On the “Read the Policy” Rule
Michael Sean Quinn, Ph.D, J.D., C.P.C.U., Etc.
1300 West Lynn St. #208
Austin, Texas 78703
(o) 512-296-2594
(c) 512-656-9759
mquinn@msqlaw.com
(Resumes at www.michaelseanquinn.com)
It is often repeated in arguments,
briefs, and court opinions that policyholder must read their policies. The proposition expressed in this phrase, or
one equivalent to it, taken just by itself, has been for a long time and now is
a repeatedly deployed slogan. The truth
is that when standing alone—this phrase is not a rule of insurance law and
never has been. The same is true of contract law--that body of common law from
which much of insurance law is derived.
In support of what is argued here, a
few cases are cited. Some of them are
quite old. Actually, they are valuable
precedent. It is a good thing that many
parts of the common law of insurance has not changed much in the last century
or so. There are significant
exceptions. The law of late notice is
one of them.
The rule “Insureds must read their policies” must first be analyzed and
conceived correctly. It might even have started with contract law in general
and then seeped it way into insurance law.
As everyone knows, the common law of insurance is nothing but a
subdivision of the common law of contracts. In the area of contract law, there
is no reason why the so-called duty to read the contract must be an iron-clad
doctrine with absolutely uniform absolute application To the extent that the
correct analysis is determined, it is easy to see that this rule, traditional
though it is, should be overthrown. It
cannot be much more than jurisprudential laziness why this did not happened
years ago. The first thing to understand is that the word “read” cannot
mean just read. It must mean read and understand,
taken together. It is completely
pointless to force an insured to read a policy she does not understand. (Herein, all the relevant pronouns will be
combined into “she” where possible.)
This essay will taken the word “read” to mean “read and understand” or
“read and understood.”
Just as one can read a policy without
understanding it, one can understand an
insurance policy without having read it. No doubt, “understand the policy” is a
logically sufficient replacement for “read the policy.” Maybe that is the real rule: Policyholders must understand their policies.
One
suspects that how a policyholder comes to understand her policy makes no
difference whatever. Of course, it is
probably true that reading a policy is the most frequent way entities,
including people, at least try to come to understanding contracts of insurance,
although reading documents like insurance policies is certainly a very unreliable method or achieving
understanding complex instruments.
Instruction helps immensely and can be reliable under some significant
circumstances. One suspects that having
been told the meaning of a policy by someone who is knowledgeable, perhaps an by
a knowledgeable intermediary, is a more reliable route to understand than many
others.
Of
course, intermediaries are not required to explain policies, but they better
get it right if they try. May v. United
Servs. 844 S.W.2d 666, 669 (Tex. 1992). See, for example, Avila v. State Farm Fire and Casualty, Co., 9 F.Supp.2d 570
(S.D.Tex.1999) and Firth v. Guardian Life
Insurance Company of America, 744 F.Supp.2d 570 (S.D. Tex. 1999). [Look at
the volume numbering and the dates on these cites.] Then again, one can imagine a plaintiff
oriented lawyer consistently advising clients to explicitly ask for
descriptions and explanations of policies.
It is hard to imagine intermediaries refusing to do so.
Would
the same would probably be true if the advice for the insurance customer came
from a blog or an advertisement. After
all, the former does involve reading, and the latter often does.
This
or something like it is “age old” in Texas common law. If an insured relied
upon acts of an agent of the insurer the insurer, “it would not necessary for
him to examine to policy to ascertain the terms upon which it was made.” Aetna
Ins. Co v. Holcomb, 34 S.W. 925 (Tex. 1896). Then again it is worth noticing that the rule
formulated here refers to the terms of the policy (words) but to the external
facts which were the context in which the contract of insurance was formed
(surroundings). The law is pretty much
the same now. Of course, context is always important, even
in the law of contracts. Then again, see Northern
Assurance Company v. Stan-Ann-Oil Co., 603 S.W.2d 218 (Tex. App.--Tyler
1979, no writ). (In this case, an
intermediary was liable when it knew that the insured wanted something but did
not know about them and then bought the insured the wrong thing, the
intermediary was liable.)
