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4.3 Freedom of Contract in the Field of Private Insurance
  • 1 Freedom of Contract in the Field of Private Insurance


    There are numerous older cases, and some recent ones as well, informing us that an insurance policy is no different from any other contract.[105] "[T]he insurance company is entitled to have its contract enforced by the courts as written."[106] No other result is possible, it has been said, if the fundamental principle of the security of transactions is to be preserved. A court, on this view, may not strike out or change any part of the policy so as to vary or contradict a statement in the original agreement; its function is limited to the interpretation of, and only of, the policy's ambiguous terms.[107] Having signed the application and having retained the policy based on the application, the policyholder (and for that matter, the beneficiary) is bound by the statements and terms that it contains.[108] "After all," as Holmes said, "no rational theory of contracts can be made that does not hold the assured to know the contents of the instrument to which he seeks to hold the other party."[109]


    Yet, despite the repeated assertion of such views, a growing body of case law too large to be ignored strains to distinguish the insurance policy from ordinary run-of-the-mill contracts and to treat the former as standing in a class by itself.[110]


    The time has long passed when the ordinary insurance policy could be characterized as the result of individual haggling. Once insurance became a mass industry, the drafting of a policy became a one-sided affair. The standard policy emerged, drafted by the individual insurer or by the industry as a whole, acting in cooperative fashion, as in the case of motor vehicle insurance.


    Today, the choice of a policy holder is about as restricted as the choice of a car buyer. An applicant for insurance is offered a limited number of policy forms and must accept one of these if he desires insurance with a given company.[111] In this way, standardization saves transactions costs — a benefit for both parties. From the industry's point of view, standardization (uniformity) is an advantage because it makes possible the calculation of risks and therefore provides the statistical basis for its efficient distribution. Risks that are difficult to calculate can be excluded altogether or insured only at an increased price. To the policyholder, uniformity means reduced costs and equal treatment. In addition it means standard wording, which increases the chance the policyholder will understand the contract: the greater the ignorance of the policyholder, the more he is protected by standardization, which approximates his normal needs. To this extent, the sophisticated purchaser of insurance, who the policy, may have little advantage over his less experienced peer.[112]


    The insurance policy is the prototype of a standardized mass contract. Once its usefulness was proven in the field of marine insurance, it spread quickly from industry to industry. And yet, the standardized mass contract, despite its unquestionable advantages, has frequently been a tool for overreaching, because of the unequal bargaining power of the majority of contracting parties. However important it is for the insurance industry to be able to select and control the risk incurred, the history of insurance furnishes many illustrations of the abuse of freedom of contract.


    The evolution of warranty law from its early beginnings in marine insurance is a case in point. Dissatisfied with the existing law of misrepresentation and concealment, marine insurers invented an additional device for the selection and control of risks: in their policies they included clauses (labeled "warranties") that made the existence of facts affecting the risk a condition of the insurer's liability.[113] These warranties, typically based on information coming from the insured or his agent, were rigidly enforced, and any deviation from the true state of affairs, however trivial or immaterial to the risk and however innocent, was, according to a famous decision by Lord Mansfield, fatal to recovery.[114]


    The insurance industry knew a good thing when it saw one. When new types of insurance, such as fire or life insurance, became popular, the industry, particularly in this country, made the fullest use of freedom of contract to impose on the policyholder strict warranty law and to constantly increase the number of exceptions to coverage, which were often couched in obscure language.[115] "Machine made" warranties came into existence. Some life insurance applications contained close to one hundred questions, including the most trivial matters concerning the health of the applicant or his close relatives, which the applicant would almost certainly be unable to answer correctly.[116] Many a policyholder or beneficiary came to grief after making payments for years. The owners of fire policies often did not fare any better.[117]


    A backlash became inevitable. In time, the marketing of insurance was regulated and the terms of insurance transactions were controlled by legislation, administrative action,[118] and judicial decision.


