The doctrine of reasonable expectations has been most clearly developed by the courts of Iowa and Arizona. Iowa first adopted Professor Keeton's version of the doctrine of reasonable expectations in 1973 in the case of Rodman v. Farm Mutual Insurance Co., 208 N.W.2d 903. A later Iowa Supreme Court case upholding and elaborating on that position was C&J Fertilizer, Inc. v. Allied Mutual Insurance Co., 227 N.W.2d 169 (1975). The C&J Fertilizer case involved a company whose president had a high school education. He asked for and obtained two policies of insurance that included burglary coverage (a broad form storekeepers policy and a mercantile burglary and robbery policy). The insured did not read the policies. Both contained a definition of “burglary” that limited coverage to situations where there were visible signs of forced entry on the exterior of the building. The insured's business was burglarized and substantial amounts of fertilizer were taken. The insured showed that one of the outside doors, due to its design, could be forced open without visible signs, and also showed that there were signs of forced entry on an interior door. Evidence supported the conclusion that the burglary was not an “inside job.”

The insurer denied the claim and the trial court also held for the insurer, basing its decision on the absence of visible signs of forced entry on the building's exterior. The state supreme court found this approach too mechanical, reasoning that older forms of contract interpretation often ignore the imbalance of bargaining power between the issuers and buyers of standard contracts. The court said: “It is generally recognized the insured will not read the detailed, cross-referenced, standardized, mass-produced insurance form, nor understand it if he does.”

The supreme court found that the parties had reached general agreements on the purchase of burglary coverage on chemicals and equipment, “[b]ut there was nothing relating to the negotiations with defendant's agent which would have led plaintiff to reasonably anticipate defendant would bury within the definition of 'burglary' another exclusion denying coverage when, no matter how extensive the proof of a third-party burglary, no marks were left on the exterior of the premises. This escape clause . . . was never read to or by plaintiff's personnel, nor was the substance explained by defendant's agent.” The court disapproved of the fact that the definition of burglary in the form did not comport with a layman's understanding or with the legal definition of the term.

The court took the position that the “most [the insured] might have reasonably anticipated was a policy requirement of visual evidence (abundant here) indicating the burglary was an 'outside' not an 'inside' job. The exclusion in issue, masking as a definition, makes the insurer's obligation to pay turn on the skill of the burglar, not on the event the parties bargained for: a bona-fide third party burglary resulting in loss of plaintiff's chemicals and equipment.” It should be noted that the decision also found for the insured under the alternative legal theories of breach of an implied warranty that the policy was fit for its intended purpose, and “unconscionability” (the unfair result of great inequality in bargaining power combined with terms unreasonably favorable to the dominant party).

A later case from the same court, Lepic v. Iowa Mutual Insurance Co., 402 N.W.2d 758 (1987), refined the doctrine by clearly adopting guidelines for its application. Two cases were consolidated for consideration in the Lepic decision. Both cases involved minors who were passengers in autos that were involved in separate one-vehicle accidents. Lisa Lepic was injured while riding in an underinsured vehicle. Her parents had an underinsured vehicle policy with limits of $100,000 per person and $300,000 per accident. Lisa put in a claim for her bodily injuries, and her parents put in a claim for Lisa's medical expenses and loss of consortium. The sum of these claims exceeded the $100,000 limit. The issue before the court was whether the limit of liability for 'each person' in the underinsured motorist or bodily injury liability coverages of personal auto policies applied to each injured person (and thus to all claims relating to the injury) or to each person with a claim based on the insured's injury. The court ruled in favor of the insurance companies, holding that the limit applied to the injured person and all claims relating to that person's injury.

The court stated that the doctrine of reasonable expectations is applicable when: (1) a policy term is bizarre or oppressive; (2) the provision “eviscerates the nonstandard terms explicitly agreed to;” or (3) the provision eliminates the “dominant purpose” of the contract. These guidelines had been referred to in the C&J Fertilizer case, but the court had not specifically adopted them in the earlier case.

