Most cases involving the reasonable expectations doctrine arise in one or more of three basic contexts: (1) ambiguity in the terms of a policy, either generally or within the framework of a policy exclusion; (2) policy exclusions that undermine the insured's reasonable expectations of coverage; and (3) situations where, by virtue of the policy being a contract of adhesion, the insurer in essence took advantage of the insured by issuing a policy that was not consistent with the insurer's reasonable expectations of coverage.
Currently before the Supreme Court of Ohio is the question of whether Ohio law encompasses the reasonable expectations doctrine.
In Honeybaked Foods, Inc. v. Affiliated Insurance Co., pending in the United States District Court for the Northern District of Ohio, the case will turn on this very question. In that case, a risk report completed by Affiliated Insurance prior to Honeybaked purchasing the insurance policy in question noted that “[t]he most significant and common hazards exposing the food industry are centered on the susceptibility of food products to spoilage and contamination.” Honeybaked purchased the policy mindful of the risk assessment.
In early November, 2006, HoneyBaked discovered that a sample of its products had tested positive for listeria monocytogenes, a pathogenic bacterium that causes listeriosis, an uncommon but potentially fatal disease. Further investigation revealed that a risk of contamination affected over one million pounds of product produced from September 5 through November 5, 2006. Honeybaked suspended operations and recalled tons of contaminated product.
The Affiliated insurance policy contained a contamination exclusion, stating:
"This policy does not insure against loss or damages caused by [contamination, including but not limited to pollution]; however, if direct physical loss or damage insured by this policy results, then that resulting direct physical loss or damage is covered."
Affiliated denied the claim, explaining that the policy excluded the product loss, and because “there is no covered physical loss or damage, any business interruption associated with the listeria contamination is also not covered.” Honeybaked sued.
The trial court stated that “a jury could find that HoneyBaked had a reasonable expectation of coverage for losses due to contamination. But the policy, when closely interpreted, excludes losses caused by contamination. The availability of coverage, notwithstanding the exclusion, turns on the question of whether Ohio law incorporates the reasonable-expectations doctrine and applies such doctrine to this case.”
A recent Minnesota decision stated that “The doctrine of reasonable expectations does not destroy the insured's obligation to read the policy, but only holds an insured to a reasonable understanding of that policy.” Frey v. United Services Auto. Ass'n, (Minn. Ct. App. 2008).
Some states allow for use of the doctrine only under certain circumstances while others are less strict on application. The Reasonable Expectations Doctrine is a "principle [that] pertains to alleged ambiguities within the policy." Brown v. Indiana Insurance Co., (Ky. Supreme Court, Dec., 2005.) "Under Arizona law, even unambiguous policy language will not be enforced against the insured if the insured had a reasonable expectation of coverage." Madsen v. Fortis Benefits Ins. Co., (U.S.D.C. Ariz., Dec. 21, 2006).
In Honeybaked Goods, the policy excludes losses from contamination. The risk of such loss, a jury could find, motivated HoneyBaked’s purchase of the Affiliated policy, and that Affiliated knew of HoneyBaked’s desire and need for coverage against losses from contamination. The court stated: “Whether coverage is available in this case depends on whether Ohio law encompasses the reasonable-expectations doctrine.”
The Ohio Supreme Court a is very conservative court, but in a recent decision overturned lower courts and extended coverage to victims of a bus crash finding that where a University had hired a bus driver, the bus driver was covered under the University’s policy. Fed. Ins. Co. v. Executive Coach Luxury Travel, Inc., (Ohio S.Ct., Dec. 28, 2010.) What is worth noting is that the Dissent in Fed. Ins. Strongly supports the view that intent of the parties is the critical inquiry in such coverage disputes:
“The majority’s narrow interpretation expands the scope of coverage beyond what the parties to the insurance policy intended,” Justice Stratton wrote. “Today’s opinion unreasonably extends coverage to a third party and effectively opens the door for similar claims under other scenarios because the omnibus clause is standard in many insurance policies.” Fed. Ins. Co. v. Executive Coach Luxury Travel, Inc., 2010-Ohio-6300 Dec. 28, 2010, Stratton, J. and O'Donnel, J. Dissenting.
In order for Honeybaked to prevail, The Ohio supreme court will have to rule that Ohio either does or does not recognize the reasonable expectations doctrine and the trial court would have to take an Arizona approach and enforce the policy against the insurer based on the position that Honeybaked had a reasonable expectation of coverage despite the exclusionary language.
What is the lesson here? Despite the availability of the reasonable expectations doctrine in some states, the lesson is that care in drafting and an understanding of the law of the state in which the policy is issued are of the utmost importance in insurance policies.