Bad Faith Insurance: The Reasonable Expectations Doctrine

The Reasonable Expectations Doctrine

The plain meaning of an insurance policy is informed by the reasonable expectations of the insured.  “A contract of insurance should be strictly construed against the insurer and read in favor of coverage in accordance with the reasonable expectations of the insured.”   Insurance policies are contracts of adhesion, drawn by insurers, and should be construed as reasonably understood by an insured.  The test is not what the insurer intended its words to mean, but rather what a reasonable person in the insured’s position would understand them to mean.  “The policy should be read as a layman would read it and not as it might be analyzed by an insurance expert or an attorney.”

Richards v. Hanover Ins. Co.

The Supreme Court of Georgia, in Richards v. Hanover Ins. Co., expressly approved application of the reasonable expectations rule and explained its function in conjunction with other rules of policy construction.  In Richards, a couple’s insured home was destroyed by fire.  The husband was arrested for arson.  The insurance company denied coverage to the wife, relying on an exclusion barring coverage in the event of “neglect of the insured to use all reasonable means to save and preserve property.”  In essence, the insurer argued that the “neglect provision” created a joint obligation by both insureds to preserve the property, and that if one insured breached the obligation the exclusion was triggered for both. The wife argued that her duty under the “neglect provision” was several from that of her husband’s.  The Georgia Supreme Court agreed, not by relying on public policy or concepts of fairness, but by reference to the plain terms of the policy construed in light of the insured’s reasonable expectations.  The court looked to the definition of “insured,” and found that the term referred to an individual.  Furthermore, reading the definition in light of the reasonable expectations of the insured, nothing in the language of the policy would indicate to a reasonable insured that the “neglect provision” created a joint – as opposed to several – obligation.