The court concluded that the reasonable expectations doctrine would not be applied in this case because none of the three possible triggers were presented by the facts. Because the doctrine was not triggered, the language of the policy controlled the decision.

Later cases from the Iowa Supreme Court also show that the court will not apply the doctrine unless it finds “objectively reasonable” cause to do so. The case of Aid Mutual Insurance v. Steffen, 423 N.W.2d 189 (1988) involved claims for liability coverage under a homeowners and farmowners policy for litigation about patent rights. The insureds were brothers who had formed a company to sell to other parties patent rights they had obtained. Litigation by some of their clients ensued as a result of allegations that the rights were worthless. The insurers refused to defend and indemnify the brothers because of the business pursuits exclusion.

Only one brother filed a timely appeal to the lower court's finding for the insurers, and in his appeal he asserted that he had reasonable expectations of coverage. The court responded by pointing out the limited circumstances under which the doctrine could be applied. “Reasonable expectations may be established by proof of the underlying negotiations or inferred from the circumstances. . . . If an ordinary layman would not misunderstand the policy's coverage, and there were no circumstances attributable to the insurer which would foster coverage expectations, the reasonable expectations doctrine is inapplicable. . . . There is simply no evidence from which we can conclude that the [insureds] expected the policy to cover any lawsuits which may arise out of contracts for patents.” In a similar vein, the court found no objectively reasonable expectations of underinsured motorist coverage in the case of West Trucking Line, Inc. v. Northland Ins. Co., 459 N.W.2d 262 (1990).

Arizona Supreme Court cases have also led to the development of the doctrine. In Danner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 682 P.2d 388 (1984), the insured was in the business of auto sales, service, and leasing. The dispute over coverage arose when one of the insured's lessees severely injured a pedestrian. The insurer took the position that its limit of liability for insureds who were lessees was $15,000. The named insured asserted that the insurer's agent had assured him that lessees would be covered for $100,000/$300,000 because an umbrella policy would pay the difference. Actually, the umbrella policy did not provide the higher limits for insureds who were lessees. The court pointed out that the named insured had read the liability policy, but did not read the umbrella policy when the agent assured him that it provided the higher limits.

The court phrased the issue as whether courts will “enforce an unambiguous provision contrary to the negotiated agreement made by the parties, because, after the insurer's representations of coverage, the insured failed to read the insurance contract that was in his possession.” In answering this question in the negative, the court reviewed the development of law relating to insurance contracts, noting that at one time the majority rule had been that an oral agreement between the parties could not be shown to vary the terms of a policy (the parol evidence rule). The court took the position that application of this rule in the case of insurance contracts ignored the difference in bargaining positions between the parties and that the doctrine of reasonable expectations was based on enforcing those expectations that have been induced. The court was aware that “if not put into perspective, the reasonable expectations concept is quite troublesome, since most insureds develop a 'reasonable expectation' that every loss will be covered by their policy. . . .”

However, the Arizona court underlined the importance of the idea that a contract does not consist merely of written words, and that the written words are evidence of the agreement but not necessarily coextensive with it.

The court also adopted the idea that insureds are not under an obligation to read their standard contracts, and specifically stated that this rule was not limited to cases where the policy had not yet been delivered before the loss.

Three years later, in Gordinier v. Aetna Casualty and Surety Co., 742 P.2d 277 (1987), the Arizona Supreme Court again addressed the ideas presented in the Darner case. Tina Gordinier and her husband separated. When their car insurance was renewed by the husband's mother, no notice was given to the insurer of the change in living arrangements. Tina's husband was the named insured on the policy. She was subsequently injured while riding as a passenger on an uninsured motorcycle belonging to a friend, and she put in a claim for uninsured motorist coverage. Coverage was denied because she was not residing in the named insured's household. The court of appeals ruled against Tina, specifically finding that the “reasonable expectations” doctrine outlined in the Darner case could not apply because “resident of the same household” was unambiguous language.

