JSH Reporter JSH Reporter - Fall 2017 - Page 32

REASONABLE EXPECTATIONS ARTICLE 032 BEWARE THE INSURED’S “REASONABLE EXPECTATIONS” AUTHOR: John Lierman EMAIL: jlierman@jshfirm.com Arizona has the dubious distinction of being home to lawsuits in which a plaintiff can sue his insurance company for breach of contract and bad faith when the insurance company has issued exactly the policy requested by the plaintiff (or his agent), and even when the insurance company does exactly what the policy said it would do. That is because Arizona, along with most states, has a doctrine that, under certain circumstances, allows the insured to re-write even a perfectly clear policy after an apparently uninsured loss occurs. That doctrine is the “doctrine of reasonable expectations.” The doctrine of reasonable expectations permits a court to find that the insured has the insurance coverage he “reasonably expects”—even if the policy plainly and unambiguously says something quite different. The doctrine is thus a powerful weapon in the hands of a plaintiff suing for bad faith. The doctrine of reasonable expectations arose in the early 1970s. Thirty-eight states have adopted it in some form. As originally conceived, it amounted to little more than a fancy way of saying that an insurance company cannot promise one thing and then deliver another. And in many states the doctrine is little more than a re-expression of the requirement that ambiguity in an insurance contract be construed against the insurer. In those states, therefore, the doctrine is only employed after the court has found ambiguity in the policy. But Arizona’s formulation holds the dubious distinction of being perhaps the most aggressive form of the doctrine in the United States, and permits reformation even of a completely unambiguous policy. As a federal judge has blandly observed, Arizona’s formulation of the reasonable expectations doctrine is expansive.” Gregorio v. GEICO Gen. Ins. Co., 815 F. Supp. 2d 1097, 1105 (D. Ariz. 2011). In legalese, the doctrine operates to overrule the integration BIO: jshfirm.com/JohnDLierman clause in an insurance contract. The integration clause is that portion of a contract that states that the written contract supersedes any negotiations or previous agreements. In the insurance context, the integration clause is the policy provision that declares that the insured has no rights to insurance beyond those provided in the policy. But the doctrine of reasonable expectations nullifies that provision, by providing that if a buyer and a seller of insurance reach an understanding about what coverage the buyer wants, and the seller assures the buyer that he will get what he asked for, that assurance becomes the binding contract, even if the paper policy that follows says something different. Consequently, even if the policy is completely clear, a court can set it aside to give the insured coverage the policy does not provide, if that coverage is what the insured reasonably believed he was getting. The Arizona Supreme Court adopted the doctrine in 1984, stating that it relieves an insured from “certain clauses of an agreement which he did not negotiate, probably did not read, and probably would not have understood had he read them.” Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 394 (1984). Or at least that was the idea. The most memorable words in the opinion came from the Chief Justice in dissent: “The decision makes the contents of a written insurance policy irrelevant in the determination of the nature and extent of coverage.” Id., at 401 (Holohan, C.J., dissenting). As subsequent events proved, Justice Holohan was, unfortunately, mostly correct. The plaintiff bar seized the opportunity to hold insurers accountable for insurance that buyers of insurance “reasonably expected,” regardless of what their policies said. ...ARIZONA’S FORMULATION HOLDS THE DUBIOUS DISTINCTION OF BEING PERHAPS THE MOST AGGRESSIVE FORM OF THE DOCTRINE IN THE UNITED STATES, AND PERMITS REFORMATION EVEN OF A COMPLETELY UNAMBIGUOUS POLICY