Four conceptions of insurance.

• Author: Abraham, Kenneth S.

This Article identifies four conceptions of insurance that have operated in the debates about insurance law in recent decades, analyzes these conceptions, and examines the normative agendas that drive them. These are the contract, public utility/regulated industry, product, and governance conceptions. Although these conceptions adopt very different perspectives, each is a way of struggling with the two fundamental questions that modern insurance law has continually faced. The first question involves the extent to which the language of an insurance policy should determine its legal effect. This is the insurance law version of the age-old question concerning the validity of one-sided provisions in contracts of adhesion. Because virtually all insurance policies, including high-end corporate insurance policies, are standard-forms, it is a question at the core, not the periphery, of insurance law. The second question involves the proper influence of what are sometimes called "public law" values on the scope of private insurance coverage. This is a question with which much of modern private law struggles. To what extent should private law be about doing justice between two contracting parties, and to what extent should it also be concerned with other, more nearly public law matters? Public law matters such as the impact of litigation outcomes on the future behavior of other parties or the equal treatment of similarly situated policyholders. Ultimately, the Article argues, adopting a particular conception of insurance is no substitute for making or rejecting the normative choices that each conception entails. It is not our concepts, but our political, economic, and social values that underlie and underwrite legal doctrines and practices. Nonetheless, sometimes we do not see through our conceptual structures but instead are led around by them. This is part of what is taking place in the contests among different conceptions of insurance. In such circumstances, the kind of critical analysis this Article undertakes is required to expose the normative agendas that are doing the actual work within each conceptual structure.

INTRODUCTION I. THE CONTRACT CONCEPTION A. Tensions in the Core Conception B. Administrative and Judicial Regulation of Insurance Contracting II. THE PUBLIC UTILITY/REGULATED INDUSTRY CONCEPTION III. THE PRODUCT CONCEPTION A. The Deficiencies of the Cost-Benefit Approach B. Atwater Creamery and Preference Diversity 1. A "Reasonable Alternative Design" Test? 2. The Problem of Preference Diversity IV. THE GOVERNANCE CONCEPTION A. Insurance as Surrogate Government 1. Insurance "Due Process" 2. Insurance "Equal Protection" B. Insurance as Organization: The Relationship Between the Majority and Minority of Policyholders CONCLUSION INTRODUCTION

One of the ways that contests over the proper content of a body of legal rules take place is through competing descriptions of the subject matter that the rules address. When we "describe" a subject--when we create a conception of a subject by explaining, giving an account of, or making sense of it-the description is likely to have normative implications. It is easy enough to get an "ought" from an "is" (1) when a particular subject or phenomenon typically has distinctive norms associated with it.

This is an Article about different descriptions of insurance and the features of insurance law that might flow from them. In recent years, the contest often has been among different ways of describing insurance in terms of something else. The contest, that is, has been over competing metaphors and analogies. Each metaphor creates, develops, or calls upon a different conception of insurance in service of a particular view of what insurance law should be or do. Thus, normative agendas have driven the choice of metaphor.

My goal in this Article is to identify four different conceptions of insurance that I have discerned in the debates about insurance and insurance law in recent decades, to analyze these conceptions, and to examine the normative agendas that drive them. Ultimately, in my view, adopting a particular conception of insurance is no substitute for making or rejecting the normative choices that each conception entails. Going back at least to the legal realists we have understood that it is not our concepts, but our political, economic, and social values that underlie and underwrite legal doctrines and practices. (2) Nonetheless, sometimes we do not see through our conceptual structures but instead are led around by them. This is part of what is taking place in the contests among different conceptions of insurance. In such circumstances, critical analysis is required in order to expose the normative agenda that is doing the actual work within a conceptual structure.

To accomplish this, at points I must extrapolate from the existing case law, scholarly literature, and policy statements of actors in the field, because the four conceptions of insurance are not equally coherent, developed, or systematic. In addition, some of their features are obviously directed at legal doctrine, but some make no claim to have express implications for doctrine. Nevertheless, conceptions that purport to describe aspects of insurance or insurance law necessarily have implications for insurance law doctrine. This does not mean that the conceptions are comparable in every regard. Rather, they attempt to confront or criticize different features of insurance. None of the four conceptions is (and probably could not be) a full-blown model of insurance. Instead, they compete for overlapping, but not wholly coincident, territory, and none of them attempts to capture all of insurance or all of insurance law.

Each, however, is a way of struggling with the two fundamental questions that modern insurance law continually has faced. The first question involves the extent to which the language of an insurance policy should determine its legal effect. This is the insurance law version of the age-old question concerning the validity of one-sided provisions in contracts of adhesion. (3) Because virtually all property-casualty insurance policies, including high-end corporate insurance policies, are standard-forms used by most insurers, (4) it is a question at the core, not the periphery, of the law of insurance. The second question involves the proper influence of what are sometimes called "public law" values on the scope of private insurance coverage. This is a version of the question with which much of modern private law struggles, (5) To what extent should private law focus on doing justice between two contracting parties, and to what extent should it be concerned with other, more nearly public law matters, such as the impact of litigation outcomes on the future behavior of other parties or equal treatment of similarly situated policyholders? The very idea of insurance involves a group of individuals or entities in an indirect relationship, without any contract specifying the terms of that relationship. Concerns that involve public law values, such as discouraging moral hazard or ensuring the equal treatment of policyholders, naturally arise when no contract specifies the rights and obligations of the parties to an indirect relationship. And because insurance is a device that is used in other legal regimes that openly pursue public law values--tort (6) and corporate law, (7) for example--it is almost inevitable that insurance law will be asked to support these pursuits.

These two fundamental questions are of course related. The greater the influence of public law values on the interpretation of insurance policy language, the less determinative of an insurance policy's legal effect the language of the policy is likely to be. But public law values influence more than just the legal effect given to insurance policies; these values may influence the coverage that insurance policies provide in the first instance and the prices different policyholders pay.

It is worthwhile at the outset to briefly summarize the four conceptions. The contract conception (8) understands insurance as a voluntary agreement between an individual policyholder and an insurer, subject to the constraints and rules of construction that are ordinarily placed on such agreements by the law of contracts. This conception supplies the "literal" view of insurance to which the other conceptions, understood as metaphors or analogies, contrast themselves. Under the public utility/regulated industry conception, (9) contract is a mere tool for bringing the regulated relationship into existence. On this view, insurance is a cartelized industry selling a good sufficiently essential that it requires government regulation in the public interest. The product conception (10) sees insurance more as a tangible good than a promise to perform financial services, and therefore appropriately subject to rules analogous to those that govern defectively designed products. Tort, rather than contract, is the core paradigm in this conception. Finally, the governance conception (11) views insurance as a surrogate for government in controlling behavior and protecting against misfortune, as well as an organizational arrangement among policyholders. These governance relationships create the risk of abuse by the insurer for its own ends, and for the ends of the majority of policyholders at the expense of the minority. Insurance law rules, analogous to those that protect the populace against government and the minority of the populace against overreaching by the majority, are therefore desirable.

1. THE CONTRACT CONCEPTION

   The traditional and dominant conception of insurance is that it is a contract transferring a risk of loss to a party whose business is selling such contracts, rather than as an incident of another transaction. (12) The language of an insurance contract, an insurance policy, is the agreement of parties.

   The contract conception is the...