What's Reasonable to Expect?

It is Mr. Jaggers, the lawyer, who tells Pip that he is “a young fellow of great expectations,” in Charles Dickens' novel of the same name. In the course of the novel, Pip learns that great expectations are not always fulfilled. So it is in the law; but what of reasonable expectations? At least in the insurance context, generally, a policyholder's reasonable expectations as to coverage will be fulfilled. A number of jurisdictions have adopted one version or another of the reasonable expectations doctrine, originally proposed by Judge Robert E. Keeton in Insurance Law Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961 (1970). This doctrine, however, has developed somewhat unevenly in the state courts, with some courts applying the doctrine to ambiguous provisions only and others using the doctrine to avoid enforcing even unambiguous policy language. Insurance companies have been advocating for yet another wrinkle: They argue that the rule should apply solely to unsophisticated parties. But should the application of the reasonable expectations doctrine turn on whether Pip bought an insurance policy when a blacksmith's apprentice or as an ascendant gentleman in London?

The Policy Justifications for the Reasonable Expectations Doctrine

The reasonable expectations doctrine, as proposed by Judge Keeton, is not just a rule of interpretation. See Eugene Anderson, Jordan S. Stanzler, & Lorelie S. Masters, Insurance Coverage Litigation, ' 2.05 (2d ed. 2000). It is also a rule of equity that prevents insurance companies from enforcing policy language ' no matter how clear or unambiguous ' that would frustrate the reasonable expectations of the policyholder:

The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970).

At least eight jurisdictions have adopted Judge Keeton's version of the rule, or something very close to it. See Whittier Properties, Inc. v. Alaska Nat. Ins. Co., 185 P.3d 84, 91 (Alaska 2008) (” ' even though we have determined that the exclusion is not ambiguous, [the insured] may still prevail under the reasonable expectations doctrine.”); First American Title Ins. Co. v. Action Acquisitions, LLC, 187 P.3d 1107, 1114 (Ariz. 2008) (holding that the reasonable expectations doctrine will apply to unambiguous policies in certain circumstances); Nationwide Agri-Business Ins. Co. v. Goodwin, 782 N.W.2d 465, 473 (Iowa 2010) (describing reasonable expectations doctrine as applicable where an insurance company fostered the policyholder's expectation of coverage); Atwater Creamery Co. v. Western Nat. Mut. Ins. Co., 366 N.W.2d 271, 277 (Minn. 1985) (adopting reasonable expectations doctrine as proposed by Judge Keeton); Flomerfelt v. Cardiello, 202 N.J. 432, 441 (N.J. 2010) (holding that ambiguous terms will be construed to give effect to insured's reasonable expectations and adding that the policy will be construed this way even if a “close reading” or “painstaking” analysis might yield another result); Barth v. Coleman, 878 P.2d 319, 323 (N.M. 1994) (“The doctrine of reasonable expectations is not restricted to those cases in which the policy language is at issue.”); Safe Auto Ins. Co. v. Berlin, 991 A.2d 327, 332 (Pa.Super. 2010) (recognizing that, under some circumstances, the reasonable expectations doctrine can apply to unambiguous insurance policies); Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034, 1042 n. 12 (C.A.D.C. 1981) (explicitly agreeing with Judge Keeton's formulation of the reasonable expectations doctrine and basing the “interpretation of these policies on the expectations that [the insured] could have reasonably formed, as an objective matter, on the basis of the policies' language.”).

Many more jurisdictions have adopted a variant of the reasonable expectations doctrine in which the rule applies to ambiguous contracts only. See, e.g., Colford v. Chubb Life Ins. Co. of America, 687 A.2d 609, 614 (Me. 1996) (“If [an insurance policy] is ambiguous, it will be construed against the insurer so as to comply with the objectively reasonable expectations of the insured.”); Burns v. Smith, 303 S.W.3d 505, 512 (Mo. 2010) (“When 'there is an ambiguity, insureds are entitled to a resolution of that ambiguity consistent with their objective and reasonable expectations as to what coverage would be provided.'”) (quoting Niswonger v. Farm Bureau Town & Country Ins. Co. of Mo., 992 S.W.2d 308, 317 (Mo.App.1999) (emphasis added)). These cases treat the doctrine as an adjunct to the doctrine of contra proferentem ' the rule that ambiguities in an insurance policy are to be construed against the insurer. See Insurance Coverage Litigation, supra at ' 2.05[B]; cf. Wilkie v. Auto-Owners Ins. Co., 664 N.W.2d 776, 787 (Mich. 2003) (declining to adopt the rule of reasonable expectations because “it is already well established that ambiguous language should be construed against the drafter, i.e., the insurer.”).

