When a private individual (rather than a business) purchases insurance, they do not negotiate the terms of the contract, because insurance contracts are forms filed with, and approved by, the Department of Insurance. The policy purchased is often so lengthy that it is bound into a booklet and not provided to the individual policyholder until after the insurance premium is paid. If the policyholder does have the time and inclination to review the policy, they probably will not understand the various limitations on coverage contained therein due to the prolixity of the various contract clauses.
To balance the inequities of market power in the insurance relationship, the courts limited the insurer’s freedom of contract. The various doctrines designed to level the playing field between the consumer and the insurer are generally known as the contra proferentum rules of contract interpretation.1
A particularly broad contra insurer rule is the notion that insurance polices should be construed according to the objectively reasonable expectations of the insured and their beneficiaries, notwithstanding the policy language contained in that insurance contract.
HISTORY OF THE REASONABLE EXPECTATIONS DOCTRINE IN ILLINOIS2
In the first Illinois case to address this Doctrine, Insur. Co. of North America v. Adkisson3, the court refused to apply the Doctrine to defeat a "bailment clause" that excluded coverage for property damage under the care, custody and control of the insured.4 In Adkisson, the court first noted that the Doctrine, if applicable at all, would be a rule of contract interpretation; and, since the court held that the contract clauses at issue were not ambiguous, the Doctrine would not apply.5 The Adkisson court reasoned, "We are unable to see how [the bull owner’s] reasonable expectations were any part [of the insurance agreement],"6 because the party asserting the doctrine [the bull owner] was a non-party to the insurance contract. Not content to dispense with the doctrine on the specific facts before it, the court concluded, "We are not disposed to engraft such a novel doctrine upon the Law of Illinois."7
Although some subsequent cases cited Adkisson as precluding the Doctrine8, others held that the Doctrine was a rule of construction to be applied only where the policy clause at issue is ambiguous.9 The Illinois Supreme Court later applied the Doctrine in Hoglund v. State Farm Mut. Auto Ins. Co., 10 to defeat a coverage defense based on policy language, stating,
"We believe that the exculpatory language on which State Farm relies cannot be read in isolation. Rather, it must be read in conjunction with the policyholders’ reasonable expectations and it must also be read in conjunction with the public policy behind the uninsured motorist statute and the coverage intended by the insurance policy itself." 11 (Emphasis supplied).
The Illinois Supreme Court then reaffirmed that the Reasonable Expectations Doctrine was the law in Illinois in Cummins v. Country Mutual Insurance Co, 12 where it stated, "...in determining when coverage is appropriate, this court can also consider a policyholder’s reasonable expectations and the coverage intended by the insurance policy."13
Cummins was cited in an underinsured motorist case, McKinney v. American Standard Ins. Co.14, where the insurer sought to avoid payment of UIM benefits based on a set off clause. The claimant whose wife and child were killed, recovered $318,000.00 in a wrongful death action after which he filed a UIM claim against his own insurer. 15 The claimant’s policy provided that any UIM benefit would be reduced by amounts paid by the negligent party. Since the claimant had UIM coverage in the amount of $50,000 and the amount recovered was $318,000, the insurer argued that it owed nothing under the UIM policy even if the damages suffered exceeded $318,000.16 The court rejected the insurer’s position stating:
"In determining the extent to which the limit of liability clause effects McKinney’s UIM claim, it is appropriate to consider an insured’s reasonable expectations and the coverage intended by the policy." 17 …Thus, a reasonable person in the position of the insured could expect ‘amounts payable’ to be the equivalent of the total damages incurred."18
In 2001, the Second District Appellate applied the Doctrine in Michael Nicholas Inc. v. Royal Insurance Co. of America.19 In Royal, coverage was denied to a construction company sued under the now defunct Structural Work Act, based on an exclusion for any assumption of liability by the insured in a contract or agreement. An exception to the exclusion was provided for an "insured contract" under which the claimant assumed the "tort liability" of another, meaning that there would be coverage for an assumption of another’s liability for negligence. The Court held that an "insured contract" would violate the Construction Contract Indemnification for Negligence Act,20 so that there would never be "...any situation where the exception would apply in plaintiff’s line of work, because if plaintiff ever agreed to indemnify another party for its own negligence, the contract would be unenforceable."21 Thus, the court concluded, "to interpret the [insurance] policy as Royal suggests would defeat the plaintiff’s reasonable expectations of coverage in those situations."22
In other cases, the courts have refused to apply the Doctrine where policy language clearly put the insured on notice that a specific coverage was unavailable. In State Farm Fire and Casualty v. Sandra Trousdale23, Mr. Trousdale was killed while traveling in a car that he owned, but which was driven by a Ms. Grygiel. Ms. Grygiel had inadequate liability insurance to cover the wrongful death claim, so Mr. Trousdale’s survivor submitted an underinsured motorist claim under an umbrella policy that included a UIM endorsement. State Farm denied the claim because Trousdale had no insurance on the car in which he was killed,24 and the umbrella policy required that the insured maintain an underlying policy on any vehicle to be covered thereunder, and the policy excluded any vehicle owned by the insured. The court rejected Trousdale’s claim that these exclusions violated the insured’s reasonable expectations because, since the insured had a duty to read his insurance policy, the expectation of the insured of coverage was unreasonable.25
The trend in Illinois is toward explicit adoption of and expansion of the Reasonable Expectations Doctrine. The more restrictive view of the doctrine is that it is a tool of construction to be invoked only where the contract is ambiguous. The broader view is that the doctrine is an independent social policy test to determine the bounds to which an insurer can go to limit a risk that it expressly assumed pursuant to contract.