    The first attempts at statutory regulation were rather feeble and inefficient, in part because the judicial branch, constrained by traditional contract theory, felt, on the whole, that it lacked authority to tamper with the terms of the insurance contract. Gradually, however, the principle of freedom of contract was hemmed in by restrictions. To protect the insured, ambiguities were discovered by the courts (where none existed) in order to make room for interpretations that protected the legitimate expectations of the policyholder. Warranties were narrowly construed,[119] and the doctrines of waiver and estoppel were used with increasing frequency,[120] often with conflicting results. It is no wonder that the law of insurance fell into a state of deplorable uncertainty. Since insurance policies did not fit into the conventional pattern of contract law with its individualistic presuppositions (the common law of offer and acceptance, the doctrines of agency, the canons of interpretation, and the parol evidence rule, to mention only a few), the latter were "in various instances badly warped, if not broken, in order that insurance law could accommodate itself to the actuality of fact.”[121]


    The cases leave very little doubt that insurance law is a field where, to use the language of Max Weber, "antiformalist tendencies" were, and still are, at work.[122] The "peculiar legal aspect" of insurance law cannot be sufficiently explained by its aleatory element, but is due, in large measure, to the solicitude that courts have shown for the insured.[123] Although only a few courts have said that an insurance contract is one of the utmost good faith,[124] a high standard of fair dealing has been imposed in a number of significant respects. Courts have imposed a duty to warn, to explain,[125] and to communicate information in the formation and performance stages[126] (a reaction against misrepresentation on the part of the insurer or his agent),[127] as well as a duty to make good faith efforts to defend and to settle, on pain of being subject to excess liability, e.g., recovery beyond the policy limits.[128] These duties are "matched" by duties on the part of the insured to cooperate,[129] and to make available vital information duties, however, which have been softened by the downgrading of warranties[130] and incontestability clauses,[131] as well as by liberal use of the doctrines of estoppel, waiver, and laches.[132]


    To improve the lot of the policyholder still further, and to bring about a rational system protecting reasonable expectations, renewed efforts were made at legislative and administrative reform. In the field of fire insurance, regulation largely took the form of legislative fiat,[133] which reduced warranties, coverage limitations, and exceptions to a minimum.[134] The techniques used for controlling life insurance and related policies have been quite different; here, all that is typically required is that the policy contain certain provisions to protect the minimum expectations of the policyholder.[135] In many states, strict warranty law has been abolished in toto, with warranties sometimes being converted into mere representations.[136] As a result, so long as there is no fraud or concealment, the untruth of a statement by the applicant for insurance is fatal to recovery only if material to the risk.[137] The criteria of materiality, however, are not uniform and in many states the law can be evaded by rephrasing warranties so as to make them into coverage provisions.[138]


    Outside the field of motor vehicle insurance and worker's compensation, only a few states have gone so far as to impose on insurance companies a duty to insure acceptable risks.[139] And interim insurance, usually provided in the form of "binders" protecting the applicant in the interval between application and issuance of a policy, has, unfortunately, escaped regulation, with the result that binders are often worded in such a way as to enable the insurer to play fast and loose with the applicant.[140]


    The various improvements in insurance regulation, however useful and important, have not dispensed with the need for regulation by creative judicial decision, particularly since many of the statutes in question are poorly drafted.[141] This is particularly true since insurance policies cannot avoid the use of technical terms with which the majority of policyholders are likely to be unfamiliar. Ambiguities are inescapable. The insured buys a product with a deplorable lack of understanding of what he is getting.[142] The technical language of the policy has created an atmosphere in which most policyholders are forced to rely On the skill, honesty, and fairness of their broker and his interpretation of the terms. It is only natural that prior to the issuance of an insurance policy, the insurer or his agent will be most anxious to please.


    In this atmosphere of selling, "roseate with promises," it can hardly be expected that agents will call attention to defects or dangers lurking behind technical language. Rather, the insurer focuses attention on the small cost the value of his services, and the insured's duty to his family and his creditors. . . . If anything is said about collection in case of loss, it is the most glowing account of the record of full and prompt payment.[143]


    Small wonder that the individual policyholder is seldom able to determine the value of the policy. To make matters worse, the policy is presented to the buyer as a packaged product and he does not ordinarily gain access to it until he receives it in the mail. The applicant for life insurance, for instance, does not usually see the policy terms until he has signed the application and sent in the first premium, and the company has approved the application and executed and issued the policy, a procedure that may take weeks.[144] This delay substantially enhances the policyholder's disinclination to read the policy carefully, or even to read it at all, a fact of which insurance companies are well aware.