Whether the reasonable expectations doctrine is a principle of equity or a rule of interpretation, or both, it rests largely on the same set of public policy justifications. Many courts emphasize that, in general, “there is unequal bargaining power between the parties so that one party controls all of the terms and offers the contract on a take-it-or-leave-it basis ' ” Atwater Creamery Co., 366 N.W.2d at 277. This disparity in bargaining power justifies an interpretation of the policy (or an enforcement of the policy, as the case may be) that comports with the insured's reasonable expectations. Id.; see also Harper v. Fidelity and Guar. Life Ins. Co., 234 P.3d 1211, 1222 (Wyo. 2010) (“The doctrine of reasonable expectations is essentially a rule of construction that acknowledges the usual disparity of bargaining power between an insurer [and insured] and the fact that insurance contracts are generally contracts of adhesion.”) (quoting St. Paul Fire and Marine Ins. Co. v. Albany County School Dist. No. 1, 763 P.2d 1255, 1262 (Wyo. 1988)).

The general inequality between insurer and insured is one justification for the reasonable expectations doctrine, but it is not the only justification. Courts and commentators alike have assembled a long list of reasons why an insurance policy should cover what the insured reasonably expects it to cover. See Jeffrey W. Stempel, Stempel on Contracts, ' 4.09[C] (3d ed. 2009) (compiling justifications for reasonable expectations doctrine). An exhaustive list of policy rationales would be exceedingly long, but would include the following:

• Because very often the policyholder will not receive a copy of the policy until after the transaction is completed, its decision to purchase the policy is based on its reasonable expectation of what is covered. Id.; see also Reliance Ins. Co. v. Moessner, 121 F.3d 895, 905 (3d Cir. 1997) (“The control exercised by insurers is especially problematic when the insured, whether sophisticated or not, does not receive the actual insurance policy until after offering to buy insurance and paying the first premium.”); Zuckerman v. Transamerica Ins. Co., 650 P.2d 441, 446 (Ariz. 1982) (“The insured is given no choice regarding terms and conditions of coverage which are contained on forms which the insured seldom sees before purchase of the policy, which often are difficult to understand, and which usually are neither read nor expected to be read by either the person who sells the policy or the person who buys it.”).
• Where the insurance company's marketing of a product creates certain expectations, it should not be permitted to subvert those expectations with cleverly crafted policy provisions. See Stempel on Contracts, supra at ' 4.09[C]; see also Kenneth S. Abraham, Judge-Made Law and Judge-Made Insurance: Honoring the Reasonable Expectations of the Insured, 67 Va. L. Rev. 1151, 1156 (1981).
• The reasonable expectations doctrine encourages the insurance company to provide greater information, which in turn, makes the insurance market more efficient. See Judge-Made Law, supra at 1170 (“By imposing liability on the insurer where the insured possesses inaccurate coverage information, the expectations principle theoretically should encourage the production of more accurate information and thus create a more efficient market.”).

Applying the Reasonable Expectations Doctrine to Sophisticated Parties

In Resure, Inc. v. Chemical Distributors, Inc., 927 F.Supp. 190, 191 (M.D.La. 1996), a truck exploded as a result of a chemical reaction. The policyholder allegedly caused the explosion by failing to clean the truck properly. The insurance company sued the policyholder for a declaration that, due to the pollution exclusion in the policy, the loss was not covered. The policyholder argued that the exclusion was ambiguous because “pollution exclusion clauses are generally directed at the insured's own polluting activities.” Id. at 193. The court disagreed, holding that the exclusion unambiguously applied “regardless of whether the discharge results from the insured's activities or from the activities of others.” Id.

