South Carolina Supreme Court Gives Life to Doctrine of Reasonable Expectations
Over the last half century, the doctrine of reasonable expectations emerged in many jurisdictions as a mechanism to determine coverage based on the objectively reasonable expectations of the insured at the time of application. For many years, South Carolina valiantly resisted the urge to join in the reasonable expectations movement. Recently, however, signs emerged that the SC Supreme Court might be looking to rethink its position. In 2011, the Court re-issued its controversial opinion in Crossmann Communities v. Harleysville Mutual Insurance Co., 717 S.E.2d 589 (2011) and adopted a time-on-risk allocation methodology based on the reasonable expectations of the insured. The Court did not expressly adopt the doctrine in Crossmann, but the foundation had been laid that it may be willing to do so if given the opportunity. Last week, the Court finally got that opportunity in Bell v. Progressive Direct Ins. Co., No. 27381 (S.C. April 9, 2014), and, as predicted, adopted the doctrine of reasonable expectations under certain circumstances.
In Bell, the plaintiff was injured while a passenger in a non-owned vehicle. Thereafter, he submitted a claim for underinsured motorist (UIM) benefits under a Progressive policy issued to his “on again off again fiancée.” The plaintiff was identified as a “Driver” on the policy’s declarations page; however, his occasional fiancée was the only listed named insured. Progressive denied the plaintiff’s claim for UIM coverage because he was neither the named insured not was he a resident relative of the named insured. In turn, the plaintiff sought a judicial declaration that he was entitled to UIM coverage either under the plain language of the policy or based on his reasonable expectations that he was a named insured.
The circuit court granted summary judgment in favor of Progressive, finding that the plaintiff and his fiancée were not engaged in a common-law marriage and, thus, were not “relatives.” The court also found that listing the plaintiff as a “driver” on the declarations page but not as a “named insured” was unambiguous. Moreover, the court rejected the plaintiff’s reasonable expectations argument. The Court of Appeals affirmed on all grounds and, again, refused to adopt the doctrine of reasonable expectations. In its opinion, the Court of Appeals noted that
[B]ecause the doctrine [of reasonable expectations] cannot be reconciled with the rule that unambiguous insurance policies are subject to the traditional rules of contract construction, this court is precluded from adopting the doctrine, . . . Such a departure from jurisprudence must be left to our supreme court.
See Bell v. Progressive Direct Ins. Co., Op. No. 2011-UP-242 (Ct. App. June 23, 2011). And so, the Court was finally presented with its opportunity.
In a rather interesting opinion, the Court first held that the policy’s terms were not ambiguous and, thus, the policy foreclosed UIM coverage to the plaintiff. The Court then transitioned to the issue for which this case was granted certiorari in the first place, the doctrine of reasonable expectations. Initially, the Court declined to apply the doctrine where a policy unambiguously denies coverage under its plain terms. Rather than stop there, however, the Court could not relinquish its opportunity to finally opine further on the doctrine. While acknowledging that its jurisprudence does not support the creation of a substantive right of reasonable expectations, the Court indicated that the reasonable expectations of parties entering an insurance contract would be honored within the confines of the Court’s interpretive rules and fairness principles (i.e. not expanding coverage beyond that contemplated by the plain language of the policy). Accordingly, the Court held that while reasonable expectations may be used as an interpretive tool, the doctrine cannot be used to alter the plains terms of an insurance policy. Nonetheless, because it determined that the terms of the Progressive policy were unambiguous, the Court did not apply the doctrine.
For insurers, the Bell decision has both positives and negatives. On the positive side, the Court declined to adopt the doctrine of reasonable expectations as a rule granting substantive rights to an insured when there is no doubt as to the meaning of the policy language. On its face, the doctrine of reasonable expectations, as adopted, has a fairly limited scope, only to be applied in situations where policy terms are ambiguous or conflicting. Because policy ambiguities are construed against the insurer, the doctrine should not have a significant impact of coverage determinations, in theory. For obvious reasons, this limited adoption is much more preferable than the alternative.
On the other hand, the adoption of the doctrine presents a number of issues that will need to be addressed in time. First, while the doctrine is only to be applied in situations with contract ambiguities, only time will tell if Bell is merely the first step to an eventual full-force adoption of the reasonable expectations doctrine. At this time, the Court appears to treat this limited adoption of the doctrine merely as an element of its historical jurisprudence on contract construction. However, the Court went out of its way in Bell to adopt the doctrine when there was no reason for it to do so based on the facts presented. We question whether the Court would have gone further if presented with a different set of facts.
Second, now that the doctrine can be applied in ambiguity situations, it is reasonable to expect an increase in challenges to the clarity of policy language. If ambiguity is the threshold for the application of the doctrine, certainly insureds will seek to look for ambiguities which otherwise may not never appeared to be patently ambiguous. At that point, the court is given the discretion to determine whether the policy language is ambiguous and, if so, whether the doctrine of reasonable expectations is to be applied. As such, while the adoption of the doctrine may not appear to be a drastic change on its face, in reality, it may provide another tool for insureds to challenge coverage determinations.
Third, the limited adoption of the doctrine raises some interesting procedural questions which will need to be addressed by the courts. Ambiguity questions are legal issues to be decided by the court. Reasonable expectations of an insured are questions of fact to be decided by a jury. If ambiguity is a threshold inquiry for the applicability of the reasonable expectations doctrine, then it would appear that the court would have to first decide whether an ambiguity exists before the reasonable expectations question could be handed to the jury. It remains to be seen whether the court, as gatekeeper, would first make a determination on ambiguity by way of cross motions for summary judgment prior to trial, whether both issues would be tried together with the ambiguity question decided by directed verdict, or whether the issues would require two separate trials. Regardless of how it is decided, the adoption of the doctrine creates a new procedural wrinkle which will have to be tested.
At this point, we should treat Bell for what it is – a limited adoption of the doctrine of reasonable expectations – while appreciating what it could be – the first steps of a more expansive coverage doctrine.
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