INsunaNCE CoNSUMER CouNspt's CoruMN
TnB Rn¡soNAßLB ExpnctarroNs DocrRrNE IN MoNraNe
BY PRIT:ESSOR GREG MUNIIO
Introduction
The scenario is familiar: The
insured, present in counsel'.s office,
has suffered a loss involving home,
auto or business and has made a
claim fot ìnsurance. The insured
reports being shocked when the insurer said the loss was not covered
because
of a condition
or exclusion
or existing coverâge was reduced by
an offset of limitation of liabiliry
clause. UsualÌy, counsel is also surprised by the policy language that
defeats or reduces coverage or by the
v/ay the insuter applies the policy
language to defeat coverage.
Flowever, the insured's belief that
the policy covered the loss seems
reasonable, and the result appears
unfair. Counsel invariably wonders
whether thc offending insurance
policy provision can be deemed void
in Montana for violaring the reasonable expectarions of the insured.
After all, the court has protected the
rights of insureds by findng vioiadons of the insured's reasonable
expectations in such notevorthy
cases as .ÞIarþ u. Progressiue Specia/ry
Ins. Co.,2 (2003) and Bennett u. State
Farm Mutaal,3 (1993).
Then there is the famous line by
Professor Keeton, oft quoted by the
Montana Supreme Court,a "The objecúvely reasonable expectations ()f
applicants and intended beneficiaries
regarding the terms of insurance
contrâcts will be honored even
though painstaking study of the
policy provisions would have negated
those expectations." It would be a
gleamrng sword indeecl that would
slay an insurance provis.ion solely for
violating an insurec'l'.s reasonable
expectatìons.
Pnc¡
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1
While the reasonable expectâ
tions doctrine in Montana varics
clependrng on the court you are in, it
is alive, well, and under-appreciated.
The courts are not clear on its theoretical basis, but use it l-iberally to
damn or bless insurance provisions.
Our inquiry here raises several
questions, the biggest being, can we
in fact, void an insurance provision in
Montana solely because it violates the
insured's reasonable expectations?
Can the reasonable expectatìons doctrine be applied absent any fìnding
of ambiguity? Or, if the provision
violates the insured's reasonable
expectations, is there automatically
ambiguity? Can the insured have a
reasonable expectation in variancc
with the policy provisions where
there is no ambiguity?
Montana State and Federal
Courts have cited reasonable expectarions of the insured in perhaPs
twenty decisions. A review of those
decisions reveals that the doctrine is
frequently invoked by counsel for
insutance consuriters and is readily
applied by state and federal courts
either to void a provision altogether
or to resolve an ambiguity in a policy.
Nevertheless, reasonable expectations
cìecisions in Montana reflect a lack of
ciarity about the doctrine tesulting in
conflicting court pronouncements.
Counsel who can âdvocate for clear
application of the doctrine have a
fine tool for assuring that their clients
get the benefit of the policy for
which they bargained.
insurance policies.
In the coffee
houses in l-ondon where the ship-
owners negotiated insurance with
the unclerwriters, the terms \¡/ere
subject to a certain amount of bargaining. -A.s insurance spread to protection of property from fire and to
injury and damage arising out of
business, âuto travel, and aviation, the
use of forms drafted by the insurers
or their trade organizalions became
the convention.'.loda¡ only the most
sophisticated commercial insureds
and their brokers are engagecl in
negotiating anything other than price
and levels of coverage. The contracts
have become contracts of adhesion
which the insured can either accept
or reject
in total.
Âs contracts of adhesion, insurance policies were subject to the
general contract rule that ambiguiry
is resolved against the draftsmen.
However, I(eeton, in studying rights
in variance from the insurance policy
provisions, noticed the development
of a line of decisions in which
courts voidecl unambigr.rous provisions in favor of the insured based
solely on reasonable expcctations.
I-Ience, his famous assertion that the
objecuvely reasonable expectations
of the insured regarding the terms of
the policy "wiìl be honorecl even
though painstal<ing study of the
policy provisions would have negated
those expectations."s I(eeton further
said:r'
Reasonable Expectations
Not only should a
policyholdert reasonable expectâtions be honored in the
Historically, insurecls pla;'ed a
substantial role in fonnulating their
and technical
language, but those expecta-
Profess<¡r Keetonts ConcePt
of
face
of cllfficult
Tnl¡r TnpNos - Survrprnn 2008
'
tiorm should prevail as well
'u¡hen the language of an
unusual provision is clearly
understandable, unless the
insurer can show that the
policyholder's failure to read
such language is unreasonable.