Applying New Mexico law, the court also declined to apply the doctrine of reasonable expectations. “The rationale for the doctrine,” according to the court, “is that 'the insured most often is a layman, the average man or woman on the street, who is not a college graduate or a student of insurance law. ' They cannot, ordinarily, read and understand the complex, complicated and intricate provisions of an insurance policy ' '” Id. at 194 (quoting Read v. Western Farm Bureau Mut. Ins. Co., 563 P.2d 1162, 1166 (N.M.Ct.App. 1977)). Accordingly, the court concluded that the doctrine “probably has little application in the business insurance context.” Id. Furthermore, the court held that “[e]ven if it is appropriate to apply the doctrine in certain business settings, it should not be applied here, since [the] President and Chief Executive Office [sic] of [the policyholder] ' personally participated in procuring the policy ' ” Id. Finally, the court held that, because the policy was not ambiguous, the doctrine did not apply. Id. (citing Davison v. Business Men's Assur. Co. of America, 518 P.2d 776, 778-79 (N.M. 1974)).

This case is typical of those that do not apply the reasonable expectations doctrine to sophisticated policyholders. See, e.g., In re SRC Holding Corp., 545 F.3d 661, 671 (8th Cir. 2008) (holding that Minnesota courts limit the reasonable expectations doctrine to cases where there is unequal bargaining power between the parties); Playtex FP, Inc. v. Columbia Cas. Co., 609 A.2d 1087, 1092 (Del.Super. 1991) (“Because this was a negotiated contract, not a contract of adhesion, the doctrine of reasonable expectations is not applicable.”). These cases share a myopic focus on only one of the reasonable expectations doctrine's many public policy justifications ' namely, that an insurance policy is an adhesion contract between parties of unequal bargaining power. In contrast, cases that consider the full range of policy rationales for the reasonable expectations doctrine apply the rule regardless of whether the policyholder is sophisticated.

For example, in Reliance Ins. Co. v. Moessner, 121 F.3d 895 (3d Cir. 1997), the court considered whether a pollution exclusion became part of a sophisticated policyholder's comprehensive general liability policy. In the underlying litigation, two plaintiffs alleged that they were overcome by carbon monoxide emitted from the policyholder's vaporator ' a device “used to cure pre-formed concrete products ' ” Id. at 898 n. 1. The policyholder submitted a claim to the insurance company for defense and indemnity for the underlying litigation. The insurance company responded with an action for declaratory judgment that it was not obligated to cover the policyholder based on a “Total Pollution Exclusion,” which was added when the insurance policy was renewed. Id. Arguing for summary judgment, the insurance company took the position that the reasonable expectations doctrine did not apply to the policyholder because it was a sophisticated party. The Third Circuit, applying Pennsylvania law, disagreed.

The Reliance court began by discussing Tonkovic v. State Farm Mutual Automobile Insurance Co., 521 A.2d 920 (Pa. 1987), a Pennsylvania Supreme Court case holding “that, regardless of the ambiguity or lack thereof inherent in an insurance policy, courts should ensure that the insured's 'reasonable expectations are fulfilled.'” Reliance 121 F.3d at 903 (quoting Tonkovic, 521 A.2d at 926). Relying on this rule, the Tonkovic court concluded that “[w]hen the insurer elects to issue a policy differing from what the insured requested and paid for, there is clearly a duty to advise the insured of the changes so made. The burden is not on the insured to read the policy to discover such changes, or not read it at his peril.” Tonkovic, 521 A.2d at 925.

Turning to the insurance company's sophisticated insured defense, the Reliance court recognized that “sophisticated insureds may exercise more bargaining power vis-'-vis the insurers, and therefore be in less need of protection from the courts than other insureds.” Reliance 121 F.3d at 905. Nonetheless, even for sophisticated policyholders, “the rationale of the reasonable expectations doctrine is still applicable when the insurer unilaterally alters the insurance coverage requested by the insured.” The Reliance court reasoned that, regardless of whether the policyholder was sophisticated, it “has a right to expect that [it] will receive something of comparable value in return for the premium paid.” Id. (quoting Collister v. Nationwide Life Ins. Co., 388 A.2d 1346, 1353 (Pa. 1978)). This rule applies with special force “when the insured, whether sophisticated or not, does not receive the actual insurance policy until after offering to buy insurance and paying the first premium.” Id.; see also UPMC Health System v. Metropolitan Life Ins. Co., 391 F.3d 497, 503-504 (3d Cir. 2004) (relying on Reliance and holding that the reasonable expectations doctrine applied to sophisticated policyholder).

