As I mentioned in an earlier blog post, I am writing a book with the working title “When Words Collide: Resolving Insurance Coverage and Claim Disputes.” I’ve completed the first draft of the first two major chapters and along the way plan to post some excerpts on my blog. Keep in mind that these posts are from the initial rough draft of the book and may be modified substantially before publication.
In this excerpt from the chapter on “Policy Interpretation Basics,” I excerpt part of the discussion about whether an insured has a duty to read the policy. Courts are split on this and each situation stands on its own merits. A bigger issue, from my experience spanning four decades is, do agents, brokers, underwriters, adjusters, consultants, expert witnesses, etc. have a duty to read the policy? Of course they do.
Another issue I explore below is, what happens if a claim occurs before the insured is given the opportunity to read the policy? Can insurers enforce exclusions and limitations in a contract they’ve never given the insured the opportunity to read? A number of courts say they cannot.
With that, on with this blog post….
Who reads rental agreements at the counter when renting a car? Pretty much no one. Who reads 78-page software or phone app licensing agreements? Almost certainly no one. Who reads insurance policies? Virtually no insureds and far too few insurance professionals like agents, underwriters, and adjusters. Why? In the case of insureds, one reason might be that the actual policy forms are not provided for days or weeks after coverage is bound. A presumption of an insured might be that, if the insurer doesn’t see a need for the insured to read the policy before entering into the insurance contract and perhaps weeks afterwards, is there really any need to read it when received? Would whether or not an insured reads the policy make any difference in how a claim is resolved?
Opportunity to Read the Policy
Three times in the last few years, I’ve conducted research on the danger of purchasing insurance online. Most recently, it involved getting online quotes for auto and homeowners insurance directly from an insurer’s web site or through several of many web sites that allow you to get multiple premium quotes. In each instance, I communicated through the web site or via email, asking for a copy of the insurance contract (i.e., policy forms) to review in order to make a purchasing decision. In every single instance, as was my experience in my prior two experiments, the insurer refused to give me a copy of the policy forms.
Can you think of any other type of written contract you enter into (financing or leasing an auto, buying or renting a home or apartment, etc.) where the party that wrote the contract REFUSED to allow you to read it before signing? For years I have had a standing $100 offer to the first person who can explain this rationale in a reasonable way. This bizarre approach is dangerous in many ways, the most important one for the purpose of this book being that it conditions consumers (along with incessant price-focused industry advertising) to believe that insurance is a commodity distinguished only by price. By the time you finish this book, we will have dispelled that dangerous myth.
What do the courts have to say about the ability of insurers to enforce exclusionary or restrictive policy provisions if the insured has never been given the opportunity to read the policy? In one case, Miller v. Safeco Ins. Co. of America, 683 F. 3d 805 (U.S. Court of Appeals, 7th District, 2012), the court said the “…insurer may not deny coverage based on an exclusion in the policy.” In its decision, it explained that an insurer should not be able to accept a premium “…and then deny liability based on an exclusion of which the insured was not aware because the insurance company had not informed him or her of the exclusion or given him or her the means to ascertain its existence.”
In the state of Wisconsin, other cases include Kozlik v. Gulf ins. Co., 268 Wis.2d 491, 673 N.W.2d 343, 348 (Wis. Ct. App., 2003) and Gross v. Lloyds of London Ins. Co., 121 Wis.2d 78, 358 N.W.2d 266, 271 (Wis. Ct. App., 1984). The Kozlik case also references decisions in Alabama, Florida, Kentucky, Michigan, North Dakota, Utah, and Washington, but I have not done an exhaustive review to determine how widespread this position actually is in the judiciary.
To answer a prior question, would an insured reading or not reading the policy prior to a claim make any difference in how that claim is resolved? Probably not. However, it might make a BIG difference in whether an insured engages in certain activities, purchases (and uses) certain property, etc. Knowing the likelihood and adequacy of coverage, whether learned by reading the policy or asking a representative of the insurer, is a critical aid to decision making that involves the assumption of risk.
