The insurance policy as social instrument and social institution.

AuthorStempel, Jeffrey W.

ABSTRACT

This Article suggests that insurance policies are not merely contracts but also are designed to perform particular risk management, deterrence, and compensation functions important to economic and social ordering. Recognizing this fact has significant implications regarding the manner in which insurance policies are construed in coverage disputes. From this insight flow interpretative consequences suggesting that policy construction can be improved by not only performing traditional contract analysis of disputed policies but also appreciating the particular function of the insurance policy in question as part of the insurance product's larger role as a social and economic instrument or institution. Applying this broader analysis, the Article examines in some detail the longstanding and frequently litigated issue of how many "occurrences" have taken place within the meaning of liability insurance, as well as examining issues of "business risk," "accidental" events, liquor liability exclusions, claims for inherent diminished value of vehicles involved in automobile collisions, trigger of coverage, and the workers' compensation implications of post-injury suicide. Appreciating the social instrument status of insurance vindicates some judicial decisions while exposing the shortcomings of others.

TABLE OF CONTENTS INTRODUCTION I. THE CONCEPT OF THE INSURANCE POLICY AS SOCIAL INSTRUMENT AND SOCIOECONOMIC INSTITUTION II. APPLYING THE SOCIAL INSTRUMENT PERSPECTIVE: THE PERPETUALLY PERPLEXING PROBLEM OF DETERMINING THE NUMBER OF "OCCURRENCES" UNDER A LIABILITY POLICY A. Addison Insurance Co. v. Fay B. Plastics Engineering Co. v. Liberty Mutual Insurance Co C. Baumhammers and Koikos III. CONSTRUING INSURANCE POLICIES IN LIGHT OF THEIR SOCIAL INSTRUMENT FUNCTION: ADDITIONAL APPLIED EXAMPLES A. Business Risk Exclusions in General Liability Policies B. What Constitutes a Sufficiently Fortuitous "Occurrence" or "Accident," and the Problem of "Expected or Intended" Injury C. Liquor Liability D. Inherent Diminished Value Automobile Damage Claims E. Trigger of Coverage and the Asbestos Mass Tort F. Workers' Compensation and Post-Injury Employee Suicide CONCLUSION: THE NET BENEFITS OF PRUDENT USE OF THE SOCIAL INSTRUMENT PERSPECTIVE INTRODUCTION

Long gone is the day when contracts were individualized agreements, negotiated separately through personal interaction between the principals. Almost forty years have passed since Professor Slawson famously observed that 99 percent of the contracts in use were in fact standard form contracts rather than customized agreements reached after significant bargaining. (1) This fact is widely recognized, but legal scholars still debate the empirical or normative consequences of this development. Recognition of the absence of particularized bargaining over contract terms should logically impact judicial approaches to standardized contracts used en masse. But although the degree to which contracts have become "things" has not gone unnoticed, (2) and insurance policies have been analogized to statutes, (3) these perspectives remain in the minority. Mainstream legal opinion continues to characterize insurance policies as contracts rather than products and to apply longstanding classical or neoclassical contract doctrine to contract disputes, often with no acknowledgment of the degree to which insurance departs from the classic bargain model of contracting. (4) In many cases, courts compound this narrow view of insurance by taking a similarly narrow view of contract--focusing excessively on only the text of the policy. More sophisticated courts take a broader view of contract law and endeavor to correctly interpret the policies at issue by reference to policy text, party intent, policy purpose, the reasonable expectations of the parties, (5) and public policy considerations. (6)

Although some bemoan the supposed degree to which insurance law diverges from contract law, (7) the Grundnorm remains that insurance law is largely contract law. Although this seems both correct--if one is forced to select a single category in which to place insurance--and unlikely to change, alternative characterizations and their resulting perspectives can illuminate the nature of insurance policies and the correct resolution of insurance policy disputes. In cases and commentary, insurance policies have been episodically analogized to products for some time, (8) with growing attraction to the teachings of this perspective. (9) In addition, the most common insurance policies are produced in a manner similar to private legislation and share similarities with statutes. (10)

In this Article, I wish to add a further characterization to the discussion of the nature of insurance policies and an additional interpretative approach to the construction and application of insurance policies. In addition to functioning as contracts, products, and statutes, insurance policies exist as social institutions or social instruments that serve important, particularized functions in modern society--often acting as adjunct arms of governance and reflecting social and commercial norms. (11) Appreciating this aspect of insurance policies can better inform courts in assessing the meaning of disputed policies and improve insurance coverage litigation outcomes.