Tina admitted that she had never read the policy, and asserted that she would not have understood the limitation on her coverage if she had. The supreme court pointed out that her husband's brothers and sisters would have been covered under the policy if they lived with him, but his estranged wife, for whom premium was being paid, was not. The court reemphasized its position that the reasonable expectations doctrine was not limited to cases where an ambiguity exists in the policy language. In Gordinier, the court laid out those circumstances under which it would not enforce an unambiguous boiler-plate provision in an insurance contract:

1.     Where the contract terms, although not ambiguous, cannot be understood by the reasonably intelligent consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations of the average insured;

2.     Where the insured did not receive full and adequate notice of the term in question, and the provision is either unusual or unexpected, or one that emasculates apparent coverage;

3.     Where some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured;

4.     Where some activity reasonably attributable to the insurer has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and unambiguously denied by the policy.

The court applied these guidelines to the facts of the case, starting with the fact that the application gave no notice that the person filling out the application would become the sole “named insured” and thus receive greater coverage than other insureds. The court next pointed out that while the couple lived together, Tina was fully insured under the policy. The change in her coverage resulted from the creation of a separate household, something that many insureds would not expect. The court pointed out that premium was being charged for two drivers on two cars, and these circumstances were not changed by the division of the household. The court was careful to limit the scope of its decision as applied to these facts, stating: “We are not implying that there is a . . . problem inherent in limiting extensions of coverage to those relatives of the named insured who actually reside with the insured. The carrier cannot be expected—without extra compensation—to cover all of an insured's relatives, no matter who they are and where they are. Any contrary expectation would be objectively unreasonable. On the other hand, in the case before us, we presume [the insurer] contracted to insure a husband and wife.” The court also clarified that coverage would not necessarily apply to Tina if the carrier could show that the husband and wife had been made aware of the difference between named insured and omnibus insured status, or had specifically requested it.

As the parol evidence rule has weakened over the last decade, insureds have had some success in introducing advertising materials as evidence of their contract expectations. The following two cases illustrate disagreement in the courts concerning advertising materials and how they should be viewed for purposes of the reasonable expectations doctrine.

An Illinois appellate court held that the brochure became part of the insurance contract and that the insured was entitled to coverage based on the brochure in Dobosz v. State Farm Fire & Casualty Co., 458 N.E.2d 611 (1983). The brochure in question gave brief descriptions of the basic, broad, and all risks homeowners policies. The peril of water damage was listed as covered under the all risks policy, without any limitations noted under the peril. However, the brochure did include a general disclaimer that stated: “This brochure contains only a general description of coverages and is not a statement of contract. All coverages are subject to the exclusion and conditions in the policy itself.”

The insured, an attorney, selected the all risks form based on the brochure and statements of the agent that this was the best type of coverage to buy. Almost two years later, water leaked through the walls of his basement and sump pump pit and caused the sump pump to stop. Water collected in the basement and caused damage of $1409.66. The insurer denied the claim based on the water damage exclusion for water below of the surface of the ground that seeps or leaks through a foundation. The evidence was unclear on the point of whether the insured had ever received a copy of the actual policy until after the loss.

In determining that the brochure became part of the contract, the court stated that there are two important facts that must be established before this is appropriate. The insured must rely on the brochure for making the decision to buy the policy, and also, the brochure must differ from the policy itself. The court reasoned that when the brochure and policy differ, the contract contains an ambiguity to be resolved in favor of the insured.

The court also found coverage under an alternative theory, i.e., the theory that an insurer “may be estopped to rely on an exclusionary clause in the insurance policy where descriptive brochures or solicitation materials distributed by the insurer misrepresent coverage” because of the reasonable expectations of coverage such materials create. Dismissing the argument that the insured attorney was not a typical layperson (there being no evidence of an expertise in insurance matters), the court stated, “Where the dominant theme of the insurer's advertising materials is comprehensive coverage, the insertion of a relatively inconspicuous caveat that coverage is subject to the policy terms should not be found sufficient to overcome the overall impression created by the brochure.”