More specificaliy, and consisrent
wìth the Montana court decisions,
Keeton said, "A.n ìnsurer will not be
permitted an unconscionable advantage in an insurance transaction, and
the reasonable expectarions of appl.icants and intended benefìciaries wi.ll
be honored."i For Keeton, the reasonable expectatjons doctrine is based in
unconscionabiliry. Courts used ambigurty merely as a means to reach reasonable expectations, and the majority
of decisions {ìndtng ambþity needed
reasonable expectaúons as a ground
for the ambigurry. A necessary result
of basing reasonable expectations in
unconscionabitiry is rhar courts would
differentiate berween sophisricated
d unsophisricated insureds, limiting
iecovery for insureds such as lawyers
and big business.
\)ühile the Monrana courts have
regulady applied the doctrine of reasonable expectations, the decisions
have been inconsistent. However,
analysis of the Montana cases and
the reason.ing of the state and federal
courts,' allows us to categorize the
cases into roughly three lines: (1) those
cases argr.rably estabìishing rhar rhe
"reasonal¡le expectations" doctrine is a
stand-alone doctrine based on uncon-
scionabilit¡ thus not rcquiring a contract law fìnding of ambiguity to
trigger its applicarion; (2) those cases
that apply the "reasonable expecta-
tions" doctrine as an adjunct to contract law, thus requiring an ambiguiry
in the contract language beforc looking
to the reasonable expectations of the
i.sured; and (3) rhose cases in which
.-e is no ambiguiry but the court
âppears to apply the doctrine and
Truer TRnN¡s
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Sutr¡vrnn 2008
concludes that the insured's expectations are not reasonable because a clear
exclusion from coverage defea.ts them.
court cited l{eeton's famous article
and quoted Keeton's principle.e The
court ended by saying, "'fhis policy
is an adhesion contract that jusufies
Classic Keeton: Voiding an insurance provision absent ambiguiry
solely for violating the insureds
reasonable expectations
The Montana Supreme Court has
ruled insurance clauses void for violating an insured's reasonable expectations. Tran¡america Ins. Co. u. Ro1/e,
(1983)8 appeârs to be the fìrst Montanz- c se to apply the doctrine of
reasonable expectations, arguably
adopting Keeton's principles verbaam. Ro/e involved a child auro passenger who sued her mother for
quadriplegic injuries she suffered as
a result of the mother's negligence
whj-le driving the family auto.
Transamerica's auto poìicy included
a "household exclusion" which excluded coverage "for bodily iniury to
any person who is related by blood,
mariage, or adoprion to [the insured],
if
that person resides
in
fthe
insuredt] household at the time of
the loss." The F-ederal District Court
certifìed to the Montana Supreme
Court the following quesrions: (1)
whether the "household exclusion"
was valid, and (2) whether a parent was
immune from tort liabiJity to a child.
First, the Montana Supreme
Court held that, by enacring the Mandatory Insurance Laq MCA S 33-6301, "the legrslature has expressly
outlawed the'household exclusion."
Therefore, the inclusion of the clause
violated Montana public policy by
violating a srarurory provision. Second, the court abrogated parental
immuniry by holdìng that a parent is
not immune from a child's tort action
arising from injury by automobile.
The court continued, "In addirion,
we hold that the household exclusion
clause is invalid due to its failure to
'honor the reasonable expectations'
of the purchaser of the policy." The
this court's consideration
consumer approach."lo
of
the
The court found no ambiguity
in Ro/e, the household exclusion
there being quite clear. Hence, Ro1le
was the classic l(eeton principle case
that voided an unambþous insur,
ance provision for violating the
insured's reasonable expectarions.
Doubters can only specuiate v¡hether
the court ¡vould have ruled the exclusion invalid for violating reasonal¡le
expectations
if
the exclusion had not
also been founcl to be "expressly
outlawed" by the Mandatory Insurance Law.
