On the “Read the Policy” Rule 

It is often repeated in arguments, briefs, and court opinions that policyholder must read their policies.  The proposition expressed in this phrase, or one equivalent to it, taken just by itself, has been for a long time and now is a repeatedly deployed slogan.  The truth is that when standing alone—this phrase is not a rule of insurance law and never has been. The same is true of contract law–that body of common law from which much of insurance law is derived.  

In support of what is argued here, a few cases are cited.  Some of them are quite old.  Actually, they are valuable precedents.  It is a good thing that many parts of the common law of insurance have not changed much in the last century or so.  There are significant
exceptions.  The law of late notice is one of them. 

The rule “Insureds must read their policies” must first be analyzed and conceived correctly. It might even have started with contract law in general and then seeped its way into insurance law.  As everyone knows, the common law of insurance is nothing but a
subdivision of the common law of contracts. In the area of contract law, there is no reason why the so-called duty to read the contract must be an iron-clad doctrine with absolutely uniform absolute application To the extent that the correct analysis is determined, it is easy to see that this rule, traditional though it is, should be overthrown.  It cannot be much more than jurisprudential laziness why this did not happen years ago.

The first thing to understand is that the word “read” cannot mean just read.  It must mean read and understand, taken together.  It is completely pointless to force an insured to read a policy she does not understand.  (Herein, all the relevant pronouns will be
combined into “she” where possible.)  This essay will be taken the word “read” to mean “read and understand” or “read and understood.”

 Just as one can read a policy without understanding it,  one can understand an insurance policy without having read it.  No doubt, “understand the policy” is a logically sufficient replacement for “read the policy.”  Maybe that is the real rule: Policyholders must understand their policies. 

One suspects that how a policyholder comes to understand her policy makes no difference whatever.  Of course, it is probably true that reading a policy is the most frequent way entities, including people, at least try to come to an understanding of contracts of insurance, although reading documents like insurance policies is certainly a very unreliable method of achieving understanding complex instruments.

Instruction helps immensely and can be reliable under some significant circumstances.  One suspects that having been told the meaning of a policy by someone who is knowledgeable, perhaps a by a knowledgeable intermediary is a more reliable route to understanding than many others.     

Of course, intermediaries are not required to explain policies, but they better get it right if they try. May v. United Servs. 844 S.W.2d 666, 669 (Tex. 1992).  See, for example, Avila v. State Farm Fire and Casualty, Co., 9 F.Supp.2d 570 (S.D.Tex.1999) and Firth v. Guardian Life Insurance Company of America, 744 F.Supp.2d 570 (S.D. Tex. 1999). [Look at the volume numbering and the dates on these citations.]  Then again, one can imagine a plaintiff-oriented lawyer consistently advising clients to explicitly ask for descriptions and explanations of policies. 

It is hard to imagine intermediaries refusing to do so.  Would the same would probably be true if the advice for the insurance customer came from a blog or an advertisement.   After all, the former does involve reading, and the latter often does.

This or something like it is “age-old” in Texas common law. If an insured relied upon acts of an agent of the insurer, “it would not necessary for him to examine to policy to ascertain the terms upon which it was made.”  Aetna Ins. Co v. Holcomb, 34 S.W. 925 (Tex. 1896).  Then again it is worth noticing that the rule formulated here refers to the terms of the policy (words) but to the external
facts which were the context in which the contract of insurance was formed (surroundings).   The law is pretty much the same now.   Of course, context is always important, even in the law of contracts. Then again, see Northern Assurance Company v. Stan-Ann-Oil Co., 603 S.W.2d 218 (Tex. App.–Tyler 1979, no writ).  (In this case, an intermediary was liable when it knew that the insured wanted something but did not know about them and then bought the insured the wrong thing, the intermediary was liable.)

In any case, no insured has ever, ever, ever had—and does not now have—a general legal duty to read her contract of insurance.  If insureds were to have a general duty to read their insurance policies, then no insured could ever refrain from reading such a policy without violating someone else’s rights.  Usually the “someone else” is the carrier that sold the policy (or its successor), but it could be a variety of other people and/or: banks, other lenders, soon to be ex-spouses, actual ex-spouses, some purchasers, e.g.,
consumers of various services, some sellers, and so forth.  Obviously, they cannot have a legal duty to themselves in this—or any other—regard.  Conceiving duty in this context as a general duty is a secular legal sin.