In
any case, no insured has ever, ever, ever had—and does not now have—a general legal duty to read her contract of
insurance. If insureds were to have a general duty to read
their insurance policies, then no insured could ever refrain from reading such
a policy without violated someone else’s rights. Usually the “someone else” is the carrier that sold the policy (or its
successor), but it could be a variety of other people and/or: banks, other
lenders, soon to be ex-spouses, actual ex-spouses, some purchasers, e.g.,
consumers of various services, some
sellers and so forth. Obviously, they
cannot have a legal duty to themselves in this—or any other—regard. Conceiving of duty in this context as a general
duty is a secular legal sin.
The idea of the policyholder’s duty
is not that she has a “general” duty to read her policy must be exchanged for
the idea that the policyholder has a contract based duty to read the contract
of insurance. In this sense of the word
“general,” the duty “modified” the would run only from the insured to the
insurer. But that does not work either.
It is not a breach contract for an insured not to have read the whole
policy. If coverage is later sought, the
breach of duty would be to have failed to read the relevant language of the
policy before purchasing it.
Of course, if an insured has a duty
to read the policy purchased, the carrier must have one or more corresponding reciprocal
duties. This is implied by the duty of
doctrine of implied duties of good faith found in all contracts.
Of course, Texas has
refused to accept this doctrine, at least when worded this way. It is established law that in order for there
to be an actionable breach of contract by one party, the other party must have
fully performed its obligations under the contract. Aquila
S.W. Pipeline, Inc. v. Harmony Exploration, Inc., 48 S.W.3d 225, 235 (Tex.
App.—San Antonio, pet. denied.) (contract case)
One would think that the carrier must have
the duty to provide a policy which the other party to the contract can
understand.
The
historical idea of contract law, that each party involved in drafting the
contract, and so each party, has a duty to the other(s) to understand it. This
is nonsense in the contemporary age of something like a nearly universal
standardization, outside huge transactions.
The problem of understanding
usually falls upon the insured.
Unfortunately, in the practical
world, however, could an insurer actually have a duty to make sure that a
customer understands a policy she is about to purchase? How might this be done? Is the agent to explain the policy line by
line? In general terms? What about the agent asking the question what
do you think you might not understand?
What about a brochure? What about
required classes? With pop quizzes? Most of these, of course, are nonsense. Does
it really makes sense to put all this kind of risk on the insured?
So
are we stuck with an unsolvable dilemma?
If so, who should bear the burden of error? Should it really be a insured, especially if the insured is a
“mere” person and not an more experienced venture?
One must think about the rule Insureds Must Read Their Policies
carefully. It is surely not the case
that every insured under a given policy has a duty to read that policy. At least some named insureds, usually the
owner of the policy, aka the “policyholder,” at least sometimes, may have
restricted duty under most circumstances, if anyone does, but it not the case
that all named insureds have such a duty., even if one of them does. Should the right to compensation be forfeited
by an additional named insured, if she had no understanding of the policy, but
the first named insured did? Or didn’t. Nor is it the case that unnamed insureds must
read the policy; this point is completely obvious, even if the previous one
were not; the additional, but unnamed insured, may not even know about being an
insured until disaster has struck.
Thus, all sorts of features of the
duty read seem troublesome. Not only is
there trouble about requiring blind people to read a text, there is
irrationality inherent in requiring a party to a form contract of the type he
must buy to avoid at least most risks, to understand language which is obviously
vague, unclear or ambiguous. This point
is especially obvious when courts disagree about the meaning of a given
term. It also seems difficult to require
an “ordinary” Jill to understand a term in her policy with respect to which
millions and millions of dollars have been spent trying to get authoritative
rulings as to the meaning of precisely that given term. In passing, it should be noted that the idea
of blindness cannot be loosened much under Texas law, and probably that of many
states. Even very fine print can be
required reading, at least if it is legible to some degree. Morrison v. Insurance Company of North
America, 6 S.W. 605,606 (Tex. 1887). This is what a magnifies glass if for, after
all. Then again, does it make sense to
legally require Jill to use a magnifying glass to read a 20 page document in
very small print?