Other courts likewise have extended the rule of reasonable expectations to sophisticated policyholders. See, e.g., Old Republic Ins. Co. v. Underwriters Safety and Claims, Inc., 306 Fed.Appx. 250, 254, 2009 WL 32704, *3 (6th Cir. 2009) (holding “that sophisticated consumers may also rely on reasonable expectations as to the consequences of a failure to provide notice”); James v. Burlington Northern Santa Fe Ry. Co., 2007 WL 2461685, *8 (D.Ariz.) (D.Ariz. 2007) (predicting that “the Arizona courts are likely to apply the reasonable expectations doctrine, regardless of the insured's commercial status, where the insured alleges that it did not know and had no reason to know of the existence of an exclusion of coverage in a standardized insurance contract.”); Owens-Illinois, Inc. v. Aetna Cas. and Sur. Co., 597 F.Supp. 1515, 1523 (D.C.D.C. 1984) (applying reasonable expectations doctrine to sophisticated policy holder). These cases recognize that the rule of reasonable expectations is supported by more than just the usual disparity in bargaining power between the insurer and its insured. Rather, the rule is also justified by the realities of the insurance market, where policyholders often receive their policies only after paying for them. In these cases, sophisticated and unsophisticated policyholders alike are entitled to a policy that covers what they reasonably expected it to cover.

Moreover, though courts apply various versions of the reasonable expectations doctrine, at the very least, the doctrine may be viewed as a rule of contract interpretation. As such, the application of the rule should not vary depending on the identity of the policyholder.

In Boeing Co. v. Aetna Cas. and Sur. Co., 784 P.2d 507, 514 (Wash. 1990), the court considered whether the “layman” rule ' which fixes the meaning of a contract by referring “to what the average lay person might understand” ' applied to Boeing, “a corporate giant.” The court held that it did. “The critical fact,” according to the Boeing court, was “that the policy in question is a standard form policy prepared by the company's experts, with language selected by the insurer.” Id. This standard language had “been issued to big and small businesses throughout the state.” Id. Accordingly, “it would be incongruous for the court to apply different rules of construction based on the policyholder because once the court construes the standard form coverage clause as a matter of law, the court's construction will bind policyholders throughout the state regardless of the size of their business.” Id.; see also Reliance, 121 F.3d at 905 (noting that contra proferentem, though initially justified by disparities in bargaining power, has been “routinely applied ' to coverage disputes involving business insureds and even to disputes between insurance professionals ' “); Stempel on Contracts, supra at ' 4.11[E] (compiling cases rejecting the “sophisticated insured defense” to contra proferentem).

The same reasons that justify extending the “layman” rule to a corporate giant, like Boeing, apply with equal force to the reasonable expectations doctrine. As recognized by the Boeing court, there is one set of contract-interpretation rules, which apply to the policy not the policyholder. Thus, whether or not the policyholder is sophisticated is irrelevant in the view of such courts to how the policy is interpreted.

Conclusion

It was never reasonable for Pip to expect that he would receive a fortune from Miss Havisham ' the wealthy, jilted bride who encouraged her adopted daughter, Estella, to toy with Pip's affections. Pip's na'vet', however, did not justify Miss Havisham's letting him believe that she was his secret benefactor. She may not have created Pip's great expectations, but she certainly indulged them to her benefit.

Insurance companies reap the benefits of the mere reasonable, not great, expectations of their policyholders. Expecting coverage, either because their insurance companies create such expectations or simply because it is reasonable to do so, policyholders continue to pay premiums to their insurance companies. Courts should fulfill an insured's reasonable expectations regardless of its sophistication. Whether the policyholder is a blacksmith's apprentice or a wealthy gentleman, applying the reasonable expectations doctrine is justified because doing so recognizes the reality of the insurance transaction, creates uniformity, and promotes efficiency.

Lucas M. Blower is an associate in the Akron, OH, office of Brouse McDowell, where he regularly represents policyholders in insurance coverage matters.

