Understanding Insurance Policies as NonContracts: An Alternative Approach to Drafting and Construing These Unique Financial Instruments

Insurance policies commonly are understood to be a species of standardized contracts. This Article challenges that conventional wisdom and argues that insurance policies do not actually qualify as contracts under the doctrinal and theoretical bases of contract formation. It examines the process by which insurance policies are created and sold, and measures that process against the requirements for contract formation. This Article also distinguishes insurance policies from other types of standardized contracts, such as wrap agreements, which currently are the subject of much litigation and scholarly commentary. It then explores the doctrinal and theoretical bases underlying the specialized rules that courts have developed to interpret insurance policies—rules that incorporate public policies such as ensuring that injured parties are compensated and that powerless consumers receive protection against overreaching by insurers — and explains how courts implicitly have recognized that insurance policies are not simply a type of standardized contract.

Then, in order to avoid the current problem of regulatory capture associated with the approval of policy language, this Article proposes a reform of insurance law. It advocates that an independent third party should draft insurance policies into shorter, more understandable documents with input from both insurers and policyholders. And it recommends that instead of using the current rules of insurance policy interpretation, courts would use the canons of statutory interpretation to interpret insurance policies. Under this approach, consideration would be given to the drafting history, societal interests, and overriding purpose of insurance, and Chevron deference would be afforded to the drafter’s interpretation.