1.11 The Reasonable Expectation Doctrine

• Jurisdiction: Arizona

As general references see:

Gottsfield, Darner/Gordinier: The Darlings of the Non-Drafting Party's Nursery, 25 ariz. att'y 2 (October 1988), p. 35.

Birnbaum, Stahl & West, Standardized Agreements and the Parol Evidence Rule: Defining and Applying the Expectations Principle, 26 ariz. l. rev. 796 (1984).

Mertz, Insurance Law-Challenging Boilerplate Exclusions, 84 ariz. st. l.j. 551.

Keeton, Insurance Law: Rights at Variance with Policy Provisions (pt. 1), 83 harv. l. rev. 961 (1970).

Abraham, Judge-Made Law and Judge-Made Insurance: Honoring the Reasonable Expectations of the Insured, 67 va. l. rev. 1151 (1981).

Plitt, When Is A Standardized Insurance Contract Binding? The development of the reasonable expectation doctrine in Arizona, ariz. b.j. (February/ March 1988), p. 30.

Gottsfield & Plitt, Darner's Neglected Tenet-Abandonment of the Ambiguity Doctrine, 27 ariz. att'y 4 (December 1990), p. 20.

In Arizona, the terms of an unambiguous standardized insurance contract may be held to be unenforceable if the terms of the contract are beyond the reasonable expectations of the insured. This so-called "reasonable expectation doctrine" began finding general judicial acceptance in the 1960s in other jurisdictions.^[122]

Professor Robert E. Keeton gave formal expression to the doctrine in 1970: "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."^[123] The doctrine was frequently embraced by the courts of other jurisdictions throughout the decade of the 1970s.^[124]

In 1982, the Arizona Supreme Court adopted the reasonable expectation doctrine in Sparks v. Republic National Life Insurance Co.^[125] and Zuckerman v. Transamerica Insurance Co.^[126] In Zuckerman, the court gave the doctrine its initial form:

Where the conditions [to the policy] do no more than provide a trap for the unwary, the insurer will be estopped to raise them. We thereby grant the consumer his reasonable expectation that coverage will not be defeated by the existence of provisions which were not negotiated and in the ordinary case are unknown to the insured. See Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127 (1982).^[127]

The court limited the application of the doctrine to only those situations where the terms and conditions of the policy were not truly negotiated by the parties.^[128] The court in Zuckerman, however, gave no guidance to the lower courts or the Arizona Bar as to how or when to apply the doctrine, which appeared limitless in its scope and application.^[129]

To most Arizona practitioners, the Zuckerman decision passed unnoticed.^[130] The relative obscurity of the reasonable expectation doctrine was eliminated by the Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co.^[131] decision.

In Darner Motors, the court recognized that the doctrine must be put into proper perspective: "[I]f not put in proper perspective, the reasonable expectations concept is quite troublesome, since most insureds develop a 'reasonable expectation' that every loss will be covered by their policy."^[132]

The court also recognized that the doctrine "must be limited by something more than the fervent hope usually engendered by loss."^[133] The appropriate limitation is in Corbin's treatise on contract law, which states that the expectations to be realized by application of the doctrine are those that "have been induced by the making of a promise."^[134]

In his concurring opinion, Justice Cameron pointed out that the reasonable expectation doctrine does "not allow interpretation on the basis of 'impression or imagination' of the consumer. Only those reasonable expectations which are induced by the words or conduct of the parties should be considered."^[135]

The unexpressed intent of either party is irrelevant; it is the outward manifestation of their assent that is important.^[136] However, under proper circumstances, silence by an insurance agent may create a reasonable expectation of coverage absent an express disavowal of coverage.^[137] A continuing course of conduct in annually renewing an insurance policy, after annual premium increases, may give rise to a reasonable expectation of a higher limit of insurance coverage than that contained in the policy.^[138]

The reasonable expectation analysis must begin by attempting to determine what expectations have been induced.^[139] In making this determination, the court will rely upon the printed words of the contract, which are usually of "paramount importance."^[140]

Each insurance contract will be dichotomized into its two main component parts: (1) the dickered deal^[141] and (2) the collateral agreement containing supplementary boilerplate provisions.^[142] As to those provisions which have been negotiated-the "dickered deal"-traditional contract principles will apply.^[143]

Recognizing that standardized terms are often not the result of direct negotiation and may be unknown, or even unknowable,^[144] to the consumer, the court in Darner Motors, adopted Restatement (Second) of Contracts Sec. 211^[145] as the test utilized to determine whether the standardized terms are within the reasonable expectations of the parties and, as such, are to be enforced. The Restatement approach is basically a modification of the parol evidence rule.^[146]

Subsection (3) of Sec. 211 codifies and limits the application of the reasonable expectation doctrine: "Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement." The test focuses on the state of knowledge of the contract drafter. If the carrier has "reason to believe" that the insured would not have assented to the terms of the policy "as a whole"^[147] if the insured had known that it contained the clause being contested, the reasonable expectation doctrine will preclude enforcement of that standardized clause.

While the Restatement test focuses on the carrier's "reason to believe," the test "does not require insurers to read their insured's minds."^[148] The court of appeals has found that "it would make no sense at all to infer such a 'reason to believe' from circumstances of which the insurer has no knowledge."^[149] Under the doctrine, a carrier's agent must alert the customer to any term in the standard policy that is contrary to what the agent "knows" to be the purpose of the transaction.^[150] The agent, at the time of purchase, is not required to "obtain from the insured every bit of information that might conceivably bear on any provision of the policy being sold."^[151]

Comment (f) to Section 211(3) provides guidance as to when a "reason to believe" may be inferred:

Such a belief or assumption may be shown by the prior negotiations or inferred from the circumstances. Reason to believe may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly agreed to, or from the fact that it eliminates the dominant purpose of the transaction.^[152]

The supreme court, in Gordinier v. Aetna Casualty & Surety Co.,^[153] amplified its holding in Darner by delineating four categories where the reasonable expectation doctrine was applicable:

(1) Where the contract terms, although not ambiguous to the court, cannot be understood by the reasonably intelligent consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations of the average insured.^[154]

(2) Where the insured did not receive full and adequate notice of the term in question, and the provision is either unusual or unexpected, or one that emasculates apparent coverage.^[155]

(3) Where some activity reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured.^[156]

(4) Where some activity reasonably attributable to the insurer has induced a particular insured to believe that she has coverage, although such coverage is expressly and unambiguously denied by the policy.^[157]

The...