  1. THE CONCEPT OF THE INSURANCE POLICY AS SOCIAL INSTRUMENT AND SOCIOECONOMIC INSTITUTION

    The insurance policy is created and designed to play a particular role in social and economic activity. The concept I am advancing could accurately be termed the insurance policy as social instrument, business instrument, commercial instrument, economic instrument, public policy instrument, or even political instrument. All of these descriptions would essentially be accurate characterizations of my use and conception of the term. Standard types of insurance policies are designed by the insurance industry, which includes excess insurers and reinsurers, (12) with varying degrees of consultation, interaction, and development with respect to the policyholder and brokerage community. (13) Standard form policies and insurance itself are also more heavily regulated than most contractual endeavors or commercial arrangements. (14) In drafting insurance policies, the insurance industry also engages in de facto dialogue with the judicial system, sometimes "overruling" judicial determinations with which it disagrees or effectively acquiescing to judicial decisions it initially opposed. (15) Insurers seek to further sales of their products by working to spread coverage into different corners of society--sometimes with the tacit blessing of judicial, political, and business actors. (16)

    Insurance policies serve a function in the social ordering of personal and economic activity. Although this statement is perhaps true for any contract, commonly sold insurance policies are particularly important in that they serve as part of the infrastructure by which such activity is conducted, at least in the United States and other industrialized countries. Although the activity involved could, in theory, be conducted in the absence of insurance--and to a significant extent is conducted without insurance in less developed countries--insurance is integral to business and social activities and practically necessary to modern industrial society. Anyone needing a mortgage to buy a home, for example, is practically required to purchase homeowners insurance, at least in an amount equal to or greater than the lender's financial exposure. (17) In perhaps the best known example, every state effectively requires auto insurance in order to license a car. (18) And the State effectively mandates workers' compensation coverage. (19)

    As a result of these characteristics, insurance policies and the insurance systems of industrialized nations tend to serve socioeconomic purposes as social instruments and to take on the role of social institutions. Consider typical commercial activity. A building usually will not be built unless the developer can obtain surety bonds (20) and the various contractors are able to obtain general liability coverage, professional liability coverage, builder's risk insurance, and basic property insurance after completion of the building. (21) For both new and existing commercial activity, the typical business requires auto insurance, premises and operations general liability insurance, products and completed operations general liability insurance, and workers' compensation coverage mandated by state law. (22) Manufacturers, in addition, will need to be sure that their liability policies have sufficient coverage for products and completed operations exposures. Similarly, professionals such as lawyers, doctors, accountants, insurance agents, and insurance brokers will need errors and omissions or professional liability insurance. (23)

    Although perhaps less obvious on the level of personal insurance, the same holds true. As noted above, banks will not lend to homeowners in the absence of homeowners coverage and states will not let consumers or businesses license a car without at least minimal amounts of automobile insurance. (24) And the typical homeowners insurance policy also provides personal liability coverage to the homeowner. (25) Individuals with reasonably high net worths also frequently purchase "umbrella" insurance that provides additional and supplementary liability insurance protection. (28) Many states require and statutorily administer workers' compensation insurance, making it a necessary condition for nearly any commercial activity and even for government activity. (27) In addition, many businesses, as a practical matter, also may need to acquire directors and officers insurance to induce people to accept these posts or to satisfy other constituencies. (28) Moreover, other businesses may need or strongly desire to obtain employment practices liability insurance, environmental...

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