When the requirement of reading,
simplicter, is combined with the requirement of understanding, its “twin,” the
analytical problems for the legal duty discussed here get worse than a little
foggy. Yet as lawyers, we have a duty to
represent our clients vigorously. How
many lawyers are really comfortable arguing persuasively, given the actual law,
that those with very, very near and uncorrectable vision people are subject to
the same law as those with vision closer to the normal
So what’s going on with these central rhetorical
slogans: “Read the policy” or “You must read your policy” or “Insureds have a duty to read their policies”? Are they really the essence of part of the
law? Maybe not. A good guess might be that they are designed
to be exhortations in the context of legal life. To be sure, they can and are used as major
premises in arguing dispute legal disputes.
But perhaps that is pure rhetoric. Many who are really thoughtful takes
seriously the idea that the slogans are literally—as they stand—either
justifiable or true. The only way to do
this is to embrace law as it currently exists, forgetting about a large variety
of intuitively obviously important problems.
Since
“the Rules” are valuable exhortations, they are also conceivable as a kind of
legal advice as to prudence. If this
were true, the Must Read It Rule,
would actually not a legal commandment
at all. A reasonable person would make
sure to have read the relevant portions of her policy, as it were, over time or
at significant times. Of course, if this
is the correct view of the rule under discussion, it would really be better be
formulated by Ya’ll Ought to Read the
Rule & There is Legal Danger Not To. “Better” but perhaps not as
compelling as “Ought. There is something disturbing about this idea,
however. It is entirely out of kilter
with” the real world. Then again, one
may find this approach attractive, since it is nothing but a weak-ish version
of the long standing rule: Read the Rule Citizen, for If You Don’t the
Justice System Will Kick Your Ass. And that is very disappointing, to say
the least, some might say. Still, many
find “ought” a very stimulating, even powerful, word and idea, and it can by
itself and be guidance to many.
First, and simple enough, a vast majority of
people buying insurance policies do not read them. “Everyone” knows this. Thus, if the test of
prudence is doing what the reasonable person would, prudence does not require
that the policies be read. In some
states it is obligatory that the citizenry buy policies; they are standardized; and the majority of
residence there do not actually read them.
This fact is true for most lawyers regarding some part of most of their
contracts of insurance, though not all lawyers and not all policies
Second,
if an insured can buy only one—or nearly one--type of form policy for a given
risk, e.g., auto coverage and/or homeowners coverage, what difference does it
make whether Jill has read the one she has bought, both of them or neither. She
is not even taking much risk in not reading them both. For one reason, they will be substantially the
same. Usually, there is (almost) no different
type of coverage to buy, except for price and deductible.
Of
course, for many types of policies, there are form endorsements that will
change the policy, but the uses of those in average personal policies of those
are few and far between: they are likely to be expensive; the endorsements may
not fit the rest of the policy very well; the insurer seldom bring attention to
them or their availability; intermediaries often do not know of them, what
their functions might be, and/or whether to suggest them. Of course, as just said, these observations
are more common in modestly sized personal and small business policies than
they are in larger more complex commercial policies.
It
must also be recognized that the slogan Insureds
must read their policies has a significant role in socio-business life
other than simply in litigation.
Reformers use it to try to get strong laws requiring insurer to write
understandable policies, simplicity being best. If a policy is simple, it is vastly easier to
understand it. The status of the slogan
can help an insurer to resist the temptation to draft overly difficult policies
in the service of its own self-interest.
For good or for ill, it helps remind those who need it that insurance
policies are contracts.
Having discussed several
language-based problems with the “Everyone
Must Read Their Policies” Rule, let us look at some more of the reasons why
the necessity of having read a policy is not actually by itself a rule of law
and/or should not be. Consider
the following: at least some insureds are
not always obligated to the insurer-issuer of that policy to have read the
policy issued. It makes little sense to
require a non-English speaker to read an insurance policy, she cannot possible
understand. This idea is especially
true when the insurer knows that the customer cannot read the policy, must less
understand it. It is easy to generate a
large number of different cases where this same point holds. It is much harder to draw limits. How non-English speaking must a person be
before she is released from the duty to read?
How English speaking must a
person be before she is subject to the duty to read? Should the duty to read be imposed on the
Alzheimer’s affected elderly? How much
affect is enough for such a person to get relief?