The idea of the policyholder’s duty is not that she has a “general” duty to read her policy must be exchanged for the idea that the policyholder has a contract-based duty to read the contract of insurance.  In this sense of the word “general,” the duty “modified” would run only from the insured to the insurer.  But that does not work either. It is not a breach of contract for an insured not to have read the whole policy.  If coverage is later sought, the breach of duty would be to have failed to read the relevant language of the policy before purchasing it. 

Of course, if an insured has a duty to read the policy purchased, the carrier must have one or more corresponding reciprocal duties.  This is implied by the duty of doctrine of implied duties of good faith found in all contracts.  Of course, Texas has refused to accept this doctrine, at least when worded this way.  It is established law that in order for there to be an actionable breach of contract by one party, the other party must have fully performed its obligations under the contract.  Aquila S.W. Pipeline, Inc. v. Harmony Exploration, Inc., 48 S.W.3d 225, 235 (Tex. App.—San Antonio, pet. denied.) (contract case). 

One would think that the carrier must have the duty to provide a policy that the other party to the contract can understand. 
The historical idea of contract law is that each party involved in drafting the contract, and so each party, has a duty to the other(s) to understand it. This is nonsense in the contemporary age of something like a nearly universal standardization, outside huge transactions.   The problem of understanding usually falls upon the insured. 

Unfortunately, in the practical world, however, could an insurer actually have a duty to make sure that a customer understands a policy she is about to purchase?  How might this be done?  Is the agent to explain the policy line by line?  In general terms?  What about the agent asking the question what do you think you might not understand?  What about a brochure?  What about required classes?  With pop quizzes?  Most of these, of course, is nonsense. Does it really make sense to put all this kind of risk on the insured?

So are we stuck with an unsolvable dilemma?  If so, who should bear the burden of error?  Should it really be an insured, especially if the insured is a “mere” person and not a more experienced venture?

One must think about the rule Insureds Must Read Their Policies carefully.  It is surely not the case that every insured under a given policy has a duty to read that policy.  At least some named insureds, usually the owner of the policy, aka the “policyholder,” at least sometimes, may have restricted duty under most circumstances, if anyone does, but it is not the case that all named insureds have such a duty., even if one of them does.  Should the right to compensation be forfeited by an additional named insured, if she had no understanding of the policy, but the first-named insured did?  Or didn’t.  Nor is it the case that unnamed insureds must read the policy; this point is completely obvious, even if the previous one were not; the additional, but unnamed insured, may not even know about being an insured until the disaster has struck. 

Thus, all sorts of features of the duty read seem troublesome.  Not only is there trouble about requiring blind people to read a text, but there is also irrationality inherent in requiring a party to a form contract of the type he must buy to avoid at least most risks, to understand language which is obviously vague, unclear or ambiguous.  This point is especially obvious when courts disagree about the meaning of a given term.  It also seems difficult to require an “ordinary” Jill to understand a term in her policy with respect to which millions and millions of dollars have been spent trying to get authoritative rulings as to the meaning of precisely that given term.  In passing, it should be noted that the idea of blindness cannot be loosened much under Texas law, and probably that of many states.  Even very fine print can be required reading, at least if it is legible to some degree. Morrison v. Insurance Company of North America, 6 S.W. 605,606 (Tex. 1887).  This is what a magnifying glass is for, after all.  Then again, does it make sense to
legally require Jill to use a magnifying glass to read a 20-page document in
very small print?

When the requirement of reading, simplicter, is combined with the requirement of understanding, its “twin,” the analytical problems for the legal duty discussed here get worse than a little foggy.  Yet as lawyers, we have a duty to represent our clients vigorously.  How many lawyers are really comfortable arguing persuasively, given the actual law, that those with very, very near and uncorrectable vision people are subject to the same law as those with vision closer to the normal  So what’s going on with these central rhetorical slogans: “Read the policy” or “You must read your policy” or “Insureds have a duty to read their policies”?  Are they really the essence of part of the law?  Maybe not.  A good guess might be that they are designed to be exhortations in the context of legal life.  To be sure, they can and are used as major premises in arguing dispute legal disputes.  But perhaps that is pure rhetoric. Many who are really thoughtful take seriously the idea that the slogans are literally—as they stand—either justifiable or true.  The only way to do this is to embrace law as it currently exists, forgetting about a large variety of intuitively obviously important problems.

