Court Opinion

ID: 9553453
Source: CourtListenerOpinion
Date Created: 2023-08-07 19:29:56.494053+00
Date Added: 2024-06-11T15:31:07.862561
License: Public Domain

DURHAM, Justice
(dissenting):
I dissent. I would hold that the doctrine of reasonable expectations as applied to insurance contracts is viable in Utah. Justice Zimmerman’s review of the history and rationale for the doctrine is accurate as far as it goes, but his analysis and conclusions are wrong. His opinion appears to rely on an anachronistic and unrealistic notion of freedom of contract and a misplaced view that the legislative and executive branches of government have somehow “occupied” the field of insurance regulation in a manner that makes court development of applicable contract principles illegitimate. The majority also mischaracterizes the current status of the reasonable expectations doctrine, unduly limiting its usefulness as a tool of contract construction.
The majority opinion cites two recent commentaries on the doctrine of reasonable expectations as support for the proposition that “after more than twenty years ... there is still great uncertainty as to the theoretical underpinnings of the doctrine, its scope, and the details of its application.” *813Significantly, however, one of the commentators so cited goes on to observe:
Such ambivalence is inherent in the common law where all “doctrines” were once exceptions or accretions to other doctrines that have emerged to take on lives of their own. Doctrines do not generally spring full-blown from any one case, or for that matter from a single law review article, but must await development by means of the fortuities of litigation.
[[Image here]]
Although the form of the doctrine of reasonable expectations may not be fully fixed yet in all jurisdictions, and may never be, a doctrinal core has been identified by some of the courts that have viewed the doctrine as creating rights at variance with unambiguous policy language. As a consequence, one may predict with considerable confidence that courts in the remaining jurisdictions will recognize these developments and that any confusion over the nature of the doctrine itself will rapidly dissipate.
Roger C. Henderson, The Doctrine of Reasonable Expectations in Insurance Law After Two Decades, 51 Ohio St.L.J. 823, 838 (1990).
The other concludes:
From a theoretical perspective, the reasonable expectations doctrine represents a decided advance over both strict contract analysis and the ambiguity principle. It has the advantage of honesty because it takes the insurance transaction as it is and not as it is imagined to be. It also holds the promise of fairness and, somewhat less securely, the promise of greater clarity and precision....
... [A] thorough reconsideration of the reasonable expectations doctrine shows that it can be effective.
Mark C. Rahdert, Reasonable Expectations Reconsidered, 18 Conn.L.Rev. 323, 392 (1986) [hereinafter Rahdert].
Earlier in the same article, Professor Rahdert offers the judgment that
the difficulties with the reasonable expectations concept, though real, do not outweigh its usefulness to the point that the principle should be abandoned. Returning to the regime of document-based “interpretation” of the insurance policy through manipulation of the ambiguity principle certainly affords no better promise of consistency or precision. As the legal realists demonstrated over a generation ago, such a retreat displays an ostrich-like unwillingness to confront head on the realities of the adhesion insurance contract.
Id. at 373.
As the commentators indicate, traditional notions of freedom of contract do not reflect the realities of contracting in today’s marketplace, particularly in the marketplace of insurance contracts. In fact, the majority of recent scholarly commentary on the doctrine of reasonable expectations is favorable. A notable exception, which appears to have influenced the majority opinion in this case, is Stephen J. Ware’s A Critique of the Reasonable Expectations Doctrine, 56 U.Chi.L.Rev. 1461 (1989) [hereinafter Ware]. That article reflects the “law and economics” approach to common law, wherein the principles of freedom of contract and economic efficiency are enshrined above all other values. The author’s discussion of freedom of contract depends on a highly traditional and rigorously individualistic understanding of contract law that is inconsistent with modern practice in the transaction of insurance contracts. For example, the article cites with approval a 1947 articulation of this view: “A man must indeed read what he signs, and he is charged if he does not....” Ware at 1488 (quoting Gaunt v. John Hancock Mut. Life Ins. Co., 160 F.2d 599, 602 (2d Cir.1947)). It takes little experience to realize that most insurance purchasers do not read their insurance policies and those who do often cannot understand them. Thus, such inflexible and outdated notions may ultimately frustrate the intent of the parties.