Maybe underlying the rigidity and
strength of the “Read It Rule” is
precisely the messiness of a legal world where the rules as to what counted as
required understanding varied in accordance with degree of intelligence, grasp
of language, feel for how “things fit together,” and so forth. Some would assert that this kind of mess
would increase litigation and encourage insurance fraud. There is no evidence supporting this kind of
assertion, but there is none for its negation either. Might not an onslaught of litigation regarding
“Read it you Fools” actually be socially beneficial if it stimulated more
careful conduct by insurers?
It
is worth pondering whether a good way to deal with this problem would not be to
require that an insured need not understand a policy unless that insured was negligent
in failing to understand it. There is
not much law favoring this view, but there is a little, even though the passion
of the courts—when taken as a whole—favoring it it is weak, to say the most.
Nevertheless, there
is a perfect Supreme Court of Texas
case, which one does not seem cited much.
Fireman’s Fund Indemnity Company v. Boyle General Tire Company, 392
S.W,2d 352 (Tex. 1965). In this case, Justice Pope said that “[t]he rule
followed in Texas is that an insured who accepts a policy without dissent, is
presumed to know its contents, but the presumption may be overcome by proof he
did not know its contents when it was accepted, as by showing that when he
received it he put it away without examination. Id. The late Justice Pope is a high prestige
former member of the Texas It
cites and quotes Boyle Tire, and states
that the Boyle case expresses what is
Texas law. Colonial
Savings Association v. Taylor, 544 S.W.2d 116, 118-19 (Tex. 1976),
Boyle Tire refers to a number of other cases as authority, CORPUS
JURIS SECUNDUM, and a legal encyclopedia full of them. Strangely, these two cases, while cited for
other propositions do not appear to have been cited for the just quoted
language very often. It is almost as if
makers of Texas law and trying to avoid the “Boyle-Tire
Colonial-Savings Doctrine.”)
Is there some sort of hostility to this doctrine in Texas? I have not seen this doctrine formulated and
used in significant Texas cases. Nor
have I seen it play a significant role in articles or CLE speeches. It would be interesting to know if the
hypotheses of buried hostility is true,
and if so why.
Some other cases come from elsewhere and/or
different times, e.g., McMaster v. New York Life Insurance Company,
183 U.S. 24, 39 (1901)(place and time: negligence and reading + paying
premium linked, but not conceptually), and Guinn
v. Phoenix Insurance Company, 31 S.W. 566, 569 (Tex. 1893) (time only).
Maybe there is subtle mechanism that
some courts is trying to extent the Boyle
Tire Doctrine Supreme Court, There is a subtle series of moves by means of
which there might be a hidden way to obtain legal authority for the idea that a
policyholder need not be always held to understand the language of the
policy. It goes this way. Often courts, especially in recent times,
assert that policyholders are “presumed”
to understand the policies. But presumptions, in general, are often
rebuttable; indeed, there are whole categories of presumptions which is
precisely called “rebuttable presumption,” as opposed to “conclusive presumption”
(aka “unrebuttable presumptions). Almost all rebuttable presumptions are linked
to the idea of negligence; the whole point is that if it is rebuttably presumed
that a person is legally blameworthy for something, then she is not blameworthy
if she was not actually negligent. Lee v.
Baber, 303 S.W.2d 376, 380 (Tex.
1957) (force and structure). See Beck v.
Sheppard, 566 S.W.2d 569, 571 (Tex. 1975) (bailment: horse killed by auto),
Buchanan v. Byrd, 519 S.W.2d 841, 843
(Tex. 1975(bailment: horse killed by train).
There is at least one Texas case that seems to make readings of policies
an irrebutable presumption.
Paradoxically, it is the Guinn case,
mentioned in the last distinct paragraph, which also introduces the idea of
non-negligent non-reading. In other
words, this case is contradictory.
Some cases do not describe how
policyholder plaintiffs are to be conceived.