It is Mr. Jaggers, the lawyer, who tells Pip that he is “a young fellow of great expectations,” in Charles Dickens' novel of the same name. In the course of the novel, Pip learns that great expectations are not always fulfilled. So it is in the law; but what of reasonable expectations? At least in the insurance context, generally, a policyholder's reasonable expectations as to coverage will be fulfilled. A number of jurisdictions have adopted one version or another of the reasonable expectations doctrine, originally proposed by Judge Robert E. Keeton in Insurance Law Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961 (1970). This doctrine, however, has developed somewhat unevenly in the state courts, with some courts applying the doctrine to ambiguous provisions only and others using the doctrine to avoid enforcing even unambiguous policy language. Insurance companies have been advocating for yet another wrinkle: They argue that the rule should apply solely to unsophisticated parties. But should the application of the reasonable expectations doctrine turn on whether Pip bought an insurance policy when a blacksmith's apprentice or as an ascendant gentleman in London?

The Policy Justifications for the Reasonable Expectations Doctrine

The reasonable expectations doctrine, as proposed by Judge Keeton, is not just a rule of interpretation. See Eugene Anderson, Jordan S. Stanzler, & Lorelie S. Masters, Insurance Coverage Litigation, ' 2.05 (2d ed. 2000). It is also a rule of equity that prevents insurance companies from enforcing policy language ' no matter how clear or unambiguous ' that would frustrate the reasonable expectations of the policyholder:

The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. Robert E. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv. L. Rev. 961, 967 (1970).

At least eight jurisdictions have adopted Judge Keeton's version of the rule, or something very close to it. See Whittier Properties, Inc. v. Alaska Nat. Ins. Co. , 185 P.3d 84, 91 (Alaska 2008) (” ' even though we have determined that the exclusion is not ambiguous, [the insured] may still prevail under the reasonable expectations doctrine.”); First American Title Ins. Co. v. Action Acquisitions, LLC , 187 P.3d 1107, 1114 (Ariz. 2008) (holding that the reasonable expectations doctrine will apply to unambiguous policies in certain circumstances); Nationwide Agri-Business Ins. Co. v. Goodwin , 782 N.W.2d 465, 473 (Iowa 2010) (describing reasonable expectations doctrine as applicable where an insurance company fostered the policyholder's expectation of coverage); Atwater Creamery Co. v. Western Nat. Mut. Ins. Co. , 366 N.W.2d 271, 277 (Minn. 1985) (adopting reasonable expectations doctrine as proposed by Judge Keeton); Flomerfelt v. Cardiello , 202 N.J. 432, 441 (N.J. 2010) (holding that ambiguous terms will be construed to give effect to insured's reasonable expectations and adding that the policy will be construed this way even if a “close reading” or “painstaking” analysis might yield another result); Barth v. Coleman , 878 P.2d 319, 323 (N.M. 1994) (“The doctrine of reasonable expectations is not restricted to those cases in which the policy language is at issue.”); Safe Auto Ins. Co. v. Berlin , 991 A.2d 327, 332 (Pa.Super. 2010) (recognizing that, under some circumstances, the reasonable expectations doctrine can apply to unambiguous insurance policies); Keene Corp. v. Insurance Co. of North America , 667 F.2d 1034, 1042 n. 12 (C.A.D.C. 1981) (explicitly agreeing with Judge Keeton's formulation of the reasonable expectations doctrine and basing the “interpretation of these policies on the expectations that [the insured] could have reasonably formed, as an objective matter, on the basis of the policies' language.”).

Many more jurisdictions have adopted a variant of the reasonable expectations doctrine in which the rule applies to ambiguous contracts only. See, e.g., Colford v. Chubb Life Ins. Co. of America , 687 A.2d 609, 614 (Me. 1996) (“If [an insurance policy] is ambiguous, it will be construed against the insurer so as to comply with the objectively reasonable expectations of the insured.”); Burns v. Smith , 303 S.W.3d 505, 512 (Mo. 2010) (“When 'there is an ambiguity, insureds are entitled to a resolution of that ambiguity consistent with their objective and reasonable expectations as to what coverage would be provided.'”) ( quoting Niswonger v. Farm Bureau Town & Country Ins. Co. of Mo. , 992 S.W.2d 308, 317 (Mo.App.1999) (emphasis added)). These cases treat the doctrine as an adjunct to the doctrine of contra proferentem ' the rule that ambiguities in an insurance policy are to be construed against the insurer. See Insurance Coverage Litigation, supra at ' 2.05[B]; cf. Wilkie v. Auto-Owners Ins. Co. , 664 N.W.2d 776, 787 (Mich. 2003) (declining to adopt the rule of reasonable expectations because “it is already well established that ambiguous language should be construed against the drafter, i.e., the insurer.”).