    However indispensable judicial creativity is in compensating for poor statutory drafting and gaps in the law, residues of irrationality inevitable remain in a field as emotionally charged as that of insurance.[145] The impact of the jury system is a case in point. Juries, which have the power to decide disputed questions of fact, have often been allowed to bring in general verdicts in insurance cases.[146] Although such a verdict, to quote Patterson,


    is not supposed to decide issues of law but only issues of fact, it frequently does decide the entire merits of the controversy, both legal and factual, against the insurer. This jury control of insurance, while it often results in mistaken generosity to unworthy claimants, serves as a check upon the dilatory or technical defenses that some insurers will raise.[147]


    The expectation principle has assumed a paramount role in an increasing number of cases. All too often the courts have failed to heed Llewellyn's warning that chaos lies in broad words of generalization, and salvation in the close study of facts.[148] Even at the risk of disregarding Llewellyn's advice, however, a few generalizations can safely be made. The chief weapon of courts willing to protect expectations "at variance with policy provisions"[149] (besides the traditional tools of waiver and estoppel) has been the technique of finding ambiguities in in the policy, even where none exist.[150] In this way, courts have been able to interpret insurance policies against their draftsmen by choosing from among the variant reasonable meanings of a term the one which is most favorable to the insured.[151] Ambiguity has frequently been assessed from the point of view of the average policyholder, and not from the point of view of an experienced underwriter.[152] Further, ambiguity may be found to exist if the marketing techniques of the company make it impossible for the policyholder to obtain notice of an exclusion. Air trip insurance furnishes a striking illustration: although not covered by express provision in the policy, passengers on non-scheduled airlines have received protection because the vending machines did not make the exclusion clearly visible.[153]


    A few courts have ventured beyond the older method of finding (or inventing) ambiguities,[154] and have sought to protect "insurance law rights at variance with policy provisions" by relying on arguments of public policy or on the doctrine of unconscionability, particularly when enforcing the terms of the policy would negate the very essence of the insurance contract.[155] Other courts have imposed on the insured a duty to inform the applicant of a limitation of coverage, or a duty to disclose its own knowledge of the reach of a policy provision under existing case law.[156]


    These decisions are indicative of the extent to which, as Justice Tobriner has pointed out, courts today derive the reasonable expectations of the parties to a contract of insurance from their relationship, as well as from the consensual transaction itself.[157] This should not be understood as a denial of the contractual nature of the insurance contract. But although such contracts are entered voluntarily the range of obligations they create is defined in part by the role of insurance companies in our industrial society.[158] To this extent, the evolution of American case law may be an illustration of the thesis developed by Zweigert and Katz that freedom of contract has found a limitation in the demands for contractual justice.[159]


    [105] This section is adapted from Kessler, Forces Shaping the Insurance Contract, a paper delivered at the Chicago Conference on Insurance (Conference Series No. 14, 1954). The field of insurance law is so large that many of its aspects have had to be omitted.


    [106] Drilling v. New York Life Ins. Co., 234 N.Y. 243, 137 N.E. 314 (1922); Swentusky v. Prudential Ins. Co., 116 Conn. 526, 165 A.68 (1933).


    [107] Morgan v. State Farm Life Ins, Co., 240 are. 113, 400 P.2d 223 (1965) (4/3 decision).


    [108] Russo v. Metropolitan Life Ins. Co., 125 Conn. 132, 3 A.2d 844 (1930).


    [109] Lumber Underwriters of New York v. Rife, 237 U.S. 605 (1915).