Some do not say “presumed”; instead they say “deemed.” Shindler v. Mid-Continental Life Insurance,
Co., 768 S.W.2d 31 (Tex. App.—Houston [14th Dist.], 1989, no
writ). See Roland v. Transamerica Life Insurance Company, 570 F.Supp.2d 871,
880-81 (N.D. Tex. 2008, aff’d)(“In Texas an insured has a duty to read the
insurance policy and is charged with knowledge of its provisions. An insured is deemed to be on notice of all
terms of an insurance policy.” (citations omitted)
It
is difficult to be sure what the distinction might be. Usage might incline one to believe that “deem” referred to a conclusive
presumption. Maybe “deem” is stronger
than “presumption. It is not easy to
think of a deeming being set aside by evidence, as is the case with
presumptions. But then, perhaps this
whole idea may be an argument from imagination and have no rational grounding
at all.
Maybe
allegiance to the “Read It Rule” is an attachment to the classical ideas of
contract law, one of which is that all contracts are fundamentally alike. They are all exchanges of some sort where
consideration is involved and so the reciprocal right and duties, as it were,
“running across the table” are pretty much the same. There has been doubt about this idea for a
long, long time.
Even
then there are exceptions. Consider the
situation in which there are two contracts between the same parties on the same
topic, and one of them contradicts the other.
Since the second one will take precedence over the first, it is not
necessary for a party to have read the first one. London
Terrace, Inc. v. McAlister, 180 S.W.2d 619 (Tex. 1944). (Presumably, the
second contract must have failed in some regard. Otherwise, it would be difficult to see why
the non-reading of the first contract would not be an issue.)
Nevertheless,
consider this observation of Samuel Williston. one of the two greatest scholars
of contract law in history:
To
be sure, the law with respect to insurance contracts is subject to other public
policies, including the fact that it is a highly regulated industry that the
policies are often lengthy, standardized forms filled with complex provisions,
and that relative bargaining power of the parties is sufficiently uneven to
justify some modification of the principles stated in the text. The concept of
protecting the reasonable expectations of the insured may therefore lead a
court to de-emphasize the so-called duty to read or the implied assent that
accompanies receipt and retention or signing of a document, under certain
circumstances, where to do otherwise would lead to unconscionable or unfair
results. Where, however, the language of the policy is clear and the insured’s
reasonable expectations are not frustrated by application of the rule, it is
regularly applied.
2 Samuel
Williston (with Richard Lord in the 4th Edition), A TREATISE ON THE
LAW OF CONTRACTS §6;43, 478-49 n. 10 (4TH Ed. 1991) Few would dissent from the spirit of this
observation. However, what Williston
does not mention is that his term “de-emphasize” really undermines the whole
logic of the “Read It Rule.” If you
de-emphasize what has been passed off as an axiom, it is no longer an
axiom and probably never was.
At the same time, an earlier edition
(the Third) of the Williston treatise
has been quoted as saying, “The final and perhaps the most significant
characteristics of insurance contracts, is the increasing tendency of the
public to look upon the insurance policy not as a contract but as a special
form of chattel. The typical applicant
buys ‘protection’ much as he buys groceries.”
Jay M. Feinman, The Law of
Insurance Claim Practices: Beyond Good Faith 2012.47 TORT TRIAL & INSURANCE PRACTICE LAW JOURNAL 693, 709n. (2012),
plus two other law review articles, but no cases. (For various reason, it is difficult to see
why customers view insurance as Feinman says.)
(Perhaps the best way to think of
Williston’s first observation is to formulate contract and therefore insurance
policy interpretation is in terms of a “relational theory.” In sum, this view is that the nature of the
relationship between not only the one-to-one parties to a contract but also the
categories of relationships must be regarded as
relevant to interpretation.
To
return to the topic of de-emphasis, there are other ways the Rule can be “de-emphasized”
and its axiomatic status be destroyed.
One of them is common; one is dramatic.
Consider this sample of very common formulation of the Rule: “Ordinarily,
a policy holder had a duty to examine the policy and make sure [proper] coverage is provided.” Northern
Assurance Company of America v. Stan-Ann Oil Company,603 S.W.2d 218, 224-25 (Tex. Civ. App.—Tyler, 1979, no writ). (Emphasis
added.) What is important here is the
word “ordinary.” It does not mean
“always”; it does not even mean “except for rarely.” The use of the word “ordinarily” tells one
that there may be loopholes—not just one.
These kinds of crack and crevices have been around “forever.” So how can the Rule have all the power said
to be its?