In
1990, the Montana Supreme
Rojtle in fìnding that a
"limit of liability" clause in State
Farm'.s policy's definition of
Court cited
"undersinsured vehicle" violated
the insured's reasonable expectarions.
In State Farm Mat. Aato. Ins. Co. u.
Brat/n,|l a Montana resident insured
for UIM with State Farm rvas killed
whìle riding in an auro operated and
insured in Canada. The Canadian
policy had BI limits of 200,000, but
Canadtàn tort law limited recovery
for death damages to funeral expenses only. The State Farm poìicy
promised to pay damages the insured
was "legally entitled to collect" fiom
an underinsured motorist and defined
an underinsured vehicle as one whose
limit of ìiability for boclrly inlury
liability was less than the vicrim's tort
clamages. The poÌicy requirecl that
limit to be "used up by payment of
judgments or sett-lement" before any
UIM benefìts rvould be payabie. Consequently, State Farm refusecl any
IJIM demand on the ground that
Braun was not entitled to collect
more than funeral expense under
Canadian tort law so rhar the limit of
BI liability would never l¡e used..up.
Pncn 33
The court in Montana heìd that
"legally entided to collect,, in UIM
referred only to establishment of
fault and not damages, and that, after
the fault threshold was mer, UIM
coverage was governed by contract
law as opposed to rort law. The court
then resolved the case by concluding
that the "limit
of liability,'language
vio-lated the reasonable expectations
of the insured. The court said, ,.The
insured could reasonably expect to
recover the difference befween what
he could collect from the tortfeasor's
pohcy and his proven damages up to
the policy limits purchased." The
court did not find ambiguiry and the
câse appears to illustrate the Keeton
approach. Ironically, the attorney
arguing against reasonable expecra_
tions for State Farm in Braun was
Lyman Bennett who had a reasonable
expectations spiritual awakening in
the next case in which the doctrine
arose
in the Montana Supreme Court.
Bennett u Sîate Farm Mut. Auto.
,rts. C0.12 decided by the court in
1993, buttressed Ro1le and Braøn.
There, State Farm issued two auto
insurance policies with g100,000
Underinsurcd Motorist covcrage
limits to Bozeman attorney, Lyman
Bennet and his wife Bonnie. Bonnie
was struck and injured as a pedestrian
by an underinsured motorist and
sought to recover the limits of both
policies since she was an insured under
each policy. State Farm refused ro pay
both limits on rhe basis of an ,.other
insurance" clause limiting coveragc to
the lughest ìrmit of coverage where
the.re are muldple policies.
Rennefi was originally removed to
fecleral court where
Juclge Hatfielcì
found the "other insurance,' clause
ambig-uous and then found that void_
ing the clause comportecl with the
insured's reasonable expectations.r3
I clecision was appealed to the
'.¡ìnth Circuit, which certifìed to the
Pacn 34
Montana Supreme Court the question
whether an "othef insurance,, clause
that prohibits stacking of under_
insured motorist coverage provided
by separate policies from the same
insurer is void as against public
policy?
The Montana Supreme Court
rejected State Farm,s argument that
because the Bennetts had only paid
for 9100,000 UIM coverage under
each
of their policies
and not
$200,000, they could not reasonably
cxpect dual coverage under the un_
ambiguous "other insurance,, clause
appearing in both policies. The court
reasoned that, by "the clear and un_
ambþous langaage of State Farmt
insurance policy," the UIM coveïage
was personal to the insured and not
dependent on the insured occupying
an insured vehicle. Flence, Bennett
could reasonably expect coverage up
to the limits of both policies for
which she was an insured and for
whìch separate premiums had been
paid.
in holding the "other insurance,,
clause thar prohibits stacking of the
UIM coverage void as against public
policy, rhe court summariJy said:
In
Tran¡arnerica u. Ro1le (1983),
-lhe
court asserted that
the promise to pay UIM benefìts was
clcar and unambiguous. On its face,
BenneÍt srill supports the argument
that an insurance provision can be
invalidated solely for failing to honor
the reasonable expectations of the
insured. The Bennett court clid nor say
ambiguiry was required, nor did it
fìnd any ambþiry in the policies at
Bennett
issue.