    [110] Pfister v. Missouri State Life Ins., 87 Kan. 97, 102, 116 P. 245, 247 (1911); Woodruff, Selection of Cases on the Law of Insurance, Preface at iv, v (2d ed. 1914); Schultz, The Special Nature of Insurance Contracts: A Few Suggestions for Further Study, 15 Law & Contemp. Prob. 376 (1950).


    [111] Individualization and flexibility are provided by permitting endorsements ("riders"). The New York fire policy, enacted by statutory fiat and adopted in almost every state of the union, permits a variety of endorsements, so long as they are not "inconsistent" with the basic form. E. Patterson, Essentials of Insurance Law 34-35 (2d ed. 1957).


    [112] R. Keeton, Insurance Law (Basic Text) 68-69 (1971); Restatement Second §211(2).


    [113] Patterson, supra note 111, at 308; id., Warranties in Insurance Law, 34 Colum. L. Rev. 595 (1934). A "warranty" relates to facts potentially affecting a particular risk, in contrast to "coverage" clauses, which identify the risks that fall outside the scope of coverage, and "exceptions," which exclude liability for an insured event that is caused in certain ways. Patterson's definition has been adopted by the New York Legislature. The insurance law of many states has failed to define the term warranty, though using it quite freely. For a criticism of Patterson, see Keeton, supra note 112, at 388; see also W. Young, Cases and Materials on the Law of Insurance 209 (1971).


    [114] De Hahn v. Hartley, 1 T.R. 343, 90 Eng. Rep. 1130 (1740); Park, Insurance 339 (1769). Park's classic makes it clear that one of the functions of warranty clauses was to exclude the so-called juridical risk. See further Vance, The History of the Development of Warranty in Insurance, 20 Yale L.J. 523 (1913).


    [115] Wilson v. Assurance Co., 90 Vt. 105, 108, 96 A. 340, 342 (1915). On the "readability" of insurance policies, particularly automobile policies, see Harding, The Standard Automobile Insurance Policy: A Study of Its Readability, 34 J. Risk & Ins. 39 (1967). See further Insurance Co. of N. A. v. Electronic Co., 67 Cal. 2d 679, 433 P.2d 174 (1967).


    [116] Moulor v. American Life Ins. Co., 111 U.S. 335 (1884); Globe Mutual Life Ins. Assn. v. Wagner 138 Ill. 133, 58 N.E. 970 (1900).


    [117] For the evolution of insurance in this country see Horwitz at 226.


    [118] Regulation by legislation has the disadvantage of inflexibility. On the purpose of regulation, see S. Kimball, The Purpose of Insurance Regulation: A Preliminary Inquiry in the Theory of insurance Law, 45 Minn. L. Rev. 471 (1961); Legislative and Judicial Control of the Terms of Insurance Contracts: A Comparative Study of American and European Practice, 39 Ind. L.J. 675 (1964); Administrative Control of the Terms of Insurance Contracts: A Comparative Study, 40 Ind. L.J. 143 (1965).


    Control by administrative agencies has its considerable advantages, provided the commission is well staffed and financed, but this is often not the case.


    The New York Insurance Department, headed by an Insurance Commissioner, is an outstanding exception. The New York Insurance Commissioner has broad power of control, for instance, the power with regard to certain policies to disapprove a form “if it contains provisions which encourage misrepresentation or are unjust, unfair, unequitable, misleading, deceptive, or contrary to law or the public policy of the state.” (Insurance Law §141).


    The following discussion does not deal with the regulations aiming at the solvency of insurers or the regulation of premiums in the interest of fairness. As to these aspects, see Keeton, supra note 112, at 554 et seq.


    Although the insurance business is interstate commerce (U.S. Const. art. I, §8, cl. 3; United States v. Southeastern Underwriters Assn., 332 U.S. 53 (1944)) and therefore subject to federal control, the McCarran-Ferguson Act, 15 U.S.C.A. §1011-1105 (West 1976), conceded to state governments the regulation of insurance business to the extent that it is not explicitly regulated by federal law. Federal antitrust laws, however, are applicable. (15 U.S.C.A. §1012.) In addition, a 1982 law provided that even if the business of insurance is regulated by state law, it will not be immunized if it constitutes an agreement or act of boycott, coercion or intimidation, 15 U.S.C. §§1011-1013 (1982). See Kintner, Bauer, & Allen, Application of the Antitrust Laws to the Activities of Insurance Companies: Heavier Risks, Expanded Coverage and Greater Liability, 63 N.C.L. Rev. 431 (1985).