1. Translated as "against the one who produces". VerSteeg, Essential Latin for Lawyers (Carolina Academic Press 1990).
2. Hereafter referred to as the "Doctrine".
3. Insur. Co. of North America v. Adkisson, 121 Ill.App.3d 224, 495 N.E.2d 310 (3d Dist. 1984).
4. The facts giving rise to the coverage dispute were that a farmer loaned his stud bull out to the owner of a cow herd who, through his negligence killed the animal. Suit was filed and coverage was sought under the negligent farmers’ automobile and general liability policies.
5. Id at 226, 495 N.E.2d at 31.
6. Id at 229, 495 N.E.2d at 34.
7. Id at 229, 495 N.E.2d at 34.
8. Zurich Ins. v. Northbrook Excess & Surplus, 145 Ill.App.3d 175, 494 N.E.2d 6334 (1st Dist. 1986)
9. Great Southwest Fire Insurance Co. vs. Greenlee, 134 Ill.App.3d 814, 481 N.E.2d 28 (1st Dist. 1985).
10. Hoglund v. State Farm Mut. Auto Ins. Co., 148 Ill.2d 272, 592 N.E.2d 1030 (1992)
11. Id at 276, 592 N.E.2d at 1034. In Hoglund, two declaratory actions arising from uninsured motorist claims were consolidated. One claimant was injured while a passenger on an uninsured motorcycle, another while traveling in her husband’s car. In the second claim, the claimant’s husband was uninsured because although he had motor vehicle insurance, his liability coverage was negated by a "family member" exclusion. In both claims, the uninsured motor vehicles collided with vehicles that were insured. In both instances, the claimants suffered damages in excess of the liability limits of the negligent adverse vehicle, and they therefore sought UM coverage from their own carrier. State Farm denied UM benefits because its contract provided a set off for any payments from third parties, and a right of subrogation that would reduce the UM benefits under its policy.
12. Cummins v. Country Mutual Insurance Co, 178 Ill.2d 474, 687 N.E.2d 1021(1997)
13. Id at 480, 687 NE2d at 1027. Mr. Cummins had an under-insured motorist policy with limits equal to those of the tort-feasor. However, the tort-feasors’ policy limits were paid out to more than one claimant so that Cummins received less than the negligent party’s policy limits. He then tried to collect the difference from his own insurer under his UIM policy. Country Mutual denied coverage on the grounds that the tortfeasor was not an underinsured motorist under both the policy and the controlling statute because Cummins limits were equal to the tortfeasors’ limits.
14. 296 Ill.App.3d 97, 694 N.E.2d 200 (3d Dist. 1998)
15. Id at 98, 694 N.E.2d at 201.
16. Id at 99, 694 N.E.2d at 202.
17. Id at 100, 694 N.E.2d at 203.
18. In other words, the UIM carrier would have to pay out $50,000. The $318,000 recovered from the negligent party would not completely offset the UIM policy limits. The court noted that if the insurers position were adopted, there would be no case where the policy limits would be paid out rendering the insurance an illusory contract.
19. Michael Nicholas Inc. v. Royal Insurance Co. of America, 321 Ill.App.3d 255, 748 N.E.2d 786 (2d Dist. 2001)
20. 740 ILCS 35/1
21. Royal at 260, 748 N.E.2d at 791.
22. Id at 260, 748 N.E.2d at 791.
23. State Farm Fire and Casualty v. Sandra Trousdale, 285 Ill.App.3d 566, 673 N.E.2d 1132 (1st Dist. 1996)
24. (He owned other vehicles on which he maintained insurance).
25. Compare Lincoln Logan Mut. Ins. Co. v. Fornshell, 309 Ill.App.3d 479, 722 N.E.2d 239 (4th Dist. 1999), where it was held that the reasonable expectations doctrine would not defeat an intentional act exclusion for an insured convicted of murder, the court reasoning that it is not reasonable that an insured can be indemnified for murder.
Christopher S. Carroll is a solo practitioner in Warrenville IL. He earned a B.A. with honors from the University of Illinois in 1974 and a J.D. from Kent College of Law (Illinois Institute of Technology) in 1978. He was formerly employed in the Property and Casualty Insurance Industry for a decade in various positions as a trial attorney, claims attorney and litigation manager.