In the 1995 companion cases
I-eibrand u. National Farmers [.Jnion
ProperQ and Casaal4t Co., and Cole
Track In¡urance Excbange,ta Federal
c_¡f
u.
District Judge Shanstrom, cerrifìe<ì to
the Montana Supreme Court the
question whether amendatory en_
dorsemenrs containing modtfìecl
household exclusions to auto cover_
age were valid and enforceable ìn
Montana. The insureds in each case
took the positions that the exclusions
were void and unenforceable for
1) being unclear and ambiguous,
(2) violaring rheir reasonable expecta_
tions, and (3) violating the public
policy of Montana. The Montana
Supreme Court concluded that the
policy provisions at issuc were un_
cleaq ambþous, and void. Accord_
ingl¡ the court declined tô reach the
mobile liability poìicy because
of whether the provisions
violated the insuredt reasonable
expectations, or were void as contrany
to public policy.
Only if the courr considere<l
it did not honor the reasonable
expectations of the insured.
reasonable expectations to be a sepa_
rate ground for invalidating the modi-
202 Mont. 173, 656 p.2d 820,
we invaliclated a "household
exclusion" clause in ân auto-
\ù7e
reaffìrmed that decision in
LYel/conte u.
Home In¡urønce Co.
(1993), 257 Mont. 354, 3SB,
849 P.2d 190,1.93, staring that
thc "reasonablc expectation
doctrine is in accord with our
strong public policy that insur_
ance is intended to serve a
fi"rndamental protective purpose. \ü7e affìrm it again here.
issues
fied exclusìon did the holding in
If the courr
considered reasonable expcctatìons
only applicable to resolve ambiguity,
l-¿ibrand make sense.
there was no reason .it could not
apply the doctrine to resolve the
ambiguiry. In effect, the court said
that the provision was ambiguous so
as to be unenforceable, making a
fìnding of invahdiry for violation of
reasonablc expecfations moot. There_
Tru¿r Tnrruos - Suvnrrn 200g
fore, going to the trouble
a separate analysis would
.lnecessafy.
of
detailing
^ppe
f
Interestingly, while not citìng
I(eeton, the court then discussed
unconscionability, the basis of
I(eeton's theory
tations, saying:
of
reasonable expec-
\X/hile we dccide rhis case on
the basis of the ambiguiry in
the policy language, we are nor
unmindful of the insureds'
arguments that these contracts
are contracts of adhesion; that
full coverage for damages suffered by family members is nor
available on the open insurance market, and that to arbitrarily preclude full coverage
for famìly members, âs opposed to all othcr persons, is
unconscionable and void as a
matter of publtc polic¡ and
therefore, unenforceable, reof the furure clariry
of such an exclusion.
gardless
The court concluded that the
record was insufficient to evaluare
the policies there for unconscionabiliry but allowed that it could be a
factor in any furure consideration
of the validiry of the provision.
While the court found ambiguir¡
the decision impìicitly supporrs rhe
proposirion that reasonable expectations is a stand-alone doctrine by
which a provision can be voided.
The court
n
State Farm
Møt. Aato.
Ins. Co. u. Gibson,ts (2007) applied the
reasonable expectations doctrine to
void an "owned vehicle exclusion"
that State Farm drafted in to its Medical[>ay coverage. The exclusion, which
acted as an anti-stacking provision,
hacl been previously held valid in
Lierboe u. State Farnttt (2003).
In Cibson, the plainriffs had paid
three separate premiums for Medical
Pay coverage on three autos and
sought to stack the coverage. As in
I;ierboe u. State Farn Q003), the insurer refused to stack coverage cidng
the "oryned-vehicle exclusion" which
provided there was no Medical Pay
coverage for any owned auto except
the "occupied" auto. The Gibsons
argued the exclusion was invalid as
against pubtc poìicy. They apparently
made no claim that the provision was
ambiguous, and the court confirmed
that by stating rhat, absent ambiguiry
will be enforced, and the
only exception is if the contracr vioa provision
lates public policy.