Since “the Rules” are valuable exhortations, they are also conceivable as a kind of legal advice as to prudence.  If this were true, the Must Read It Rule, would actually not be a legal commandment at all.  A reasonable person would make sure to have read the relevant portions of her policy, as it were, over time or at significant times.  Of course, if this is the correct view of the rule under discussion, it would really be better to be formulated by Ya’ll Read the Rule & There is Legal Danger Not To. “Better” but perhaps not as compelling as “Ought. There is something disturbing about this idea, however.  It is entirely out of kilter with” the real world.

Then again, one may find this approach attractive, since it is nothing but a weak-ish version of the long-standing rule: Read the Rule Citizen, for If You Don’t the Justice System Will Kick Your Ass. And that is very disappointing, to say the least, some might say.  Still, many find “ought” a very stimulating, even powerful, word and idea, and it can by itself be guidance to many.  First, and simple enough, a vast majority of people buying insurance policies do not read them.  “Everyone” knows this. Thus, if the test of
prudence is doing what the reasonable person would, prudence does not require that the policies be read.   In some
states it is obligatory that the citizenry buy policies;  they are standardized, and the majority of residents there do not actually read them. 

This fact is true for most lawyers regarding some part of most of their contracts of insurance, though not all lawyers and not all policies Second if an insured can buy only one—or nearly one–a type of form policy for a given risk, e.g., auto coverage and/or homeowners coverage, what difference does it make whether Jill has read the one she has bought, both of them or neither. She
is not even taking much risk in not reading them both.  For one reason, they will be substantially the same.   Usually, there is (almost) no different type of coverage to buy, except for price and deductible. 

Of course, for many types of policies, there are form endorsements that will change the policy, but the uses of those in average personal policies of those are few and far between: they are likely to be expensive; the endorsements may not fit the rest of the policy very well; the insurer seldom bring attention to them or their availability; intermediaries often do not know of them, what
their functions might be, and/or whether to suggest them.  Of course, as just said, these observations are more common in modestly sized personal and small business policies than they are in larger more complex commercial policies.

It must also be recognized that the slogan Insureds must read their policies has a significant role in socio-business life other than simply in litigation.  Reformers use it to try to get strong laws requiring insurers to write understandable policies, simplicity is best.  If a policy is simple, it is vastly easier to understand it.  The status of the slogan can help an insurer to resist the temptation to draft overly difficult policies in the service of its own self-interest. 

For good or for ill, it helps remind those who need it that insurance policies are contracts. 

Having discussed several language-based problems with the “Everyone Must Read Their Policies” Rule, let us look at some more of the reasons why the necessity of having read a policy is not actually by itself a rule of law and/or should not be.

Consider the following:  at least some insureds are not always obligated to the insurer-issuer of that policy to have read the
policy issued.  It makes little sense to require a non-English speaker to read an insurance policy, she cannot possibly understand.   This idea is especially true when the insurer knows that the customer cannot read the policy, and much less understand it.

It is easy to generate a large number of different cases where this same point holds.  It is much harder to draw limits.  How non-English speaking must a person be before she is released from the duty to read? 

How English speaking must a person be before she is subject to the duty to read?  Should the duty to read be imposed on the
Alzheimer’s affected the elderly?  How much effect is enough for such a person to get relief?

Maybe underlying the rigidity and strength of the “Read It Rule” is precisely the messiness of a legal world where the rules as to what counted as required understanding varied in accordance with the degree of intelligence, grasp of language, feel for how “things fit together,” and so forth.  Some would assert that this kind of mess would increase litigation and encourage insurance fraud.  There is no evidence supporting this kind of assertion, but there is none for its negation either.  Might not be an onslaught of litigation regarding “Read it you Fools” actually be socially beneficial if it stimulated more careful conduct by insurers?