    [119] Moulor v. American Life Ins. Co., supra note 116.


    [120] Patterson, supra note 111, at 493. See Morris, Waiver and Estoppel in Insurance Policy Litigation, 105 U. Pa. L. Rev. 925 (1957). See further F. Kessler & G. Gilmore, Contracts 860-863 (2d ed. 1970).


    [121] Woodruff, supra note no. 110. According to Slawson, most insurance policies are not contracts at all but exercises of private lawmaking power. To the extent that they are not contracts, he argues they should be governed by principles derived from administrative law. See Slawson, Standard Form Contracts and Democratic Control of Lawmaking Power, 84 Harv. L. Rev. 529 (1971). For a suggestion to apply the implied warranty of sales law to insurance policies, see Comment, 35 Yale L.J. 203, 207-208 (1925); State Security Life Ins. Co. v. Kintner, 243 Ind. 331, 185 N.E. 2d 572 (1926) (dissenting opinion). See further 7 Williston §900 (Jaeger 3d ed. 1963).


    [122] Max Weber, Economy and Society (G. Roth & C. Wittich eds. 1978):


    New demands for a "social law" to be based upon such emotionally colored ethical postulates as "justice" or "human dignity," and directed against the very dominance of a mere business morality, have arisen with the emergence of the modern class problem. They are advocated not only by labor and other interested groups but also by legal ideologists. By these demands legal formalism itself has been challenged. (The translation is by Max Rheinstein; a footnote has been omitted.)


    [123] E. Patterson, Essentials of Insurance Law 62 (2d ed. 1957).


    [124] Bowler v. Fidelity & Casualty Co., 53 N.J. 313, 250 A.2d 580 (1969); Keeton. Ancillary Rights of the Insured, 13 Vand. 1. Rev. 844 (1960); Comment, The Emerging Fiduciary Obligation and Strict Liability in Insurance Law, 14 Cal. W.L. Rev. 358 (1978). The requirement of utmost good faith originated in English marine insurance law (British Marine Insurance Act of 1906 §18(1)) and was applied to lapses of nondisclosure on the part of the insured. It is still applied in England in marine as well as nonmarine insurance. E. G. Horne v. Poland, [1932] 2 K.B. 384; Hasson, The Doctrine of Uberrima Fides in Insurance Law — A Critical Evaluation, 33 Mod. L. Rev. 615 (1969). The powerful opinion of Taft, J. in Penn Mutual Life Ins. Co. v. Mechanics Savings Bank & Trust Co., 72 F. 413 (1896), may have led to the demise of the rule in this country in life and fire insurance cases.


    [125] Holz Rubber Co., Inc. v. American Star Ins. Co., 14 Cal. 3d 45, 533 P.2d 1015, 120 Cal. Rptr. 415 (1975). See further note 156 infra.


    [126] Bowler v. Fidelity & Casualty Co., supra note 124.


    [127] 136 A.L.R. 5 (1942).


    [128] Crisci v. Security Insurance Co., 58 Cal. Rptr. 13 (1967).


    [129] MFA Mutual Ins. Co. v. Sailors, 180 Neb. 201, 141 N.W.2d 846 (1966); Puppkes v. Sailors, 183 Neb. 784, 164 N.W.2d 441 (1909); Billington v. Interim Ins. Exchange of Southern California, 71 Cal. 2d 728, 456 P.2d 982 (1969). The duty, according to Keeton, supra note 124, exists even in the absence of a policy provision. It is fatal to coverage only if prejudicial to the insurance carrier (a jury question). The insurer, on his part, has the duty to elicit information. Noncooperation presents, of course, a danger to the victim. On the duty to notify see Young, supra note 113, at 609f.


    [130] See infra.


    [131] Keeton, supra note 112, at 322. The clause has often been extended beyond life to disability and accident insurance.