Because the Gibsons had paid
the separate premiums and were the
insureds under all three policies,
which facts disunguished Gibson ftom
Lìerboe, the court found that the
Gibsons had "every expectation
of
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TnIar TnnNos
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Survr¡upn 2008
PncB 35
receiving" the coverage sought and
that the exclusion defeated coverage
for which valuable considera¡ion had
been paid. Consequently, the court
voided the owned- vehicle exclusion
in the Mecl Pay coverage as against
publtc policy insofar as it acted as an
antì-stacking"provision. Gib¡on is one
cases where the court
has used the doctrine of reasonable
expectatjons absent ambiguiry to void
an insr:rance provision.
of the clearer
Harþ u. Progressiue SpedalE Int.
Co.,n (2003) invoìved the same basic
issues as the i986 federal O¡born case
that will be discussed later. As in
Otborn, the pol_icy defìned an
underinsured motor vehicle as one
Montana courts have occasionally
insisted that Montana requires
ambiguity as a prercquisite to any
reasonable expectarions inquiry.
Federal cases requiring ambiguiry
trefore applying the reasonable
expectations doctrine
In contrast, Montana federal
courts began their analysis of the
reasonabìe expectations doctrine via
tradirional contract law interpretation; where the presence of ambiguity is the threshold issue. In 1986,
Federal District Judge Lovell voided
provisions of Transame¡ica Insurance Company's auro policy in
sanction on attorney Page Wellcome
Tran¡america Insarance Groaþ u. O¡born}8
and the insurer he represented for
with BI limits less than the insured's
UIM limit and coupled the UIM
coverage with a provision that offset
any BI coverage received from the
tortfeasor against the UIM benefit
due. The result was that there was no
situation in which the insured could
ver recover the $50,000 UIM shown
on the declarations page.
'Ihe court io IJar@ lumped the
public pohcy issues together, saying
"[w]e conclude that the offset provision, as well as the defìnition of
underinsured motorist, violate
Montana public policy because they
$25,000 UIM coverage. (Ihis was the
same fact scenario of Harþ (2003)
create
cliscussed above.)
^n
ambiguity regarcling cover-
age, render coverage that Progressive
promised to provide illusory,
ancl
defeat the insured's reasonable expec-
tation." The case cited ancl likely folIouted Osborn but does not shed much
Iight on the law of reasonable expectations except for its indication that
defeating the insured's reasonable
expectations violates public policy and
is a ground for voiding the provision.
The above line of cases esrablishes that one can void an insurance
provision for violaung the insurecl's
'^asonablc expectations
and regard,s of whether the provision is
amb.iguous. The problem.is that
Pecn 36
These recent decisions indicate
the pohcy behind the laws of
Montana with respect to insurance. The undedying theme is
the protection of the reasonable expectarions of he insured at the time the policy
was purchased.
There, the insurer issued a d,eclarations page promising 950,000 of
Underinsured Motorist coverage.
However, the policy defìned an
underinsurecl motor vehicle as one
with BI .limits less than the insuredt
UIM limit and coupled the UIM with
a provision that offset any BI coverage receivecl from the tortfeasor
against the UIM benefìt due. The
import of the provisions.was that,
under no circumstances could the
insurecl ever receive more than
Consequend¡ Juclge Lovell
found the UIM defìnition "ambiguous and inconsistent with the limits
of liability expressed on the Declarations Page" and described it as "an
inherent ambiguity in the policy
which cânnot be reconciled." The
court held the offending vehicle to
be underinsured though its BI poJicy
limits exceeded the UIM limit of
Osborn's policy and held the policy
clefìnition of underinsured moror
vehicle voicl as against public policy
of
the State of Montana, saying
that public policy:
of
The court in O¡born clearly found
ambiguiry and just as clearly voided
the offending provision for violating
the reasonable expectations of the
insured.
Simìlady, in ll/ellcome u. Llome Ins.
Co. (1991),1e a trial court imposed a
violaúons of the court's orders regarding conduct of uoir dire, examina-
tjon of witnesses, and argument.
\)Tellcome's errors and omissions
carrier, Flome Insurance Company,
refused to pay the sanctions citing its
policy exclusion for payment of
"fines or statutory penalties whether
imposed by law or otherwise. . . "
In a federal action against I{ome
Insurance Compan¡ Wellcome
sought summary judgment on rhe
grounds (1) that the term "fìrìe" \¡r'as
ambiguous and, (2) thar coverage
should be required under the reasonable expectarions doctrine. Instead,
the Fecleral Court granted summary
judgment to Home Insurance Company fìnding that the exclusion was
unambiguous cleady excluding payments for money ordered paid by a
trial court for misconduct.