There is also the dramatic and the rare situation which “de-emphasizes” the
Rule. This is to be found in the paradoxical relationship between the “Read It Rule” and the law of fraud.
At least one important kind of fraud arises when someone reading policy to a consumer and deliberately leads
her into believing that given propositions are in a policy when they are not
(or does exactly the opposite). A very
simple example of this would be the deliberate statement that policy limit was
$1000 and the deductible was $1, while in fact the limit was $100, and the
deductible was $99. No one thinks that
the “Rule” somehow defeats a claim of fraud in this situation, although if the
“Read It Rule” is axiomatic, then
defeating a claim of fraud would be much easier.
Yes. It’s true I did lie to him about what the policy
contained. But he cannot now claim that he did not know what was in the policy
as the result of what I did. If he had
read the policy, as he must do, he would have found out that I was lying to
him, and he should not have purchased the policy.
The
argument, of course is ridiculous, and would almost never be taken
seriously. This fact, however, indicates
that the Rule is not so axiomatic as it is sometimes said to be. Even the most militant absurdist in this
situation would have to admit that there
are situations in which their argument is not likely to work. Consider a situation derived from original
contract law. The rule is that is one
party reads, describes, or explicates the contract, because the second party
does not because he cannot—say because he lost his glasses—the reading party
has an obligation to get it right. Even
an absurdist would have to admit that in this situation, the fraud claim would
work. This is very old law in Texas. Demees
& Hinkle v. Bluntzer, 7 S.W. 406 (Tex. 1888), and it does not even
require fraud, apparently all it requires is mistake. (Quick sale of 4100 heifers)
By
the way, before proceeding it is worth noting that there is good reason why The Insured
Must Read the Policy Rule, just by itself, often does not appear in judicial decisions of
record, e.g., printed in Westlaw.
Consider this one: “Ordinarily, a policy- holder had a duty
to examine the policy and make sure
[proper] coverage is provided.” Northern Assurance Company of America v.
Stan-Ann Oil Company, 603 S.W.2d 218, 224-25 (Tex. Civ. App.—Tyler, 1979, no writ). (Emphasis added.) “Ordinary” does not mean “always”; there may
be loopholes to be found in “ordinarily.”
These kind of crack or crevice have been around “forever,” as already
observed.
Of
course, it is well established law in Texas, and pretty much everywhere else in
the English speaking world that a contract is considered as a whole and each
part is given effect. Anglo-Dutch Petroleum International, Inc. v.
Greenberg Peden, P.C., 35 2 S.W.3d 445, 449-50 (Tex. 2011), Gilbert Texas Construction, L.P. v.
Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2011), and many others. At the same time, specific provisions in
insurance contracts control specific matters, including grants of coverage,
exclusion, conditions, and so forth.
These points are first year law school induced common sense. It is not the case, however, that not knowing
the whole distorts reading of one part—or some parts--in all relevant respects,
or at all.
As
interesting as this proposition, as legal theory is, it also have practical
import.
Consider taking
a deposition. If a lawyer’s question is
formulated in such a way as to (i) invite to the witness to say that she has
not read the policy and then indicate that this “failure” is somehow but almost
certainly to produce legal defeat, (ii) some other criticism, such as
ignorance, irresponsibility, or shamefulness, (iii) suggest that suit-loss is just around the
corner and that she has enhanced his client’s position, (iv) and/or more than
one of these, this very question may discourage the plaintiff-witness-target. On the other hand, if the witness is clear
that she is not required to have read the policy, where that idea means “the
whole policy,” the confidence of that
witness may continue.
As a final remark to this essay, consider
how the difference might affect a trial.
Q. “Have you read the policy?” A. “Yes, some of it”. Q. “Which parts of it did you read?” A. “I don’t remember, but it was parts—not just one—and I thought at the time
they were important, just as I do now.”
Q, “Did you read this one [pointing at the screen]?” A. “Again, I don’t remember. It was several years ago. But I might well have done so.” The legal theorizing about the meaning of the Must Read Rules takes on significant
practical importance. (Of course, this won’t work if the policy is turned over
in the sealed having-been-mailed envelop it came in. Or might it not? What if the policy in question is renewal?)
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