Insurance as Insurance

Insurance as Insurance

The Rutgers Center for Risk and Responsibility hosted a conference on the ALI’s forthcoming Restatement of the Law of Liability Insurance. Many thanks to all the participants for a lively debate and an interesting day. The bulk of the presenters discussed some aspect of the Restatement’s vision of insurers’ duties to defend and settle claims, the remedies for failures to do so, and general insurance contract interpretation. Presenters across the spectrum argued that the Restatement draft lacked both explanatory power for the current state of the law and normative force for where the law should go. At the core, much of the debate focussed on the appropriate frame for understanding the insurance relationship. Should courts consider an insurance policy a contract or something more? Should breach of an insurers’ duties be treated as a tort or something less? Or, left undiscussed, should the Restatement forge a new path independent of these inapt analogies?

Several presenters argued, at times quite forcefully, that an insurance policy should be thought of simply as a contract. According to this theory, policy interpretation should be the same as any other contract—plain meaning should rule the day and extrinsic and parole evidence should be limited accordingly; the scope of insurers’ extra-contractual responsibilities such as the duties to defend and settle should be limited to the well-known contractual doctrine of good faith and fair dealing; and remedies for breach should be severely limited—no non-pecuniary damages, no punitive damages, and severe limitations on consequential damages. But, as Jeff Pollock pointed out, except in rare circumstances, there is little actual negotiation when policyholders enter into an insurance relationship. Therefore, the strict contract analogy doesn’t quite fit.

Perhaps, then, insurance contracts should be viewed not as simple contracts, but rather as contracts of adhesion, where at least the interpretive rules need to change. But that analogy still fails to account for the unique nature of the promise of security that insurance is supposed to supply.

In contrast, other participants rejected contract theory altogether, arguing instead that tort duties and tort remedies are more appropriate in the insurance context. In particular, if one views the duties to defend and settle as extra contractual—i.e., beyond the scope of the duty of good faith and fair dealing—it might make sense to provide tort-like remedies. But the tort theory also fails in critical ways. For one, the tort theory lacks any explanatory power for how courts should interpret the provisions of the policy.

These arguments dovetail with a series of academic articles variously describing insurance as a contract, relational contract, product or thing, public utility, social instrument or institution, and source of private governance. Like the tort and contract theory, each of these arguments offers something to move insurance law forward, but none has found the perfect-fit comparison. This is only natural when one argues by analogy. Analogies only suggests a referent. The big question with analogic reasoning is which parts of the referent are alike and which are different.

This failure to identify the appropriate analogy for insurance, while not surprising, offers an interesting opportunity for the Restatement project: to eschew analogies altogether. Without suggesting a call to create the law of the horse, it may be time for the law of liability insurance to be considered on its own terms, without comparison or analogy. The Restatement seems to be taking up this cause sub rosa and perhaps should do so more explicitly.