Judge Hatfìeld cliscussed
Wellcome's invocation of the reasonable expectations doctrine noring that
it was recognizecl in Montana and
cittng Transameica u. Ro/e. I-Iowever,
he saicl of the doctrine that "its precise dimensions have never been
refìned," and assertecl that "it has
been utjlzed in other jurisdicrions
to resolve ambiguitres in insurance
Tnr.t-l- TnBNos
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policies in order that the policies
comport with the insured's reasonal¡le
^vDectations." He then went on to sây:
The rationale upon which the
doctrine is based is in accord
with Montana's strong public
policy of protecting insureds
from seeing insurance cover-
.
of confusing or ambigu-
ous policy language. See, Rodli
u. American Bankers Ins. Co. Of
Flonda, 44 Mont.St.Rprtr. lBBB
(D. Mont. 1987).
I-Iatfieid said that the idea that
the doctrine applied to all coverage
disputes regarclless of the presence
of ambiguiry was a minority view and
concluded from the Tran¡arnerica u.
Roy/e case that Montana would foilow
the majority view, i.e., that the doctrine is only used to resolve ambiguity. It is cliffìcult to see how he
:hed such a conclusiot-l based on
ânything the Montana Supreme Court
said in Tran¡america u. Ro/e which
involved no ambiguity ancl voided
family exclusion for violating the
a
insured's rcasonable cxpectations.
Hatfìeld concluded that Wellcome
"may not rely upon the doctrine to
create coverage which, by the clear
terms of the policy, did not exist."
I-Iatfìeld's decision, which was
appealed, is a classic example of
cases requiring ambiguity before the
doctrine can be applìed. In other
words, the doctrine's only use woulcl
be to resolve ambiguitres. When the
decision was appealed to the Ninth
Circuit, that court certifiecì the issues
to the Montana Supreme Court,
which approached the reasonable
expectations issue djfferently as wìll
be discussed belorv.
Judge Flatfìeld had also previiy found ambrguiry and then
applicd the reasonal¡lc cxpectations
Tnnr Tnnruos
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required by law" By excluding coverage only for the amounts in excess of
the minimum limits required by law,
the insurer hoped to avoid having the
decision was also appealecl to the
Ninth Circuit and certifìed from there
to the Montana Supreme Court.)
clause declared invalìd as against
public policy for not meeting the
¡\.fter fìnding the clause ambþous,
Hatfìeld reasoned that voiding the
clause comported with the insured's
reasonable expectations.2l When that.
age defeated by an insurer's
use
doctrine to void an "other insurance"
clause which acted as an anti-stacking
provision ío Bennelt u. State Farm Mat.
Auto. Ins. C0.20 Q.rontcally, Hatfìeld's
Surøprcn 2008
decision was appealed to the Ninth
Circuit, it certified to the Montana
Supreme Court the question whether
an "othef insurance" clause that
prohibits stacking of underinsured
motorist coverage provided by separate policies from the same insurer is
void as against public policy?
While the Montana Supteme
Court appeared to be pursuing a
Keetonesque policy of voiding insurance provisions solely for violaring an
insured's reasonable expectalions,
F'ecleral Judge
Hatfìeld persisted in
his apparent belief that Montana law
requìred ambiguity. He did so even
though appeals of his decisions were
going to the Ninth Circuit which was
certifying the questions to the Montana Supreme Court which v/as not
requiring ambiguiry to trigger the
reasonable expectations doctrine.
In September of
1.994,
in
Sboo,k
u.
State Farm Mat. Auto. Ins. Co. of
Bloomington,z Judge l{atfìeld was
confronted with another auto acciclent casc in which the qucstìon was
whether a "modified" family exclusion was invalid either as a marter of
public policy or because it violated
the insured's reasonable expectations.