In contrast, an Arizona appellate court found that reasonable expectations of coverage had not been created by a brochure in the case of Mason v. State Farm Mutual Automobile Insurance Co., 714 P.2d 441 (1985). In Mason, the insured and his wife each had their own automobile policies for different vehicles. The wife's insurance covered a van and the husband's covered his motorcycle. Each policy included underinsured motorists coverage and each contained an exclusion relative to this coverage for bodily injury to an insured who was injured while occupying a vehicle not insured under the policy. The husband was struck by another person's car while riding his motorcycle, and collected insurance from that driver and under his own policy's underinsured motorists coverage. He also put in a claim under his wife's policy and the claim was denied.

The insureds had been given a sales brochure when they bought the wife's policy but did not receive a copy of the policy itself until after the accident. The insured claimed that the brochure led him to believe that he would have underinsured motorists coverage under his wife's policy. He also asserted that the agent had not told him of this limitation and that the agent told him after the accident that he should be able to get the coverage. The agent filed an affidavit denying that she had made such a statement. The court found that no reasonable expectation of coverage was created by the agent's failure to point out the coverage limitation.

Furthermore, the court held that the brochure did not “reasonably induce the belief” that the husband would have underinsured motorists coverage under the policy. The brochure contained a disclaimer providing that “. . . this folder contains only a general description of acceptable coverage and is not a statement of contract.” In addition, the brochure described the drivers who would be covered under the policy, clarifying that a spouse would be covered if they were driving the named insured's car. The court found that a reasonable person who read the brochure would not be misled.

Note that both courts accepted the idea that advertising materials (including statements made by the agents) could create reasonable expectations of coverage, so the differences between the brochures is significant. In Dobosz, the disclaimer was in print smaller than the rest of the brochure. Although the description of the water damage peril under the broad form mentioned the types of water damage that would be covered (implying limited coverage), the brochure merely indicated that the all risks policy covered this peril (implying no limitations). Although the opinion in Mason does not specify that the print used for the general disclaimer was at least the same size as that used throughout, it is very probable that this was the case. Of greater importance is the fact that specific limitations on coverage were at least mentioned in the brochure.

A few cases have made mention of the reasonable expectations of “the parties,” thus including a consideration of the insurers' reasonable expectations as well as those of the insured. These cases generally involve commercial lines of insurance, a situation in which the consumer is viewed as less vulnerable than personal lines insureds.

For example, in State, DEP v. Signo Trading International, Inc., 562 A.2d 251 (1989), the insured owned a warehouse that housed improperly stored hazardous chemicals. The warehouse was inspected by the state's Department of Environmental Protection after a fire in which several firefighters suffered respiratory injuries. As a result of the inspection, the property was cleaned up by a state environmental division after the owner's noncompliance with cleanup orders. The owner was then ordered to reimburse the state. He sought insurance coverage under comprehensive liability and umbrella policies. The policies included an “owned property” exclusion. The appeals court held that the “owned property” exclusion barred insurance recovery where there had been no off-site contamination and there was no proof that there was an “immediate” or “imminent” threat to third parties. The court explained that “Such an interpretation, although certainly burdensome to [the insured], comports with the general understanding that liability insurance policies cover only tort liability for damage to others, not first party losses of the insured itself. . . . We believe that this interpretation most nearly satisfies the reasonable expectations held by the parties upon entering into the contracts, regarding the limitations of coverage.”

Another case in which the reasonable expectations of the parties was mentioned is Chmielwski v. Aetna Casualty and Surety Co., 591 A.2d 101 (1991), decided by the Connecticut Supreme Court. The deceased insured's wife, as representative of his estate, claimed underinsured motorist coverage under his business auto policy. The insured had been killed when a pickup truck struck the motorcycle he was driving. The motorcycle was not listed as a covered vehicle under the business auto policy, but nine other vehicles were listed on the policy, each accorded $500,000 of uninsured and underinsured motorist coverage. Total premium charged for the vehicles was $262. The insured had also had an excess liability policy. Coverage under both policies was claimed for a total amount of $4,500,000 (9 x $500,000).