Times have changed since the late nineteenth and early twentieth centuries, when individualism and competition were the dominant values in American culture and business:
*814The expression of this attitude in contracts law was that every contract was an outcome of a struggle between the parties in which each took every possible advantage of the other. If one party bound himself to terms he never read or did not understand, that was his choice, and the law, within broad limits, did nothing to excuse him from the risks he had supposedly voluntarily assumed.
W. David Slawson, The New Meaning of Contract: The Transformation of Contracts Law by Standard Forms, 46 U.Pitt.L.Rev. 21, 28 (1984). Today, however, the pace of life, the volume of contracting required for ordinary living, the complexity of products, and the legal implications of contracts make it necessary for people to take almost all of their contracts on trust; society has become more interdependent. The combination of the changed conditions of contracting has resulted in contracts with a larger “social,” rather than purely individualistic, meaning.
Many scholars, as well as numerous courts, have struggled with the need to adapt traditional notions of contract to modern economic and social realities. In a thoughtful article on the “new meaning of contract,” Professor David Slawson argues, “The meaning of contract is undergoing a fundamental change[,] ... primarily because of certain changes in our society.” Id. at 23. Slawson’s article details those critical social changes — the changed conditions of contracting, the decline of individualism, the growth of bureaucracy in commercial transactions, and what the author describes as “the common law working itself pure.” Id. at 29. As a result of these changes, the basic meaning of contract has changed.
The old meaning of contract centered on evidence of the parties’ mutual assent (their conduct, writings, oral statements, etc., indicating their intent to be bound). Conversely, the new meaning of contract focuses on the parties’ reasonable expectations. These expectations may arise from any source. Under the new meaning, a contract may consist of more than the parties’ manifestations of mutual assent. In fact, given the multiplicity of form contracts so pervasive in today’s society, in many cases manifestations of mutual assent are not included in the contract at all. Instead, the manifestations of mutual assent merely express the parties’ intent to be bound to a few key terms (e.g., price and date), but do not affect the contents of the contract. See id. at 23.
The reason for such essential shifts in the nature of contracts can be attributed to dramatic changes in the conditions under which contracts are transacted. Briefly summarized, Slawson outlines how conditions have changed over the last half century as follows: First, businesses, largely because of size and volume, have found it efficient and profitable to use standard forms. Second, “modern living requires the use of many products, virtually all of which have to be obtained by a contract of some kind. People today therefore have to contract frequently, not uncommonly several times a day.” Id. at 24. Third, new statutes and the “ever-quickening accumulation of the common law” have changed the number and complexity of the legal implications of every contract. Id. at 25. Fourth, the increased use of mass commercial communications has transformed the ways in which people acquire expectations about the products they buy and the commercial transactions in which they engage.
The impact of these changed conditions is that businesses can exploit the second and third conditions by drafting standard form contracts any way they like to best serve their interests. Consequently, only consumers really transact blindly. Further, “[t]he situation is aggravated by the fact that consumers typically come to transactions with their expectations about the product already largely formed [by mass commercial communications].” Id. at 26.
Finally, Slawson argues that because of the inherent contradiction in logic contained in the old meaning, “[t]he new meaning [of contract] would have emerged eventually even if the societal conditions mentioned had not changed and the extreme *815individualism of the turn of the century had not declined”:
Under the old meaning, a contract is the parties’ manifestations of mutual assent, but, at the same time, it is supposed to fulfill their reasonable expectations. This constitutes a contradiction when the manifestations of mutual assent are deemed to be writings that one party was not reasonably expected to understand or sometimes even to read. This contradiction cannot exist under the new meaning, because under it the contract is the reasonable expectations.
Id. at 29 (emphasis in original). The transition from old to new meaning is the process he describes as the “common law working itself pure.”
Slawson’s theory of the new meaning of contract is broader than the issue we are required to resolve in this case. I have described it at length because I agree with him that the doctrine of reasonable expectations is “indistinguishable in effect from the new meaning of contract, so long as the standard forms are insurance policies.” Id. at 52. Slawson’s work thus provides strong historical, practical, and intellectual support for the adoption of the doctrine.
