Insuring Understanding: The Tested Language Defense

• Author: Michelle Boardman
• Position: Assistant Professor of Law, George Mason University
• Pages: 01

Thanks to Tom Baker, Lisa Bressman, Lloyd Cohen, James Ely, Nita Farahany, Brian Fitzpatrick, Bruce Johnsen, Robert Mikos, Kimberly Moore, Richard Nagareda, Tony Sebok, James Siewert, Kevin Stack, Nicholas Quinn Rosenkranz, Alice Wellford, and Hill Wellford. Thank you to Karen Herlihy and Cody Williams for excellent research support.

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I Introduction

Consumers do not read their insurance policies. Insurers return the favor by not writing to their buyers. Or perhaps it is the other way around. Insurers draft policy language to be read by courts, not consumers. Consumers return the favor by not reading what the insurers have written. We could try to figure out who pinched whom first, who stuck out their tongue when, but it would not end the spat.

Communication requires a common language, a commonality often lacking between insurers and consumers. I have elsewhere explored how courts unintentionally give insurers incentives to ignore the buying public.¹ This Article considers the consumer side of the question: would insurers be more attentive to their policyholders if the policyholders paid more attention to insurers?

Consumers make persistent mistakes about their insurance coverage.² They have difficulty differentiating between insurance companies. They misjudge the product and fail to judge the sellers. In short, consumers do not pay much attention to what insurers write or how they act. Consumers might not be blamed for this, but they are harmed by it.

Consumers’ snub spares insurers the full force of reputational pressures necessary to a working market. And because the demand for consumer insurance can be inelastic, insurers have insufficient incentives to educate, entice, and satisfy their buyers. This Article seeks to break the cycle of insurer inattention to consumers and consumer inattention to insurers. If consumers understood policy language—understood what the contract promised—they would better understand the product and better judge whether a particular insurer had kept its promise. Real reputational effects would return to the market.

For this to happen, insurers must figure out what language consumers understand and then use it. This would be a change, one current incentives have failed to initiate. This Article proposes the tested language defense, or at least the thought experiment of the defense. For adoption by a legislature or a court, the doctrine states:

If an insurer uses consumer research to test policy language before adopting it, the insurer can present the results of the research to rebut a finding of ambiguity.

This Article offers the defense as a renovation to the current structure of plain-language incentives. A renovation trumps a solution because somePage 1078 of the forces leading consumers to ignore policy language are intractable and rational. The same holds when insurers ignore consumers. Still, allowing for a natural separation between what insurers write and consumers read does not justify encouraging a chasm.

To raise the defense, insurers have to get up early; it cannot be raised as a mere litigation position. During the drafting stage, an insurer would present test consumers with several variations on a particular clause. To raise the defense in court, the insurer would show that the clause it chose—while not perfectly understood by all consumers—beat out the next best alternatives, all drawn from a pool of initially reasonable candidates. This evidence would inform but not control the court’s decision.

The defense has immediate implications in three areas: the doctrines of contra proferentem and reasonable expectations, and the task of facing natural complexity.

A Contra Proferentem

First, the tested language defense would enhance the doctrine of contra proferentem, which instructs courts to construe ambiguities against the drafter. Insurers at times entertain the paranoid fantasy that no language, however clear, can satisfy a court. Courts, for their part, entertain the hindsight fantasy that language easily could have been drafted to be more lucid or to anticipate the case at hand.³ Language drafted, tested, and redrafted would replace these fantasies with some reality.

Consumer research would show, first, whether the relevant audience in truth finds the language ambiguous. Second, where the language is open to two or more reasonable readings, the evidence would show if the policyholder’s reading is among them. Finally, the evidence allows courts to decide if the insurer did its best to make the language readable. This is not to pat the insurer on the back, but to determine if punishing the insurer for not doing better will have any effect.

Punishment by contra proferentem has costs to consumers; it should be used only where there is a greater benefit. Where contra proferentem gives insurers a precise understanding of the court’s interpretation of a clause, the insurer is often willing to keep its unclear language in order to rely on the court’s known interpretation.⁴ Settled precedent allows courts andPage 1079 insurers to know what a clause means. But policyholders are still in the dark because the unclear policy language stands.⁵

B Reasonable Expectations

Next, the tested language defense would elicit evidence, instead of speculation, for courts applying the reasonable expectations doctrine. The original doctrine starts with the premise that “the objectively reasonable expectations of [policyholders] . . . will be honored even though a painstaking study of the policy provisions would have negated those expectations.”⁶ Most states only apply the doctrine to ambiguous provisions, and many states replace “painstaking study” with “average reading.”

Consumer evidence would inform the doctrine’s central question: Would a reading of the policy language have refuted the consumer’s a priori expectation? If so, that pre-policy expectation is no longer “reasonable” and the court will not construe the policy to provide coverage. For those courts that require a showing of ambiguity before inquiring about the consumer’s reasonable expectations, the ambiguity analysis would parallel that under contra proferentem.

C Facing Complexity

Third, the defense permits, and may require, the insurer to submit tested but rejected language—the language rejected as less readable than the winning clause. This allows a court to evaluate whether the chosen clause is better than other obvious options, perhaps foreclosing (or fulfilling) the court’s fantasy that the language could easily have been drafted to say what the insurer meant.

From this, a court will at times conclude that no formulation is sufficient; insurers simply cannot have the substance they are seeking to convey. This happens now but disingenuously: courts give causes for the failure of a clause other than its substantive incomprehensibility to laymen. Insurers attempt to address these causes by redrafting or highlighting a clause, both of which can make the contract even more difficult to read.⁷

In other cases, a court may decide to accept unavoidable complexity and let the language stand. If the insurer’s meaning serves an important actuarial function, the fact that it is too complex to explain to laypeoplePage 1080 need not necessarily lead to rejection. To truly face the complexity, however, courts in this case must stop sending insurers the “redraft” signal.

The point of this defense—allowing consumer research to disprove ambiguity—is to reward insurers for drafting fairly clear language. The language will always be imperfect, especially as applied to atypical or unanticipated losses. But applying strict liability against insurers where the language is imperfect has taught insurers the wrong lesson: redrafting “plain” language is unlikely to succeed in court.

Courts apply the doctrine of contra proferentem in case after case, confounded that insurers do not clean up their act. What the frustrated court does not realize is that it has fired its last shot, and the insurer knows it. Now that the clause at hand has a judicially settled meaning, the clause has a precise interpretation.⁸ Coupled with statistical-loss data, the insurer now knows how much to charge for that bit of coverage.

In other words, courts may continue to consider the clause ambiguous based on the policy language. Insurers now consider the clause defined based on the court’s interpretation. Better to keep the language clear to the court, even if it means retaining language the court has ruled ambiguous, since at least this language has a settled judicial meaning.

If instead the insurer redrafts the clause as the court suggests, the insurer rolls the dice again. Perhaps the court will accept the new clause, but it may find the redraft ambiguous. Or perhaps it will become clear that the court has no intention of accepting the clause in any form—both contra proferentem and the reasonable expectations doctrine can conceal (sometimes barely) a court’s decision to mandate a type of coverage. Insurers are risk-averse and this game is not worth the candle. Unless the insurer cannot live with the coverage the court has found in its ambiguous clause, insurers find it better to provide the coverage and raise the...