Although Connecticut does not permit stacking in the case of fleet insurance, the wife claimed that the business auto policy was not a fleet policy since title to the vehicles was in her husband's name, not in the corporate name. The court rejected this overly-technical position and stated that “[t]he notion of 'stacking' as an objectively reasonable expectation of the parties does not . . . extend to fleet insurance contracts” because of the unreasonably high amount of insurance it would make available for an unreasonably low amount of premium. The court reasoned that if stacking were allowed, and each vehicle were accorded the same amount of coverage, the total available coverage for a premium of $262 would be $500,000 x 9 x 9, or $40,500,000.

The wife claimed in the alternative that stacking should apply to fleet policies where the insured claiming coverage is a class I insured (the named insured and relatives in his household) as opposed to class II insureds (such as employees). The court reaffirmed its position that general principles against stacking applied to all types of insureds. It reasoned that  ignoring  the “reasonable expectations of both the named insured and the insurer” would lead “to a result far beyond the reasonable expectations of the parties to the contract.”

At least eight states have declined to adopt the doctrine of reasonable expectations (Idaho, Illinois, North Dakota, Ohio, Oklahoma, South Carolina, Washington, and Wyoming). However, several of those state court opinions indicate that the courts would be receptive to the application of the doctrine if the right type of case was presented. Overall, the cases seem to indicate that the insured's familiarity with business matters is viewed as an important factor in the insurer's favor.

Courts have varied in their reasons for declining to apply the doctrine of reasonable expectations. Some states, such as South Carolina, treat insurance contracts as any other contract so that they are not viewed as contracts of adhesion. For example, in Allstate Insurance Co. v. Mangum, 383 S.E.2d 464 (1989), a South Carolina court of appeals rejected the reasonable expectations doctrine and reaffirmed the position of earlier state cases that insurance contracts are “subject to the general rules of contract construction.”

Ohio, a state with liberal rules of insurance contract interpretation, has also been reluctant to adopt the doctrine. In Sterling Merchandise Co. v. Hartford Insurance Co., 506 N.E.2d 1192 (1986), an Ohio appeals court said: “[T]he reasonable expectation doctrine requires a court to rewrite an insurance contract which does not meet popular expectations. Such rewriting is done regardless of the bargain entered into by the parties to the contract. Such judicial activism has not been adopted in Ohio by its courts and the courts' use of liberal rules of construction.” Despite this explicit rejection of the doctrine, the Ohio court was careful to describe why the doctrine would not apply to the facts of the particular case before it.

The insured was a chain of jewelry stores. One of its stores, located in a mall, suffered the theft of most of the contents of its safe (items put on display during working hours). The store's insurance policy included coverage for “safe burglary,” but only if there were visible marks of forced entry by tools, explosives, electricity, gas, or chemicals upon the doors of the safe, or the doors to both the safe and the vault if the safe was kept in a vault. The store's burglar alarm was triggered by the burglary, but there were no signs of forced entry and the insurer denied the claim.

The court found that the facts did “not indicate any misrepresentation, overreaching, or other conduct on behalf of the insurer which would justify abrogating the parties' agreement. Nor was there any evidence that Sterling was beguiled into believing it had more coverage than it did.” The court also found that the insured, by having its insurance agent keep the policies, had “tacitly refused to read its policies,” something for which the court had little sympathy, because, in its opinion, the requirements for safe burglary coverage were “plainly set out.” The court said that “The definition was not so complex or esoteric that a competent businessman could not understand it,” thus imposing a clear duty on a business insured to read the contract.

