly, the homeowners’ primary purpose in securing flood protection was to insure their walkouts from damage. If the homeowners had known that their walkouts would be excluded from coverage, it is unlikely that they would have opted to continue their flood insurance, since first and second stories are far less susceptible to flooding than walkouts. Simply stated, if the homeowners are denied coverage, then the consideration for which they bargained and for which they paid premiums is being withheld.
III.
This is a case in which the technical language of the insurance policy conflicts with a reasonable layman’s understanding of the insurance coverage. I believe that the contract is ambiguous, and while the doctrine of reasonable expectations does not require ambiguity for its application, the presence of ambiguity strengthens the argument for adopting this standard in this case. If the homeowners had realized that their walkouts were excluded from coverage, in other words, if the contract were unambiguous and clear to them, their primary, and most likely decisive, reason for incurring premium costs would have been eliminated. Fulfilling the homeowners’ reasonable expectations would provide them with the insurance for which they thought they had contracted. Such a result is particularly justified when it appears that the homeowners believed their walkouts were insured and when the government reasonably could have inferred this reliance.
In such a situation, the reasonable expectations of the homeowners should be protected. Congress intended the courts to draw upon standard insurance principles to adjudicate disputes under the NFIP. The doctrine of reasonable expectations is becoming a standard principle of insurance law. Accordingly, it should be incorporated into the federal common law, particularly in a case as compelling as this.
The majority’s bald suggestion that the reasonable expectations doctrine could be applied in a suit against a private insurer but not in an action against the federal government lacks any compelling support. No legal basis is offered for this assertion nor does the majority proffer any logical reason for its claim. Whether the insurance policy is a product of private industry or public regulations does not affect the applicability of the doctrine. Indeed, the focus of reasonable expectations analysis is on the understandings of the consumer, not on the source of the contract, which is relevant only to the extent that the policy is technical and wordy.
The homeowners present persuasive arguments for the incorporation of the doctrine of reasonable expectations into federal common law. Accordingly, I would reverse the district court’s grant of summary judgment because the homeowners have raised genuine issues of material fact regarding the applicability of the doctrine to their situation.

. For instance, if the ground surrounding a home was actually higher than the floor of the home, the entire first story would be defined as a basement and thus excluded from flood protection under the majority's interpretation of the policy.

. See Smith v. Auto-Owners Ins. Co., 500 So.2d 1042 (Ala.1986); Stordahl v. Gov’t Emp. Ins. Co., 564 P.2d 63 (Alaska 1977); State Farm Fire & Cas. Co. v. Powers, 163 Ariz. 213, 786 P.2d 1064, (Ariz.App.1989); Gray v. Zurich Ins. Co., 65 Cal.2d 263, 419 P.2d 168, 54 Cal.Rptr. 104 (1966); Cody v. Remington Elec. Shavers, 179 Conn. 494, 427 A.2d 810 (1980); State Farm Mut. Auto. Ins. Co. v. Johnson, 320 A.2d 345 (Del.1974); Corgatelli v. Globe Life & Acc. Ins. Co., 96 Idaho 616, 533 P.2d 737 (1975); C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169 (Iowa 1975); Simon v. Continental Ins. Co., 724 S.W.2d 210 (Ky.1987); Atwater Creamery Co. v. Western Nat’l Mut., 366 N.W.2d 271 (Minn.1985); Bennett v. American Life & Acc. Ins. Co., 495 S.W.2d 753 (Mo.App.1973); Dairyland Ins. Co. v. Esterling, 205 Neb. 750, 290 N.W.2d 209 (1980); Hanover Ins. Co. v. Grondin, 119 N.H. 394, 402 A.2d 174 (1979); Campbell Soup Co. v. Liberty Mut. Ins. Co., 239 N.J. Super. 488, 571 A.2d 1013 (N.J.Super.Ct.1988); Pribble v. Aetna Life Ins. Co., 84 N.M. 211, 501 P.2d 255 (1972); Foremost Ins. Co. v. Travelers Ins. Co., 54 A.D.2d 150, 388 N.Y.S.2d 402 (N.Y.Sup.Ct.1976); Mills v. Agrichemical Aviation, Inc., 250 N.W.2d 663 (N.D.1977); Collister v. Nationwide Life Ins. Co., 479 Pa. 579, 388 A.2d 1346 (1978); National Mut. Ins. Co. v. McMahon & Sons, Inc., 356 S.E.2d 488 (W.Va.1987); Patrick v. Head of the Lakes Coop. Elec., 98 Wis.2d 66, 295 N.W.2d 205 (Wis.Ct.App.1980).

. See C & J Fertilizer, Inc. v. Allied Mut. Ins. Co., 227 N.W.2d 169 (Iowa 1975); Atwater Creamery Co. v. Western Nat’l. Mut., 366 N.W.2d 271 (Minn.1985); Bennett v. American Life & Acc. Ins., 495 S.W.2d 753 (Mo.App.1973); Dairyland Ins. Co. v. Esterling, 205 Neb. 750, 290 N.W.2d 209 (1980); Mills v. Agrichemical Aviation, Inc., 197 Neb. 675, 250 N.W.2d 633 (1977).