There, the passenger wife sued her
driver husbancl for negligence resulting in her infury. State Farm's "modified household exclusion" provided
that rhere was no coverage for bodily
injury to a famtly member "to the
extent the limits of liabiliry of th.is
policy exceecì the limits of liability
minimum coverage requirements of
the Mandatory Liability Law, MCA
S ó1-ó-301 and the Motor Vehicle
Financial lìesponsibility Act, MCA
$ 61-6-103
et. seq.
In Shoo,k, Judge Hatfìeld, held
that "an exciusionary endorsement
which operates to limit coverage to
the statutory minimum amounts
established by MCA $ 61-6-301 is not
violative of the public policy inherent
in Montana's mandatory insurance
Iaw." He then adclressed whether the
modified exclusion was invalid under
the doctrine of reasonable expectations which he said, "recognizes an
insured is entitled to fully expect the
coverâge provided by a policy will be
consistent with the language of the
policy as understood by the a'ver^ge
consumer." I latfield cited Roje and
lYellcome
and then said:
Stated another wa¡ the insured
has the right to make an informed decision regarding the
securiry he will purchase for
himself and his family, and an
insurance company, granted
the privilege to market its
product in the State of Montana, will not be allowed to
vitiate that right through the
utilization of a polìcy that creates ambiguiry regarding the
coverâge afforded.
Judge Ilatfield asserted that Ro/e
"acknowledged the vitality of the
'reasonal¡le expectations' doctrine"
but never undertook to define its
precise climensions." I{e stated that
applying the doctrine to all questions
of insurance coverage
rcgardless
of
P¡cn
37
ambiguities was the minority v.icw of
a limited number of jurisdictions
whìle the majority uri.[zed the doc-
trine to resolve ambiguities. Next, he
set
forth several tenets of the law of
ambiguity:
[Â]mbiguity does not exist
because a claimant says so.
ing or phraseology of the cr¡ntract is reasonably subject to
two different interprctations.
**r.
[]he
determinatjon of
whether an ambiguiry exists in
an insurance policy rcquires an
of
the language
utilized from the viewpoint of
a consumer of average intelligence, not trained in the law or
in the insurancc
***
l¡usiness.
The determination of whether
of the puran insurance poìicy
the expectations
chaser
of
tract, and more particulaÅy, an
exclusion, is clear and unambiguous, the lang-uage controls,
and an expectation which is
contrary to the langr.rage is not
"ob j ectively reasonable."
It
can only exist where the word-
examination
[{]owever, if the language
employed in an insurance con-
are objectively reasonable must
begin with an assessment of
the narure of the securiry
which a reasonably prudent
layman would understand that
the policy is generally designed
therefore ambþous. Ultimately
Hatfìeld held:
In view of the emasculating
effect the "household exclusion" has upon the securiry
provided by a liabiliry polic¡
the reasonable consumer
would legitimately expect a
c ve^t of that magnitude to
be strategically located. The
obscure positioning of the
exclusion woulcl lead a reasonable consumer to interpret the
ianguage of the exclusion in
the most reasonably limited
mânnef.
Judge Hatfìeld decided Sbook
consistently with his view that the
If
insurer.
tancc of the household excìusion to
the average consumer, the structufe
of the policy takes on adcled significânce," and also said, "'Ihe policy,
The language employed in the
pol.icy must then be reviewed,
in light of the policy'.s purpose,
to determine whether the language is clear and sr.rbiect to
only one meaning or whether,
from the perspective of the
insured, the language is subject
to*diffcring interpretations.
the language is capable of
more than one construction,
an ambiguity exists which
must be construecì against the
Pacr
38
tion of liabilry coverage."
Federal Magistrate Judge Rich
Anderson found ambiguiry and then
it wìth the reasonable expectalions doctrine in Progressiue Casaa/4t
resolved
Insarance Conparyt u. On,en,% (2006).
Judge Flatfìeld found the modifìecl household exclusion capable of
more thân one construction and
rightful role of reasonable expectations is as a remedy when dealing
with contracrual ambiguity.
As an aside, the author notes
that, in doingsq Judge Flat{ìeld curiously claimed not to be persuaded by
any ârgument of "strucrr:ral ambiguiry" while agreeing that "the positioning of the exclusion, in relation to the
general coveragc provision, Iends
itself to the creation of the ambiguity
in the exclusion." He added, "However, given the indisputable impor-
to provide.