It is worth pondering whether a good way to deal with this problem would not be to require that an insured need not understand a policy unless that insured was negligent in failing to understand it.  There is not much law favoring this view, but there is a little, even though the passion of the courts—when taken as a whole—favoring it it is weak, to say the most.  

Nevertheless, there is a perfect Supreme Court of Texas case, which one does not seem cited much.   Fireman’s Fund Indemnity Company v. Boyle General Tire Company, 392 S.W,2d 352 (Tex. 1965). In this case, Justice Pope said that “[t]he rule followed in Texas is that an insured who accepts a policy without dissent, is presumed to know its contents, but the presumption may be overcome by the proof he did not know its contents when it was accepted, as by showing that when he received it he put it away without examination. Id.  The late Justice Pope is a high prestige former member of Texas  It cites and quotes Boyle Tire, and states
that the Boyle case expresses what is Texas law. Colonial Savings Association v. Taylor, 544 S.W.2d 116, 118-19 (Tex. 1976), Boyle Tire refers to a number of other cases as an authority, CORPUS JURIS SECUNDUM, and a legal encyclopedia full of them.  Strangely, these two cases, while cited for other propositions do not appear to have been cited for the just quoted language very often.  It is almost as if makers of Texas law and trying to avoid the “Boyle-Tire Colonial-Savings Doctrine.”) 

Is there some sort of hostility to this doctrine in Texas?   I have not seen this doctrine formulated and used in significant Texas cases.  Nor have I seen it play a significant role in articles or CLE speeches.  It would be interesting to know if the hypotheses of buried hostility are true and if so why.

Some other cases come from elsewhere and/or different times, e.g.,  McMaster v. New York Life Insurance Company, 183 U.S. 24, 39 (1901)(place and time: negligence and reading + paying premium linked, but not conceptually), and Guinn
v. Phoenix Insurance Company, 31 S.W. 566, 569 (Tex. 1893) (time only).

Maybe there is a subtle mechanism that some courts are trying to extend the Boyle Tire Doctrine Supreme Court, There is a subtle series of moves by means of which there might be a hidden way to obtain legal authority for the idea that a policyholder need not be always held to understand the language of the policy.  It goes this way.  Often courts, especially in recent times, assert that policyholders are “presumed” to understand the policies.  But presumptions, in general, are often rebuttable; indeed, there are whole categories of presumptions which is precisely called “rebuttable presumption,” as opposed to “conclusive presumption”
(aka “un-rebuttable presumptions). Almost all rebuttable presumptions are linked to the idea of negligence; the whole point is that if it is rebuttably presumed that a person is legally blameworthy for something, then she is not blameworthy if she was not actually negligent. Lee v. Baber, 303 S.W.2d  376, 380 (Tex. 1957) (force and structure). See Beck v. Sheppard, 566 S.W.2d 569, 571 (Tex. 1975) (bailment: horse killed by auto), Buchanan v. Byrd, 519 S.W.2d 841, 843 (Tex. 1975(bailment: horse killed by train). 

There is at least one Texas case that seems to make readings of policies an irrebuttable presumption.  Paradoxically, it is the Guinn case, mentioned in the last distinct paragraph, which also introduces the idea of non-negligent non-reading.  In other words, this case is contradictory.

Some cases do not describe how policyholder plaintiffs are to be conceived. 

Some do not say “presumed”; instead they say “deemed.”  Shindler v. Mid-Continental Life Insurance, Co., 768 S.W.2d 31 (Tex. App.—Houston [14th Dist.], 1989, no writ).  See Roland v. Transamerica Life Insurance Company, 570 F.Supp.2d 871, 880-81 (N.D. Tex. 2008, aff’d)(“In Texas, an insured has a duty to read the insurance policy and is charged with knowledge of its provisions.  An insured is deemed to be on notice of all terms of an insurance policy.” (citations omitted).

It is difficult to be sure what the distinction might be.  Usage might incline one to believe that “deem” referred to a conclusive
presumption.  Maybe “deem” is stronger than “presumption.  It is not easy to think of a deeming being set aside by evidence, as is the case with presumptions.  But then, perhaps this whole idea may be an argument from imagination and have no rational grounding at all. 

