Part 2: Similarities and differences between a DIY project and the interpretation of an insurance policy

Continuing today, a reflection on constructing a cabinet and how courts should engage in the proper construction of an insurance policy. For Part 1 of this series, click here.

I do not suggest that every judge in every coverage case must spend hours and hours in silent and desperate contemplation of the policy Declarations, as I did with the cabinet instructions, first trying to physically identify Parts A through QQ, then refining the search by category, trying, for instance, to distinguish the four different drawer guide rails from each other, holding each piece in turn and holding a magnifying glass over the drawing of each part, trying to determine the distinguishing characteristics of each.

But I think everyone has heard tell of a DIYer who, heedless of instructions, assembled a seemingly serviceable something from the parts provided, looking just like it was supposed to – and winding up with dozens of unused, unexplained parts. In an insurance coverage case, the failure to take every part into account is a miscarriage of justice.

“A court must construe the policy as a whole and take into account the type of insurance purchased, the nature of the risks involved, and the overall purpose of the contract,” Pekin Insurance Co. v. Wilson, 237 Ill.2d 446, 456 (2010). “It is a fundamental rule of construction that meaning and effect, if possible, be given to every part of the contract so that one provision is not construed to annul another.” Saint Paul Fire & Marine Ins. Co. v. Frankart, 69 Ill.2d 209, 216 (1977). See also, Sheehy v. Sheehy, 299 Ill.App.3d 996, 1000-01 (1998) (“Contract language must not be rejected as meaningless or surplusage; therefore, it is presumed that the terms and provisions of a contract are purposely inserted and that the language was not employed idly”).

I think that judges, particularly experienced judges who handle insurance contract disputes on a regular basis, tend to generalize too much. Like the savvy DIY-er who calls up a YouTube video instead of studying the actual directions for the product under construction, a judge may rely on outside factors---what he did in other cases, for example, involving similar policies.

Granted, insurance policies are fairly standardized these days. Some carriers, like Allstate and State Farm, may use proprietary formats, but a lot of property and casualty carriers simply use forms developed and promulgated by the Insurance Services Office (ISO), often without any modification whatsoever. But... ‘often without’ necessarily means ‘sometimes with’ – and a seemingly innocuous change in an ISO form may, or should, be outcome determinative in a given case.

The other thing that veteran judges sometimes do is make unwarranted assumptions about what the outcome in a case should be based on their understanding of what the policy in question is supposed to provide. The experienced DIYer gets a kit for a storage cabinet and she builds it because she knows how it is supposed to be built. But the proper construction of an insurance policy, unlike a storage cabinet, depends on the meticulous execution of the building instructions. The instructions may be flawed—experienced DIYers will all have tales about how following the instructions too closely would have produced a pile of junk—pre-drilled holes that did not line up with the hardware to be affixed—or vital component pieces that turned out to be improperly sized—but the proper construction of an insurance policy requires following the instructions to the letter, even if it produces an unrecognizable mess instead of a handy storage cabinet.

Although insurance policies are ordinarily construed like any other contract, Central Illinois Light Co. v. Home Insurance Co., 213 Ill.2d 141, 153 (2004), insurance policies are different from other contracts in this important respect: In most contract cases, if a contract provision is deemed ambiguous, parol evidence may be admissible to ascertain the parties’ true intent (Thompson v. Gordon, 247 Ill.2d 428, 441 (2011)); however, in the law of insurance, a policy provision that is determined to be ambiguous will just be strictly construed against the insurer, the drafter of the policy. Pekin Insurance Co. v. Wilson, 237 Ill.2d 446, 456 (2010).

A court has the obligation to ascertain and give effect to the intention of the parties in a contract dispute, whether the contract at issue is for liability insurance or the delivery of widgets. But with insurance policies, a court discharges this “primary function” from the policy language alone. Founders Ins. Co. v. Munoz, 237 Ill.2d 424, 433 (2010).

The thing is, when one enters into a contract for the sale and delivery of widgets, the object and purpose of the contract is abundantly clear, and so are the parties’ intentions: One party expects widgets, the other expects payment. The parties may build some contingencies into their agreement: There may be provisions addressing a sudden decline in widget prices, or if the widget makers should go on strike. There may be penalties for late delivery. But what if widget prices unexpectedly rise? What if a shipping strike prevents timely delivery? While not every possible mishap may have been foreseen by the parties to the widget contract, no one has to guess about the parties’ ultimate intent and purpose.

The parties’ intent is not so clear with insurance contracts. If all goes well with one of these, nothing happens.

In the case of a contract for the sale of widgets, if a dispute develops, the issues are pretty well limited: The widgets weren’t delivered. The widgets were delivered late. The widgets were delivered timely, but were defective. Only some of the widgets were delivered. The buyer failed to pay for the widgets.

There is no real limit to the kinds of disputes that can develop in a dispute over an insurance policy. This is as good a starting point for trying to ascertain where insurance disputes may arise as any: While an event that must happen will not be covered, any event that might happen may be. Mattis v. State Farm Fire and Casualty Co., 118 Ill.App.3d 612, 621-23 (1983). Insurers employ underwriters to anticipate and identify and evaluate possible claims before they occur but, as the old saying goes, “Man plans – and God laughs.”

The insurance contract is not activated unless something unforeseen occurs. One might say that if anything happens, the insured intends that the policy will cover the loss and the insurer intends to evade payment. But that is unfair as well as untrue: Insurers spend a lot of money calculating the odds, and pricing their products accordingly, but insurance companies issue policies with the abundant certitude that some claims will be presented by some policyholders and that these will have to be paid. It is fair, however, to say that, in ascertaining whether any particular loss presented was within the coverage contemplated by the parties at the time of contracting, the analysis must be conducted in full, and perhaps distorting, glare of hindsight.

I think this is the real reason why, in resolving insurance disputes, courts are instructed to look solely to the language of the policy. The policy language pre-dates the loss. Anything that either party does following the loss is posturing. (This does not address those situations where post-loss conduct, by insurer or insured, must be evaluated in light of the terms of the policy – or where the insured arguably causes a loss or otherwise voids coverage by pre-loss conduct – these are subjects for a different day.)

Anyway, after a full day of agonizing over the directions, and following them as best I could, my cabinet began to take shape. Already an improvement over my junior high efforts, the thing in my living room was clearly rectangular in shape, not merely a parallelogram. I even had the rails installed on the walls of the cabinet where the drawers were to be inserted. But I still had to build the drawers. This undertaking was deferred to Day 2.

To be continued....