§ 2.5 Other Issues in Policy Interpretation

• Library: Insurance Law in Oregon (OSBar) (2020 Ed.)

§ 2.5 OTHER ISSUES IN POLICY INTERPRETATION

§ 2.5-1 Public-Policy Issues

§ 2.5-1(a) Statutory Restrictions

Certain considerations of public policy govern the enforceability of insurance contracts, regardless of the intent of the parties in entering into the contract. While public-policy issues most often arise from judicial pronouncements, statutory law may also dictate public policy in this area. For example, an insurance policy that covers property that might be used in violation of a statute may be enforced as long as possession of the covered property is not itself illegal. It is apparently irrelevant that there may be few or no legal uses for the property. Brown v. New Jersey Ins. Co., 140 Or 547, 548-49, 14 P2d 272 (1932) (a fire insurance policy covered moonshine paraphernalia sold during Prohibition). In contrast, a policy is void or unenforceable when the ownership of the insured property is itself illegal. Nw. Amusement Co. v. Aetna Cas. & Sur. Co., 165 Or 284, 289, 107 P2d 110 (1940) (a burglary policy did not cover the theft of slot machines, which were prohibited by city ordinance); see also In re Marriage of Hutchinson, 187 Or App 733, 758, 69 P3d 815 (2003) ("Relief is denied on the basis of the public policy against enforcement of illegal contracts because a court will not aid a wrongdoer."). But see Fenter v. Gen. Acc. Fire & Life Assur. Corp., 258 Or 545, 550, 484 P2d 310 (1971) (Oregon courts "have never held that an interest in property, to be insurable, must be legally enforceable. We seem to have inquired only whether the insured had a direct pecuniary interest in the preservation of the insured property.").

NOTE: The holding in Fenter was superseded by statute, as noted in Avrit v. Forest Indus. Ins. Exch., 72 Or App 571, 574 n 1, 696 P2d 583 (1985). That statute, former ORS 743.033, was renumbered as ORS 742.011. See § 9.1-2 for further discussion of ORS 742.011.

Another example of statutory public policy involves required policy terms. A provision of an insurance policy that is contrary to the statutory requirements mandating certain coverages is void and unenforceable. Couch on Insurance §§ 19.1-19.9. See § 2.4-4 (effect of statutory violations).

In 2003, the Oregon Supreme Court cited Martin v. Ore. Ins. Co., 232 Or 197, 206, 375 P2d 75 (1962), overruled in part by Bunn v. Monarch Life Ins. Co., 257 Or 409, 478 P2d 363 (1970), for the proposition that a party to a contract cannot waive benefits of law that seek to protect the public as well as the individual who purports to waive the benefits. In re Leisure, 336 Or 244, 253 n 6, 82 P3d 144 (2003).

§ 2.5-1(b) The Judicial Doctrine of Reasonable Expectations

The judicial doctrine of "reasonable expectations" represents another public-policy departure from the usual rules governing interpretation. Gray v. Zurich Ins. Co., 65 Cal 2d 263, 270-71, 54 Cal Rptr 104, 419 P2d 168 (1966). The doctrine is defined as: "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." Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv L Rev 961, 967 (1970).

CAVEAT: Oregon's courts have not adopted the doctrine of reasonable expectations; they follow what has been termed the "traditional" approach found in most jurisdictions. See Hoffman Constr. Co. of Alaska v. Fred S. James & Co. of Oregon, 313 Or 464, 470, 836 P2d 703 (1992); Anderson v. First Farwest Life Ins. Co., 133 Or App 212, 217, 890 P2d 999, rev den, 322 Or 167 (1995); Schutt v. Farmers Ins. Grp. of Cos., 129 Or App 401, 405, 879 P2d 1303, rev den, 320 Or 272 (1994). Courts "interpret the terms of the policy from the perspective of an 'ordinary purchaser of insurance.'" Bighorn Logging Corp. v. Truck Ins. Exch., 295 Or App 819, 828-29, 437 P3d 287 (2019) (quoting Hunters Ridge Condo. Ass'n v. Sherwood Crossing, LLC, 285 Or App 416, 422, 395 P3d 892 (2017)). See also Congdon v. Berg, 256 Or App 73, 87, 299 P3d 588 (2013).

The doctrine
rests on the view that insurers should not be permitted to rely on the literal meaning of standardized policy provisions buried in lengthy, complex policies which insureds may not even receive until some months after purchasing the policy. . . . [C]ourts differ markedly in when and how they apply the reasonable expectations doctrine to coverage disputes.

Barbara O'Donnell, 1 Law and Practice of Insurance Coverage Litigation § 1:13, Legal analysis regarding insurance policy interpretation—The reasonable expectations doctrine (June 2019 update).

The doctrine is applied to the end that "the policy is construed so as to provide that coverage which a layman would reasonably have expected given his lay interpretation of the policy's terms." Cont'l Ins. Co. v. Bussell, 498 P2d 706, 710 (Alaska 1972).

The doctrine rejects the rule that construction in favor of the insured should be limited to policy language found to be legally ambiguous. See N. Star Mut. Ins. Co. v. Ziebarth, 386 NW2d 238, 240 (Minn 1986) (Scott, J...