However, the court distinguished the case before it from the Iowa C & J Fertilizer case (discussed above). Unlike the insured in C & J Fertilizer, the insured in this case had made a choice to remain uninformed of the policy terms and, being a large company, was presumed to be represented by “astute business people.” By making these distinctions, the Ohio court showed its openness to the doctrine under different circumstances.

Wyoming is another jurisdiction that has indicated its receptiveness to the doctrine under the right circumstances. The case of St. Paul Fire and Marine v. Albany County School District, 763 P.2d 1255 (1988) involved a claim by a school district for payment of a civil rights violation award to an employee. The insurer denied coverage, pointing out that the renewal application clearly showed that the school district understood that coverage applied only to the district's obligation to indemnify Board members and employees and that it did not cover lawsuits brought directly against the district. The Wyoming Supreme Court said that it did “not absolve the parties to an insurance policy from the duty to read the policy.” The court found that this was not “an appropriate case” in which to consider adoption of the reasonable expectations doctrine.

Massachusetts, previously among those states that had not adopted the doctrine but seemed disposed to do so, has begun applying the doctrine. Massachusetts has not specifically stated that it has changed course, but the state supreme court made the following statement in the case of Atlantic Mutual Insurance Co. v. McFadden, 595 N.E.2d 762 (1992): “When construing language in an insurance policy, we 'consider what an objectively reasonable insured, reading the relevant policy language, would expect to be covered.'” See also Hazen Paper v. U.S. Fidelity and Guar., 555 N.E.2d 576 (1990), in which the Massachusetts court adopted this position.

Of all the states that have declined to adopt the doctrine, Idaho has made the strongest rejection. In Casey v. Highlands Insurance Co., 600 P.2d 1387 (1979), decided by the state supreme court, the insured put in a claim for safe burglary when its safe was opened by thieves who had gained entry into the store by breaking the lock on the front door. The policy required that there be marks of forced entry on the doors to the vault or the safe. There were no such marks, as admitted by the insured. The district court had found coverage for the insured after applying the doctrine of reasonable expectations, basing its opinion on an affidavit of the insured alleging that the insurance agent led him to believe that burglary losses would be covered. The supreme court found that a genuine issue of material fact remained concerning the precise nature of the representations made to the insured by the agent so that judgment for the insured was premature. Before sending the case back for further proceedings, the court stated that Idaho did not adopt the doctrine of reasonable expectations, preferring traditional principles of contract construction.

The court said that intent is to be determined from the language of the contract itself and that insurance contracts, absent an ambiguity, must be construed as any other contract according to the meaning derived from the words of the contract. “Reliance on this traditional approach avoids the danger that the court might create liability by construction of the contract terms or creation of a new contract for the parties. In the event that there is an ambiguity in the terms of the policy, special rules of construction apply to insurance contracts to protect the insured . . . [so that] it becomes unnecessary to adopt a new theory of recovery where, conceivably, the periphery of what losses would be covered could be extended by an insured's affidavit of what he 'reasonably expected' to be covered.” Idaho's position has since been reaffirmed in Meckert v. Transamerica Insurance Co., 701 P.2d 217 (1985).

The doctrine of reasonable expectations seems to be gaining momentum and its adoption by more than a majority of states during the next decade seems almost certain. Both those jurisdictions adopting and declining to adopt the doctrine raise issues worth consideration, balancing the idea of fairness to consumers against fairness to insurers. Realistically, not all risks of economic loss can be shifted to insurers if the insurance industry is to remain solvent, and the doctrine should not be viewed as a convenient vehicle for such a result. On the other hand, it is unrealistic to expect that the evolution of contract law will bypass the area of insurance contracts. Where the doctrine is adopted, adherence to strict criteria for its application is necessary to avoid a total reliance on subjective factors. As the doctrine gains acceptance, insurance professionals will have to become increasingly vigilant about creating circumstances that might lead to a finding that reasonable expectations of coverage were created. Careful review of the policy with the insured, particularly the exclusions section, should become standard procedure for producers.