Duty to Read the Policy
What do the courts say about an insured’s responsibility to read the policy? As part of a decade-long project on insurance agents’ errors and omissions (E&O) loss control, I researched and monitored case law dealing with an insured’s duty to read insurance policies. Over that period, the case law ran about 50/50 as to whether insureds were responsible to read. In many cases that held that the insured was not responsible, the logic of the court was that, even if they read it, they were unlikely to understand it. Rather than print pages of case law on this subject, I’d simply direct you to the often-cited West Virginia Supreme Court “Broadnax” case that discusses this issue and links to other cases (e.g., Kelly v. Painter) that link to other cases addressing an insured’s obligation to read the insurance contract.
The bigger issue, in the context of this book, is whether those in the insurance industry ¾ agents, brokers, underwriters, adjusters, consultants, educators, and others ¾ have an obligation to read the policies they sell, service, underwrite, adjust, and consult and educate on. The obvious response to that question is, “Duh, of course they do.” The reality, though, is that far, far too many do not. I base that contention on a career spanning the past four decades where I’ve worked with many hundreds (if not thousands) agents on literally tens of thousands of coverage and claims issues.
There are many outstanding P&C insurance agents in the industry. These are people with an historical perspective of the industry, that understand that our industry’s primary mission is to assist consumers and organizations in minimizing their exposure to serious or catastrophic financial loss. These are men and women who engage in life-long, quality education and abide by the highest professional and ethical standards. They read and understand the insurance policies they sell and service. Sadly, they represent a minority of agents. There are far too many who:
- Don’t read policy forms because either they don’t care (apathy or price focus) or they don’t think there’s really any difference (the “Insurance is a Commodity” myth);
- Can’t read policy forms (due to functional illiteracy?);
- Read but can’t or don’t understand policy forms;
- Read and THINK they understand policy forms but are not adequately tested by traditional educational and training approaches; or
- Read and perhaps understand policy forms but can’t apply them to real-life coverage or claims scenarios.
By far, the worst class of agent is the one that doesn’t read the forms they sell or service. In many cases, they simply enter information into a comparative rating system that spits out a list of insurers and premiums with a total disregard to the differences in coverages between the products and the standards of service provided by the insurers. Worse are those that are simply apathetic and likely working in the wrong industry:
“The fact you don’t know
“Is enough of a curse;
“Not to want to know
“Is a fate that’s much worse.” – Rolf B. White
These agents offer little more than a professional liability (E&O) insurance backstop for their incompetence compared to the “caveat emptor” do-it-yourself web sites that provide the same type of service. Why don’t they read the policy forms they sell? Many share the mistaken consumer view that insurance is a commodity, that all auto or renters or homeowners policies are essentially the same. As we will discover in this book, that is far from the truth. Others imply don’t care and their apathy imperils the financial solvency of individuals and families.
You might ask, how do I know this? Again, from the tens of thousands of questions I’ve received from agents, I can tell by the very nature of their questions. For example, the following are all real questions:
- “I’ve always heard that insurers must provide 60 days notice of policy nonrenewal. Is that correct?”
- “What is the rule of thumb for cancelling a homeowners policy?”
- “Does ‘an auto policy’ cover….”
- “Does ‘a CGL policy” cover….”
- “Does ‘a’ renter’s/D&O/umbrella/etc. policy cover….”
Several years ago, I got an inquiry from an insurance agency’s commercial lines manager who also had the Certified Insurance Counselor (CIC) professional designation. She wanted to know if a liquor store needed liquor liability coverage. According to her email, “I was always told that unless you were in the business of selling liquor for consumption on your premises, you did not need to purchase liquor liability.” Just recently I viewed some agent professional liability statistics and noted a very similar claim that arose from the failure to provide liquor liability coverage for a liquor store. “Knowledge by Folklore” (aka, “I’ve always heard that…”) is not how coverage determinations should be made.
Cancellation and nonrenewal of insurance contracts is something always addressed by insurance policies, often based on permissible reasons and timing prescribed by statutes. When it comes to policy rights, there is no “rule of thumb” or generalization based on hearsay. It’s impossible to answer coverage questions based on “an” auto policy or “a” CGL policy. To answer coverage questions and resolve claims, one must read and interpret the exact language in the insurance contract in question.
Coming May 2018
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GREAT article!!!! I sent it on to the IIA of IL Education Committee.