    [132] Morris, Waiver and Estoppel in Insurance Policy Litigation, 105 U. Pa. L. Rev. 925 (1957).


    [133] Patterson, supra note 111, at 33, 141, 256.


    [134] See, in general, New York Standard Fire Policy, lines 1-37.


    [135] The "incontestable" clause may serve as an illustration.


    [136] See, e.g., Illinois Insurance Code, §154. Most states have left the old and rigid law intact in marine insurance. For an exception, see Mass. Gen. Laws. ch. 175, §186. See further Wilburn Boat Co. v. Fireman's Ins. Fund, 388 U.S. 320 (1955), which applies state and not federal admiralty law. For the subsequent history of the case see Keeton, supra note 112, at 322.


    [137] W. Vance, Handbook of the Law of Insurance 417 (Anderson 3d ed. 1951). Roughly speaking, the materiality test imposed by many statutes means either that the insurer, if correctly informed, would have denied coverage or would have charged higher premiums (or according to some case law, would have made further inquiries). Other statutes have a "contribute to the loss" test of materiality. Both types of statute apply in an all or nothing manner. By contrast, New Hampshire is the only state whose statute provides for proportionate reduction of recovery across the board. Elsewhere, this principle is generally applied only to misstatement of age and, in most states, to changes of occupation under an accident or health insurance policy (e.g., N.Y. Insurance Law §155(1)(d) and §164(E)(1)).


    [138] Metropolitan Life Insurance Co. v. Conway, 151 N.Y. 449, 169 N.E. 942 (1913). New York has tried to close the gap by restricting the number of coverage clauses, permitting some and excluding others.


    [139] Patterson, The Delivery of a Life Insurance Policy, 33 Harv. L. Rev. 198, 222 (1919). For the problem of the unwarranted insured in the fields of workman's compensation insurance and motor vehicle insurance under state funds or assigned risk plans, see Keeton, supra note 112. at 581-583.


    [140] For the various forms of binders see Comment, 44 Yale L.J. 1223 (1935), 63, Yale L.J. 523 (1954); Keeton, supra note 112, at 41-45. For their control, see Gaunt v. John Hancock Mutual Life Insurance Co., 169 F.2d 599, cert. denied, 333 U.S. 849 (1917). See, however, the "Guidelines" issued by the New York Insurance Department; Young, supra note 113 at 471. According to the Department, approval types of binders are generally not acceptable.


    [141] Patterson, supra note 111, at 8.


    [142] Keeton, supra note 112, at 350 et seq.


    [143] Hutcheson, Law and Fact in Insurance Cases, 1944 A.B.A. Insurance Law Proceedings 6, 12.


    [144] To protect the applicant against "negligent delay," tort law has often been invoked. See, e.g., Duffie v. Bankers' Life Assn. of Des Moines, Iowa, 160 Iowa 19, 139 N.W. 1087 (1913); Kessler, Contracts of Adhesion, Some Thoughts about Freedom of Contract, 43 Colum. L. Rev. 629 (1943); Note, 40 Colum. L. Rev. 1007 (1940).


    [145] Slawson, Mass Contracts: Lawful Fraud in California, 48 S. Cal. L. Rev. 1 (1974).


    [146] On general verdicts see Skidmore v. Baltimore & O. R. Co., 167 F.2d 54 (2d Cir. 1948).


    [147] Patterson, supra note 111, at 7. The magnitude of the juridical risk attributable to the power of the jury is dramatically illustrated by a recent case, Neal v. Farmers Ins. Exchange, 21 Cal. 3d 910, 148 Cal. Rptr. 389, 502 P.2d 980 (1978).


    [148] Llewellyn, What Price Contract?, 40 Yale L.J. 704, 751 (1931).


    [149] Keeton, supra note 112, at ch. 6. It has also appeared in 83 Harv. L. Rev. 961, 1281 (1970).


    [150] Keeton, supra note 112, at 356. For a glaring illustration of the interpretation technique, see the opinion of Bird, C.J., in Searle v. All-State Life Insurance Co., 212 Cal. Rptr. 1308 (1985), dealing with "sane or insane" suicide clauses.


