Thursday, August 17, 2006
Years ago, contract law played an important role in the field of products liability. Not any more, of course, after the expansion of strict tort liability for defective products. Today, breach of warranty for personal injuries is the last resort of a lawyer who blew the tort statute of limitations.
Might the same thing happen with other kinds of contracts? In a new paper, A Products Liability Theory for the Judicial Regulation of Insurance Policies, forthcoming in the William and Mary Law Review, Daniel Schwarz (Harvard) argues that at least in the realm of insurance contracts, tort law principles of "defective products," rather than contract doctrines like "reasonable expectations," should govern insurance disputes. Here's the abstract:
Many insurance law commentators believe that judges should "regulate" the substance of insurance policies by refusing to enforce insurance policy terms that are exploitive or otherwise unfair. The most common guide for the judicial regulation of insurance policies is the "reasonable expectations doctrine," which requires courts to disregard coverage restrictions that are beyond insureds' reasonable expectations unless the insurer specifically informed the insured about the restriction at the time of purchase. This Article argues that while there is a potential role for the judiciary to play in policing insurance policy terms, that role should not be defined by reference to consumers' reasonable expectations. Instead, drawing on the parallels between insurance policies and ordinary consumer products, this Article advances a products liability framework for understanding how and why courts should regulate insurance policies. It proposes that just as firms that make defective products must pay for the resulting injuries, insurers that issue "defective insurance policies" should have to provide coverage to insureds. The Article argues that the usefulness of the analogy to products liability law goes well beyond understanding the normative basis for the judicial regulation of insurance policies. Products liability law offers important insights into how courts can efficiently correct failures in insurance markets by encouraging effective disclosure to consumers and appropriately setting penalties so that insurers take an optimal amount of care in drafting policy terms.