Whether the reasonable expectations doctrine is a principle of equity or a rule of interpretation, or both, it rests largely on the same set of public policy justifications. Many courts emphasize that, in general, “there is unequal bargaining power between the parties so that one party controls all of the terms and offers the contract on a take-it-or-leave-it basis ' ” Atwater Creamery Co., 366 N.W.2d at 277. This disparity in bargaining power justifies an interpretation of the policy (or an enforcement of the policy, as the case may be) that comports with the insured's reasonable expectations. Id. ; see also Harper v. Fidelity and Guar. Life Ins. Co. , 234 P.3d 1211, 1222 (Wyo. 2010) (“The doctrine of reasonable expectations is essentially a rule of construction that acknowledges the usual disparity of bargaining power between an insurer [and insured] and the fact that insurance contracts are generally contracts of adhesion.”) ( quoting St. Paul Fire and Marine Ins. Co. v. Albany County School Dist. No. 1, 763 P.2d 1255, 1262 (Wyo. 1988)).

The general inequality between insurer and insured is one justification for the reasonable expectations doctrine, but it is not the only justification. Courts and commentators alike have assembled a long list of reasons why an insurance policy should cover what the insured reasonably expects it to cover. See Jeffrey W. Stempel, Stempel on Contracts, ' 4.09[C] (3d ed. 2009) (compiling justifications for reasonable expectations doctrine). An exhaustive list of policy rationales would be exceedingly long, but would include the following:

• Because very often the policyholder will not receive a copy of the policy until after the transaction is completed, its decision to purchase the policy is based on its reasonable expectation of what is covered. Id. ; see also Reliance Ins. Co. v. Moessner , 121 F.3d 895, 905 (3d Cir. 1997) (“The control exercised by insurers is especially problematic when the insured, whether sophisticated or not, does not receive the actual insurance policy until after offering to buy insurance and paying the first premium.”); Zuckerman v. Transamerica Ins. Co. , 650 P.2d 441, 446 (Ariz. 1982) (“The insured is given no choice regarding terms and conditions of coverage which are contained on forms which the insured seldom sees before purchase of the policy, which often are difficult to understand, and which usually are neither read nor expected to be read by either the person who sells the policy or the person who buys it.”).
• Where the insurance company's marketing of a product creates certain expectations, it should not be permitted to subvert those expectations with cleverly crafted policy provisions. See Stempel on Contracts, supra at ' 4.09[C]; see also Kenneth S. Abraham, Judge-Made Law and Judge-Made Insurance: Honoring the Reasonable Expectations of the Insured, 67 Va. L. Rev. 1151, 1156 (1981).
• The reasonable expectations doctrine encourages the insurance company to provide greater information, which in turn, makes the insurance market more efficient. See Judge-Made Law, supra at 1170 (“By imposing liability on the insurer where the insured possesses inaccurate coverage information, the expectations principle theoretically should encourage the production of more accurate information and thus create a more efficient market.”).

Applying the Reasonable Expectations Doctrine to Sophisticated Parties

In Resure, Inc. v. Chemical Distributors, Inc. , 927 F.Supp. 190, 191 (M.D.La. 1996), a truck exploded as a result of a chemical reaction. The policyholder allegedly caused the explosion by failing to clean the truck properly. The insurance company sued the policyholder for a declaration that, due to the pollution exclusion in the policy, the loss was not covered. The policyholder argued that the exclusion was ambiguous because “pollution exclusion clauses are generally directed at the insured's own polluting activities.” Id. at 193. The court disagreed, holding that the exclusion unambiguously applied “regardless of whether the discharge results from the insured's activities or from the activities of others.” Id.