Justice Zimmerman’s opinion urges, by contrast, an “interstitial” approach to solving the problems that standard form insurance contracts create. He suggests that we rely on estoppel, waiver, unconscionability, breach of the implied duty of good faith and fair dealing, and the rule construing ambiguous language against the drafter. These doctrines (along with several possibilities not mentioned by Justice Zimmerman, including the doctrines of implied condition, excuse of condition, mutual mistake, frustration of purpose, and impossibility or impracticability of performance) are all techniques courts use to broaden the inquiry to include the reasonable expectations of the parties and the meaning of the contract beyond its explicit terms:
All these doctrines have been opposed in their development by the principle of “freedom of contract.” ... Using the principle [of freedom of contract] as a justification for allowing one party to impose whatever terms it likes, even when the other party was not reasonably expected to read or understand those terms, is to apply the name “freedom” to what is essentially a license to defraud or, at least, to mislead. Contracting should be accorded the protections associated with freedom only when the parties engage in an honest effort to express what they both reasonably expect.
Id. at 55. Furthermore, each of the foregoing doctrines is limited in its capacity to resolve recurring problems with standard form insurance contracts. Unconscionability, for example, requires some form of deceptiveness or sharp dealing; consequently, the doctrine is used only in extraordinary cases. The one-sidedness and unfair advantage attendant upon adhesion contracting “can be completely legitimate and stem[ ] from perfectly natural and moral self-interest”; it is thus often entirely beyond the reach of unconscionability analysis. Rahdert at 378 (citing Leff, Unconscionability and the Code — The Emperor’s New Clause, 115 U.Pa.L.Rev. 485 (1967)).
In addition to the inherent problems associated with adhesion contracts, insurance contracts pose special problems. The adhesive nature of the insurance transaction is only the threshold consideration. The risks of one-sidedness an insurance contract creates are enhanced by a number of factors: (1) Insurance is an abstract “product” (really a future service) that is not well understood by the average consumer; (2) the service purchased is only a contingent one, to be provided in the future if an unlikely event occurs; (3) insurance is vital, often required by law, and loss events are potentially catastrophic; (4) unlike other contracts, insurance contracts do not delineate clearly between the portions of the contract providing for goods or services and clauses limiting liability if the contract does not go as planned. Distribution of risk of loss is the entire bargain. See Rahdert at 338-41.
These factors make insurance contracts peculiar but necessary. Most consumers find it necessary to purchase some form of insurance. Unfortunately, very few are *816equipped to fully understand the implications of a particular policy, especially those provisions relating to exclusion of coverage. The daunting task of comprehending an insurance policy discourages most of us from reading our policies until a loss forces us to. See Rahdert at 341.
Nevertheless, Justice Zimmerman suggests that because insurance is a regulated industry and the legislature has undertaken to exercise some control over the contents of insurance policies and contract language, the courts ought not to engage in common law regulation of fairness, at least by means of the doctrine of reasonable expectations. Such a broad restriction on the courts’ powers in this context is unwarranted. The mere existence of a regulatory framework is likely insufficient to ensure fairness. As Professor Rahdert has noted:
Most observers have agreed ... that administrative regulation generally deserves only middling marks in terms of combatting insurer fine print. State legislatures, too, have entered the field by mandating policy provisions in certain common insurance policies and by limiting the effect of some of the most potentially abusive provisions_ But legislatures can only be counted on for sporadic efforts and are subject to real pressures from insurance industry and lawyer lobbies that have little desire to promote consumer-oriented reforms_
In sum, there remains plenty of reason to believe that adhesion, standardization, and the special features that make insurance a unique sort of financial service will create a substantial risk of some underwriter overreaching in a significant number of cases. Courts, whether they be armed with the old-fashioned ambiguity principle or some more modern and potent jurisprudential weapon, stand as the last and perhaps the most effective defenders of consumers....