Maybe allegiance to the “Read It Rule” is an attachment to the classical ideas of contract law, one of which is that all contracts are fundamentally alike.  They are all exchanges of some sort where consideration is involved and so the reciprocal right and duties, as it were, “running across the table” are pretty much the same.  There has been doubt about this idea for a long, long time.

Even then there are exceptions.  Consider the situation in which there are two contracts between the same parties on the same
topic, and one of them contradicts the other.  Since the second one will take precedence over the first, it is not necessary for a party to have read the first one.  London Terrace, Inc. v. McAlister, 180 S.W.2d 619 (Tex. 1944). (Presumably, the second contract must have failed in some regard.  Otherwise, it would be difficult to see why the non-reading of the first contract would not be an issue.)  

Nevertheless, consider this observation of Samuel Williston. one of the two greatest scholars of contract law in history: To
be sure, that the law with respect to insurance contracts is subject to other public policies, including the fact that it is a highly regulated industry that the policies are often lengthy, standardized forms filled with complex provisions, and that the relative bargaining power of the parties is sufficiently uneven to justify some modification of the principles stated in the text. The concept of protecting the reasonable expectations of the insured may therefore lead a court to de-emphasize the so-called duty to read or the implied assent that accompanies receipt and retention or signing of a document, under certain circumstances, where to do otherwise would lead to unconscionable or unfair results. Where, however, the language of the policy is clear, and the insured’s
reasonable expectations are not frustrated by the application of the rule, it is regularly applied.
 
Samuel Williston (with Richard Lord in the 4th Edition), A TREATISE ON THE LAW OF CONTRACTS §6;43, 478-49 n. 10 (4TH Ed. 1991)  Few would dissent from the spirit of this observation.  However, what Williston does not mention is that his term “de-emphasize” really undermines the whole logic of the “Read It, Rule.”  If you de-emphasize what has been passed off as an axiom, it is no longer an axiom and probably never was.   

At the same time, an earlier edition (the Third)  of the Williston treatise has been quoted as saying, “The final and perhaps the most significant characteristics of insurance contracts, is the increasing tendency of the public to look upon the insurance policy not as a contract but as a special form of chattel.  The typical applicant buys ‘protection’ much as he buys groceries.”  Jay M. Feinman, The Law of Insurance Claim Practices: Beyond Good Faith 2012.47 TORT TRIAL & INSURANCE PRACTICE LAW JOURNAL 693, 709n. (2012),
plus two other law review articles, but no cases.   (For various reasons, it is difficult to see why customers view insurance as Feinman says.)

(Perhaps the best way to think of Williston’s first observation is to formulate contract and therefore insurance policy interpretation is in terms of a “relational theory.”  In sum, this view is that the nature of the relationship between not only the one-to-one parties to a contract but also the categories of relationships must be regarded as relevant to interpretation.   

To return to the topic of de-emphasis, there are other ways the Rule can be “de-emphasized” and its axiomatic status is destroyed. 
One of them is common; one is dramatic.  Consider this sample of a very common formulation of the Rule:  “Ordinarily, a policyholder had a duty to examine the policy and make sure  [proper] coverage is provided.”  Northern Assurance Company of America v. Stan-Ann Oil Company,603 S.W.2d 218, 224-25 (Tex. Civ. App.—Tyler, 1979, no writ).  (Emphasis added.)  What is important here is the word “ordinary.”  It does not mean “always”; it does not even mean “except for rarely.”  The use of the word “ordinarily” tells one that there may be loopholes—not just one. 

These kinds of crack and crevices have been around “forever.”   So how can the Rule have all the power said to be it?            

There is also the dramatic and the rare situation which “de-emphasizes” the Rule.  This is to be found in the paradoxical relationship between the “Read It Rule” and the law of fraud.  At least one important kind of fraud arises when someone reads a policy to a consumer and deliberately leads her into believing that given propositions are in a policy when they are not
(or does exactly the opposite).  A very simple example of this would be the deliberate statement that policy limit was
$1000 and the deductible was $1, while in fact, the limit was $100, and the deductible was $99.  No one thinks that
the “Rule” somehow defeats a claim of fraud in this situation, although if the “Read It Rule” is axiomatic, then
defeating a claim of fraud would be much easier.  