    [151] Restatement Second §206.


    [152] Gaunt v. John Hancock Mutual Life Ins. Co., 169 F.2d 599, cert. denied, 333 U.S. 849 (1947). The attitude of the courts stands in marked contrast to that attributed to the


    professionals who write and review insurance contracts. . . . [T]hese men — form committee members and the like — disregarding the preachments of judges, do not as a rule address themselves to the understanding of the common man. They seem to regard themselves as lawgivers: "primarily our policies are drafted for the courts not the layman, that is to say, not the policyholders."


    Young, supra note 113, at 79, quoting Foster, Humpty Dumpty, 1961 Ins. Couns. J. 130, 131-132 (a member of the Joint Form Committee representing Casualty Underwriters.)


    [153] Lachs v. Fidelity and Casualty Co., 306 N.Y. 357, 118 N.E. 555 (1954); Steven v. Fidelity and Casualty Co. of New York, 58 Cal. 2d 862, 377 P.2d 284, 27 Cal. Rptr. 172 (1963).


    [154] Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 419 P.2d 108, 54 Cal. Rptr. 104 (166). A liability policy imposed a duty on the insurer to defend a lawsuit against a policyholder, except in cases of intentional acts. The policyholder had struck another car whose owner seemed to threaten him. He claimed the action was in self-defense and that he had therefore not acted intentionally. Held. the insurer must defend policyholder in a suit that seeks recovery within the potential coverage of the policy. See the critical Note, 14 U. C.L.A. L. Rev. 1328 (1967). See further Prudential Ins. Co. v. Lumme. 83 Nev. 146, 425 P.2d 346 (1967). See also Kamarick, Opening the Gate: The Steven Case and the Doctrine of Reasonable Expectations, 29 Hastings L.J. 153 et seq. (1977-1978); Tobriner & Grodin, The Individual and the Public Service Enterprise in the New Industrial State, 55 Calif. L. Rev. 1247, 1272-1278 (1967); Meyer, Contracts of Adhesion and the Doctrine of Fundamental Breach, 15 Va. L. Rev. 1178, 1I88 (1964); Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961, 968 (1970).


    [155] Prudential Ins. Co. v. Lumme, 83 Nev. 146, 425 P.2d 346 (1967). As Professor Keeton points out, many of the cases that purport to interpret unambiguous policy terms are best explained as denying enforcement to unconscionably harsh provisions. Keeton, supra note 112, at 360.


    [156] Logan v. John Hancock Mutual Life Insurance Co., 41 Cal. App. 3d 988, 116 Cal. Rptr. 528 (1974); Bowler v. Fidelity and Casualty Co., 53 N.J. 313, 327, 250 A.2d 285 (1966); contra, Mutual of Omaha Insurance Co. v. Russell, 402 F.2d 339 (10th Cir. 1968), cert. denied, 394 U.S. 973 (1969).


    [157] Tobriner & Grodin, supra note 154, at 1247, 1272-1278; Kamarick, supra note 154; Restatement Second §§211 & Comment f, 206, 208.


    [158] Isaacs, The Standardization of Contracts, 27 Yale L.J. 34, 47-48 (1917); Tobriner & Grodin, supra note 154. Some courts and text writers have attempted to strengthen their discussion by labeling insurance policies contracts to adhesion. According to Keeton, supra note 112, at 360, insurance contracts are contracts of adhesion since most insurance policy provisions are still drafted by insurers and supervision is, on the whole, relatively inefficient. The weakness of this argument becomes apparent when we realize that no air traveler, for example, has to take out expensive air trip insurance; the same is true for many other kinds of insurance policies as well. For the loss ratio in air travel insurance, see Young, supra note 113, at 48-58. See in general Patterson, The Interpretation and Construction of Contracts, 64 Colum. L. Rev. 833, 855 et seq. (1964).


    [159] 2 K. Zweigert & H. Kotz, An Introduction to Comparative Law 9 (T. Weir trans. 1977).

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