Applying New Mexico law, the court also declined to apply the doctrine of reasonable expectations. “The rationale for the doctrine,” according to the court, “is that 'the insured most often is a layman, the average man or woman on the street, who is not a college graduate or a student of insurance law. ' They cannot, ordinarily, read and understand the complex, complicated and intricate provisions of an insurance policy ' '” Id. at 194 ( quoting Read v. Western Farm Bureau Mut. Ins. Co. , 563 P.2d 1162, 1166 (N.M.Ct.App. 1977)). Accordingly, the court concluded that the doctrine “probably has little application in the business insurance context.” Id. Furthermore, the court held that “[e]ven if it is appropriate to apply the doctrine in certain business settings, it should not be applied here, since [the] President and Chief Executive Office [sic] of [the policyholder] ' personally participated in procuring the policy ' ” Id. Finally, the court held that, because the policy was not ambiguous, the doctrine did not apply. Id. ( citing Davison v. Business Men ' s Assur. Co. of America , 518 P.2d 776, 778-79 (N.M. 1974)).

This case is typical of those that do not apply the reasonable expectations doctrine to sophisticated policyholders. See, e.g., In re SRC Holding Corp., 545 F.3d 661, 671 (8th Cir. 2008) (holding that Minnesota courts limit the reasonable expectations doctrine to cases where there is unequal bargaining power between the parties); Playtex FP, Inc. v. Columbia Cas. Co. , 609 A.2d 1087, 1092 (Del.Super. 1991) (“Because this was a negotiated contract, not a contract of adhesion, the doctrine of reasonable expectations is not applicable.”). These cases share a myopic focus on only one of the reasonable expectations doctrine's many public policy justifications ' namely, that an insurance policy is an adhesion contract between parties of unequal bargaining power. In contrast, cases that consider the full range of policy rationales for the reasonable expectations doctrine apply the rule regardless of whether the policyholder is sophisticated.

For example, in Reliance Ins. Co. v. Moessner , 121 F.3d 895 (3d Cir. 1997), the court considered whether a pollution exclusion became part of a sophisticated policyholder's comprehensive general liability policy. In the underlying litigation, two plaintiffs alleged that they were overcome by carbon monoxide emitted from the policyholder's vaporator ' a device “used to cure pre-formed concrete products ' ” Id. at 898 n. 1. The policyholder submitted a claim to the insurance company for defense and indemnity for the underlying litigation. The insurance company responded with an action for declaratory judgment that it was not obligated to cover the policyholder based on a “Total Pollution Exclusion,” which was added when the insurance policy was renewed. Id. Arguing for summary judgment, the insurance company took the position that the reasonable expectations doctrine did not apply to the policyholder because it was a sophisticated party. The Third Circuit, applying Pennsylvania law, disagreed.

The Reliance court began by discussing Tonkovic v. State Farm Mutual Automobile Insurance Co. , 521 A.2d 920 (Pa. 1987), a Pennsylvania Supreme Court case holding “that, regardless of the ambiguity or lack thereof inherent in an insurance policy, courts should ensure that the insured's 'reasonable expectations are fulfilled.'” Reliance 121 F.3d at 903 ( quoting Tonkovic , 521 A.2d at 926). Relying on this rule, the Tonkovic court concluded that “[w]hen the insurer elects to issue a policy differing from what the insured requested and paid for, there is clearly a duty to advise the insured of the changes so made. The burden is not on the insured to read the policy to discover such changes, or not read it at his peril.” Tonkovic, 521 A.2d at 925.

Turning to the insurance company's sophisticated insured defense, the Reliance court recognized that “sophisticated insureds may exercise more bargaining power vis-'-vis the insurers, and therefore be in less need of protection from the courts than other insureds.” Reliance 121 F.3d at 905. Nonetheless, even for sophisticated policyholders, “the rationale of the reasonable expectations doctrine is still applicable when the insurer unilaterally alters the insurance coverage requested by the insured.” The Reliance court reasoned that, regardless of whether the policyholder was sophisticated, it “has a right to expect that [it] will receive something of comparable value in return for the premium paid.” Id. ( quoting Collister v. Nationwide Life Ins. Co. , 388 A.2d 1346, 1353 (Pa. 1978)). This rule applies with special force “when the insured, whether sophisticated or not, does not receive the actual insurance policy until after offering to buy insurance and paying the first premium.” Id. ; see also UPMC Health System v. Metropolitan Life Ins. Co. , 391 F.3d 497, 503-504 (3d Cir. 2004) (relying on Reliance and holding that the reasonable expectations doctrine applied to sophisticated policyholder).