Bill, excellent article as usual. Here is my take on the “duty to read” issue as it applies to an insured. First, the use of the word “duty” implies a legal responsibility imposed by law. On the one hand, the producer is a professional, in a highly regulated industry, with literal reams of case law identifying and defining a producer’s duty. On the other hand, to suggest an insured has a duty is problematic. As you know, I have been involved, one way or the other, with insurance agents/brokers and while practicing law defended hundreds of agents. I secured the first Maryland court decision that dealt with an insured’s responsibility to read a policy [Twelve Knotts Limited Partnership v. Fireman’s Fund et al. circa 1981]. I believe a better approach, at least with respect to the insured, is found in another Maryland case, International Brotherhood of Teamsters v. Willis Corroon, 802 A.2d 1050 (Md. 2002). Without going into a long explanation, the essence of the court’s decision was that the “duty” is not necessarily to read the policy but simply to act reasonably under the circumstances. The court went into a comprehensive review of legal precedent before reaching its decision. The court addressed the issue of the insured’s duty to read a policy and, as you pointed out, stated that some jurisdictions believe the duty to read the policy exists, but that such duty is not the universal rule. Carry on sir! You do us, in the industry, proud!
Stan, great information. I’m on a tight publication schedule, but I’ll try to look into that and incorporate your point.
In Agent E & O court cases, the carrier often will use the defense that the agent didn’t create the insurance contract and is only a salesperson for the carrier and is not responsible for reading the policy or applying it correctly to the buyer’s exposure. It’s a defense that often wins, especially in Louisiana.
John, that’s not uncommon elsewhere either. In some states, the agent is viewed legally as no more than a policy peddler unless he or she holds himself or herself out as something more. My point about agents reading the policies they sell was less about the legal obligations and more about failure to do so negatively impacting their ability to properly cover their customers so as to minimize the potential for serious or catastrophic financial loss. Perhaps I should make that point clearer.
The article discusses the bizarre nature of insurance contracts in that most insurers will not let you review their policy forms prior to the purchase. I cite some case law from states that have prohibited insurers from enforcing exclusionary provisions in those policies. After reading the article, an attorney sent me this information for Florida:
See Figueroa v. U.S. Sec. Ins. Co., 664 So. 2d 1130 (Fla. 3rd DCA 1995) (Reversing summary judgment for the insurer for insureds failure to comply with policy condition, because insurer failed to comply with requests for a copy of the policy which set forth condition); United Auto. Ins. Co. v. Rousseau, 682 So. 2d 1229, 1229 (Fla. 4th DCA 1996) (Rejecting insurer’s argument it was entitled to directed verdict on failure to comply with conditions precedent, where insurer failed to timely comply with providing a copy of the policy).
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As for the insured’s duty to read the policy, I have always taken the position (and testified as such) that he or she does not. My reasons are as follows:
• In my 40+ years in the insurance business as an agent, expert witness, and in many other capacities, I have never known an insured to read his or her insurance policy. In my experience, only risk managers, attorneys, insurance company underwriters, and claims people read insurance policies.
• It is unreasonable to think that an insured would be able to read and understand his policy with no experience or education in the insurance business or in contract law;
• Insurance policies are complex legal contracts, sometimes over 100 pages long, drafted by attorneys and other experts. In my experience, attorneys and insurance experts themselves do not even agree on the meaning of insurance policy language. Why then should a layperson with no experience or education in the insurance business or contract law have a duty to do so;
• It is unreasonable to impose a duty on the insured to read his or her policy when, to the best of my knowledge, no such duty is imposed on the insurance agent who is presumed to know something more than the insured about the products he or she is selling or at least enough to be able to answer the insured’s questions about them;
• In my experience, most insurance agents don’t even read or understand the policies they sell and know little more than their insureds. After all, it only takes a week or so to become a licensed insurance agent. Why then should the insured have a greater duty to do so than the agent;
• In this age of paperless communications, many insurance companies, at least with respect to auto, homeowners, and other personal insurance policies, don’t even issue insurance policies in paper form anymore. Should insureds then have a duty to read their insurance policies online? What about people who don’t have computers or access to one? Furthermore, most insurance companies, in my experience, only issue renewal certificates for auto and homeowners policies so there is no policy in either paper or electronic form to read. It would be impossible then to impose a duty on the insured to read his or her policy if one doesn’t even exist.
Daniel B. Eitingon, Ph.D., CPCU, CIC, ARM, CRM, AAI, AU, ACSR, ACE, ACD