Rahdert at 341-42. Justice Zimmerman’s opinion, of course, acknowledges that traditional contract principles (like waiver and estoppel) apply to our interpretation of insurance contracts. It would therefore appear that he agrees that the courts have a role to play, the issue being how much of a role and using what tools. Eliminating such a potentially effective and necessary tool as the reasonable expectations doctrine is a mistake and unwarranted by our case law or policy considerations.
Although I acknowledge certain difficulties with the reasonable expectations doctrine, I view such problems as grounds for refinement of its content and care in its application, not for exclusion of its use. Professor Rahdert has proposed a sound model for judicial evaluation of reasonable expectations claims. Rahdert at 374-92. He suggests that courts adopt a two-tiered reasonable expectations formula. Under what he calls “weak form” reasonable expectations review, courts would enforce a policy provision if “(1) the insurer can articulate a legitimate purpose for the provision, one that pertains to defining the ‘landscape of risk’ covered by the insurance policy; and (2) the provision is stated in terms clear enough to communicate its underwriting purpose to the average purchaser” (taking account of the insured’s lack of expertise and purpose of purchasing the insurance). This form of review would apply to all insurance transactions and policy terms, regardless of their ambiguity. See Rahdert at 381-82; see also Weedo v. Stone-E-Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979) (using consideration of underwriting purposes as a factor in reasonable expectations analysis).
Courts would undertake a “strong form” review when indications of a “naked preference” are evident in the transaction.1 A *817naked preference is a policy provision that arbitrarily serves the insurer’s interest without furthering a legitimate underwriting purpose. Where a provision reasonably furthers a legitimate purpose of defining, classifying, and allotting risks, it will generally be enforceable. Conversely, where a provision merely furthers the “naked” purpose of providing the insurer a defense to coverage without serving a legitimate underwriting function, it will be subject to close scrutiny. See Rahdert at 379.
Rahdert identifies at least five factors that indicate the presence of a naked preference which should trigger strong-form review: (1) marketing practices using implicit or explicit promises of coverage substantially broader than those in the policy provisions; (2) the characteristics (i.e., individual, small business, large corporation) and attendant sophistication and expertise of the insured; (3) structure and format of the policy (certain formats and types of policy provisions may be more susceptible to use for disguising naked preferences than others); (4) comparison of risks;2 and (5) the presence of certain categories of insurance (e.g., automobile liability coverage) in which the public has such a strong interest that naked preferences pose a significant danger, even though they may not necessarily be more likely to occur.3
The foregoing proposal, which I would adopt, is that insurers in every case be held to the minimum standards of “weak form review.” Once those standards are satisfied, courts should proceed to determine whether any of the “strong form, factors” require more strict review. “In this second stage of analysis, the court should balance the force of these strong-form factors against the underwriter’s articulated rationale for excluding the risk in question.” Rahdert at 386. For a detailed illustration of Professor Rahdert’s two-tiered analysis in application, see Rahdert at 388-92.
Thus, the reasonable expectations doctrine would operate as a “balancing test,” requiring equilibrium between the risk of insurer overreaching and the advantages (especially cost, efficiency, and predictability) of standardization and form contract*818ing. In conducting such balancing, we should look to insurer conduct as well as to the insured’s state of mind in evaluating the “reasonableness” portion of reasonable expectations. See Rahdert at 376.
The special role insurance plays in society and the public interest it implicates justify such an approach. Insurance protection is vital, not only for consumers, but also for the state, which depends on the insurance industry to supply “a free enterprise alternative to government-funded social compensation.” Rahdert at 377. Furthermore, the insurance industry’s antitrust exemption has fostered a cartel-like structure in policy drafting that encourages mass standardization. This structure provides the industry with an exceptional level of “private lawmaking power.” Rah-dert at 377 (quoting W. David Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 Harv. L.Rev. 529, 530 (1971)). Such quasi-public lawmaking power should be subject to judicial review. Legislative and administrative regulation alone is inadequate. To safeguard the public interest in each case, judicial regulation of the insurance industry’s private laws (i.e., its policy provisions) is essential. See Rahdert at 377. Thus, the insurance industry’s unique law-making role necessitates the type of judicial inquiry Rahdert suggests.