Other courts likewise have extended the rule of reasonable expectations to sophisticated policyholders. See, e.g., Old Republic Ins. Co. v. Underwriters Safety and Claims, Inc. , 306 Fed.Appx. 250, 254, 2009 WL 32704, *3 (6th Cir. 2009) (holding “that sophisticated consumers may also rely on reasonable expectations as to the consequences of a failure to provide notice”); James v. Burlington Northern Santa Fe Ry. Co., 2007 WL 2461685, *8 (D.Ariz.) (D.Ariz. 2007) (predicting that “the Arizona courts are likely to apply the reasonable expectations doctrine, regardless of the insured's commercial status, where the insured alleges that it did not know and had no reason to know of the existence of an exclusion of coverage in a standardized insurance contract.”); Owens-Illinois, Inc. v. Aetna Cas. and Sur. Co. , 597 F.Supp. 1515, 1523 (D.C.D.C. 1984) (applying reasonable expectations doctrine to sophisticated policy holder). These cases recognize that the rule of reasonable expectations is supported by more than just the usual disparity in bargaining power between the insurer and its insured. Rather, the rule is also justified by the realities of the insurance market, where policyholders often receive their policies only after paying for them. In these cases, sophisticated and unsophisticated policyholders alike are entitled to a policy that covers what they reasonably expected it to cover.

Moreover, though courts apply various versions of the reasonable expectations doctrine, at the very least, the doctrine may be viewed as a rule of contract interpretation. As such, the application of the rule should not vary depending on the identity of the policyholder.

In Boeing Co. v. Aetna Cas. and Sur. Co. , 784 P.2d 507, 514 (Wash. 1990), the court considered whether the “layman” rule ' which fixes the meaning of a contract by referring “to what the average lay person might understand” ' applied to Boeing, “a corporate giant.” The court held that it did. “The critical fact,” according to the Boeing court, was “that the policy in question is a standard form policy prepared by the company's experts, with language selected by the insurer.” Id. This standard language had “been issued to big and small businesses throughout the state.” Id. Accordingly, “it would be incongruous for the court to apply different rules of construction based on the policyholder because once the court construes the standard form coverage clause as a matter of law, the court's construction will bind policyholders throughout the state regardless of the size of their business.” Id.; see also Reliance, 121 F.3d at 905 (noting that contra proferentem, though initially justified by disparities in bargaining power, has been “routinely applied ' to coverage disputes involving business insureds and even to disputes between insurance professionals ' “); Stempel on Contracts, supra at ' 4.11[E] (compiling cases rejecting the “sophisticated insured defense” to contra proferentem).

The same reasons that justify extending the “layman” rule to a corporate giant, like Boeing, apply with equal force to the reasonable expectations doctrine. As recognized by the Boeing court, there is one set of contract-interpretation rules, which apply to the policy not the policyholder. Thus, whether or not the policyholder is sophisticated is irrelevant in the view of such courts to how the policy is interpreted.

Conclusion

It was never reasonable for Pip to expect that he would receive a fortune from Miss Havisham ' the wealthy, jilted bride who encouraged her adopted daughter, Estella, to toy with Pip's affections. Pip's na'vet', however, did not justify Miss Havisham's letting him believe that she was his secret benefactor. She may not have created Pip's great expectations, but she certainly indulged them to her benefit.

Insurance companies reap the benefits of the mere reasonable, not great, expectations of their policyholders. Expecting coverage, either because their insurance companies create such expectations or simply because it is reasonable to do so, policyholders continue to pay premiums to their insurance companies. Courts should fulfill an insured's reasonable expectations regardless of its sophistication. Whether the policyholder is a blacksmith's apprentice or a wealthy gentleman, applying the reasonable expectations doctrine is justified because doing so recognizes the reality of the insurance transaction, creates uniformity, and promotes efficiency.

Lucas M. Blower is an associate in the Akron, OH, office of Brouse McDowell, where he regularly represents policyholders in insurance coverage matters.