Yes.  It’s true I did lie to him about what the policy contained. But he cannot now claim that he did not know what was in the policy
as the result of what I did.  If he had read the policy, as he must do, he would have found out that I was lying to him, and he should not have purchased the policy.
 
The argument, of course, is ridiculous, and would almost never be taken seriously.  This fact, however, indicates that the Rule is not so axiomatic as it is sometimes said to be.   Even the most militant absurdist in this situation would have to admit that there are situations in which their argument is not likely to work.  Consider a situation derived from original contract law.  

The rule is that if one party reads, describes, or explicates the contract because the second party does not because he cannot—say because he lost his glasses—the reading party has an obligation to get it right.  Even an absurdist would have to admit that in this situation, the fraud claim would work.  This is a very old law in Texas.   Demees & Hinkle v. Bluntzer, 7 S.W. 406 (Tex. 1888), and it does not even require fraud, apparently all it requires is mistake.  (Quick sale of 4100 heifers).

By the way, before proceeding it is worth noting that there is a good reason why The Insured Must Read the Policy Rule, just by itself, often does not appear in judicial decisions of record, e.g., printed in Westlaw.  

Consider this one:  “Ordinarily, a policy-holder had a duty to examine the policy and make sure [proper] coverage is provided.”  Northern Assurance Company of America v. Stan-Ann Oil Company, 603 S.W.2d 218, 224-25 (Tex. Civ. App.—Tyler, 1979, no writ).  (Emphasis added.)   “Ordinary” does not mean “always”; there may be loopholes to be found in “ordinarily.” 

These kind of crack or crevice have been around “forever,” as already observed. 

Of course, it is well-established law in Texas, and pretty much everywhere else in the English-speaking world that a contract is considered as a whole and each part is given effect.  Anglo-Dutch Petroleum International, Inc. v. Greenberg Peden, P.C., 35 2 S.W.3d 445, 449-50 (Tex. 2011), Gilbert Texas Construction, L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118, 126 (Tex. 2011), and many others.  At the same time, specific provisions in insurance contracts control specific matters, including grants of coverage, exclusion, conditions, and so forth. 

These points are first-year law school-induced common sense.  It is not the case, however, that not knowing the whole distorts reading of one part—or some parts–in all relevant respects, or at all.

As interesting as this proposition, as legal theory is, it also has practical import.  Consider taking a deposition.  If a lawyer’s question is formulated in such a way as to (i) invite the witness to say that she has not read the policy and then indicate that this “failure” is somehow but almost certainly to produce legal defeat, (ii) some other criticisms, such as ignorance, irresponsibility, or shamefulness, (iii)  suggest that suit-loss is just around the corner and that she has enhanced his client’s position, (iv) and/or more than one of these, this very question may discourage the plaintiff-witness-target.  On the other hand, if the witness is clear
that she is not required to have read the policy, where that idea means “the whole policy,”  the confidence of that witness may continue.

As a final remark to this essay, consider how the difference might affect a trial.  

Q. “Have you read the policy?”

A. “Yes, some of it”. 

Q. “Which parts of it did you read?” 

A. “I don’t remember, but it was parts—not just one—and I thought at the time they were important, just as I do now.” 

Q, “Did you read this one [pointing at the screen]?” 

A. “Again, I don’t remember.  It was several years ago.  But I might well have done so.”  The legal theorizing about the meaning of the Must Read Rules takes on significant practical importance. (Of course, this won’t work if the policy is turned over in the sealed having-been-mailed envelope it came in. Or might it not?  What if the policy in question is a renewal?)  
 

Originally posted on 10/22/2014 @ 10:14 pm

Michael Sean Quinn, PhD, JD, CPCU, Etc

Michael Sean Quinn, PhD, JD, CPCU, Etc. (530)

One of Texas's leading insurance scholars, Michael Sean Quinn is a past chair of the Insurance Section of the State Bar of Texas and has a broad legal practice.

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