I think Rahdert’s proposed “calculus” makes eminent sense, and I submit that this court could greatly enhance the development of the law in this area by undertaking the kind of thoughtful analysis he proposes. We would have to deal also with methodological problems, some of which Justice Zimmerman has identified in his opinion. Of particular concern are questions about whether the standard for reasonable expectations should be subjective or objective, whether the determination of the existence of reasonable expectations involves questions of fact or law, and the kind of evidence that is relevant to the questions. I believe that those questions are not impossible or even particularly difficult to solve. Many of the courts that have used the doctrine of reasonable expectations have addressed them, and numerous commentators, have examined additional options. See, e.g., Roger C. Henderson, The Doctrine of Reasonable Expectations in Insurance Law After Two Decades, 51 Ohio St. L.J. 823, 828-38 (1990), and cases cited therein.
In conclusion, I submit that Justice Zimmerman’s “interstitial” approach has little to recommend itself, historically or theoretically. Either it will encourage the kind of “covert” decision making that has drawn criticism in insurance contract construction cases, or it will result in rigid application of contract principles that do not comport with the real world of insurance and that unfairly disadvantage consumers. See William A. Mayhew, Reasonable Expectations: Seeking A Principled Application, 13 Pepp.L.Rev. 267, 272 (1986) (noting that courts misapply concepts of waiver and estoppel, stretch to find ambiguities beyond a reasonable interpretation of policy language, and apply vague expressions of public policy to covertly decide insurance cases and camouflage true reasons for their decisions). The doctrine of reasonable expectations would avoid both dishonesty and unfairness, and I submit that there is more than enough evidence, experience, and theory to justify our adoption of it.

. Rahdert derives his forms of judicial review ("strong" and “weak”) from Keeton’s early formulation of the reasonable expectations doctrine: “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.” Rahdert at 334 (quoting Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961, 967 (1970)). Rahdert expounds on the Keeton formula as follows:
Read in one way, by emphasizing the contrast between "expectations” and "policy provisions," the Keeton formula suggests that an *817insured can have reasonable expectations of coverage that arise from some source other than the policy language itself, and that such an extrinsic expectation can be powerful enough to override any policy provisions no matter how clear....
The contrast between "reasonable expectations” and "painstaking study of policy provisions” also can be read in an entirely different and considerably less radical way, with heavy emphasis on "painstaking.” Approached from this direction, the Keeton formula is more acceptable to the traditional contract mind. It means that an expectation formed from a cursory reading of the policy, though technically wrong, may yet be reasonable, and if so should be honored; but that expectations derived from sources other than at least a cursory review of the policy language are not reasonable, and should not be honored in the face of unambiguous contrary policy language.
The difference between these two approaches is striking. The former, “stronger” reading would confer on the courts substantial new powers to set the contours of coverage under various kinds of insurance. It would do so by reducing the power of the insurer’s written word to control the scope of the arrangement, and by substituting the dynamics of the transaction for the language of the policy as the source of the terms of the bargain. The latter, "weaker” reading would do little more than generate a new variant of the ambiguity principle. Like the ambiguity principle, it would absolve the insured of the obligation of expertise by permitting the insured’s circumstances and lack of sophistication to be taken into account. Beyond that, but only in cases where the policy provisions are sufficiently unclear that a cursory reading might create a false impression, it would also relieve the insured of the obligation of painstaking care. And it would provide the beginnings of a method for filling ambiguous gaps in policy language by referring the courts to what the ordinary insured would anticipate the scope of his or her protection to be. But it would leave the policy provisions in place as the controlling code for resolving disputes over coverage.
Rahdert at 335-36.

. "Courts should evaluate the types of risks included and excluded from the policy, both in relation to each other and to the insured’s purpose in purchasing the insurance in question." Rahdert at 385.

. "Thus, where a court discerns from legislative and other sources a strong public policy favoring coverage, the court should engage in a more detailed search for insurer preferences that would undercut the jurisdiction’s public goals.” Rahdert at 386.