. *r(*
however, separates the 'household
exclusion' both in rime and in space
and relation to this broad proclama-
There, he was confronted with the
probìem caused when the insurer
makcs a closely held corporation
the only named insured on an auto
policy that provides coverage for
bodily injury. Ârlene Owen was a vice
president, secretary and director of
a corporation in which she and her
husband were the only shareholders.
She suffered severe injury when
loading hay bales on a semi she was
driving that dicln't belong to the corporation. T'he company refused her
demand for UIM benefìts on the
ground that the corporation was the
only named insured.
Judge Änderson recited the principle that, "If ambigrrity exists, the
court may consider the reasonable
expectations of the insured." Anderson found that "Simply put, it is
rmpossible to read and understand
tbus policy by examining inclividual
coverages," and concluded that the
only way to make sense of it was "to
add human named insureds as to
those coverages that, by their very
narure, can only apply to humans."
Ultimately, he held that A.rlene
Orvens, in her positions with the
corporation could reasonably have
expected that she wouìd be covered
for UIM anci medical benefìts under
Progressive's policy with the corporauon. 'I'he case is a classic applicarion
of the school of thought that one
must fìnd ambiguity after which the
reasonable expectations of the insured can be considered ìn determining the rneaning of the polìcy.
Tm¡rr TrurNos - Su¡rrunn 2008
An atrerrant decision of the
Montana Supteme Court requiting
ambiguity
Arguably, as the result of the
large number of federal cases u¡here
the court only appLied reasonable
expectations with the presence of
contractual ambiguiry the Montana
Supreme Court began to file similar
case decisions. For the first time, in
1998, the Montana Supreme Court in
doctrine absent ambiguiry since Roy/e
in 1,979. Furthermore, the asserlion
that the court would only consider
the doctrine if it found ambiguity
first was contraclicted two months
later when the court decided Ameican
Faniþ nat. Ins. Co. u. Liuengood 26 1,16
in Decembe r 1998.
In Liuengood, Henninger negli-
(1997)
declined to apply the reasonable expectâtions doctrine while using language indicating it would only do so
after fìnding ambigruty. Ihere, the
coutt upheld an exclusion for claims
arising out of termination of employment where the operator of a non*
pro{ìt group home was sued for
gendy injured Livengoods while
clriving a van belongtng to her roommate, Frehse. Henninger's personal
auto and Frehse's van were both
insured under separate policies by
American which defendecl and paid
the loss under Frehse's policy since
Flenninger was ân insured by reason
of her permissive use. The compâny
refused to pay under the Bodrly Injury coverage of Henninger's policy
wrongful discharge. The court re-
because
Counierpoint, Lrc. u. Es¡ex In¡. Co.2a
fused to consider reasonable expectaor apply rules for interpreLing
adhesion contracts because it concluded thc provision was unambigu
ous ancl enforceable as written. The
of its "non-owned
auto
for
exclucled
coverage
exclusion" that
t.ions
"bodily injury or property clamage
court said:
arising out of the use of a vehicle,
other than your insured car, which is
owned by or furnished or avallable
for reg:lar use by you or any resident
of your household."
The District Court granted summary judgment to -1\merican, and the
This Court has said that
"[e]xpectations which are conûary to a clear exclusion from
coverage are not 'objectively
reasonable."' (Citing lYellcome
ard Statrynaz) Furthermore, we
consider special rules of interpreling contïacts only when a
contrâct is ambiguous. (Citing
Statqnan) Even though we
have previously recognized an
exccptìon to enforcing an unambiguous ìnsurance contract
term when the term violates
public policy, this cxceprion is
not before us. (Citing Aagastine
u. Sinton¡on (1997))'z5
f'hc court's statement was remarkable in ìight of the line of cases
in whtch it had been applying the
P¡rcn 40
I-ivengoods raised three issues at the
Montana Supreme Court: (1) whether
the exclusion applied, (2) whether it
violated Montana public policy, and
(3) whether it violated the reasonable
expectations of the insured. After
holding that the exclusion applied
of public
policy, the court disposed of the
and was not violatjve
reasonable expectations doctrine
ârgument just as it did in Statlntan
saying "thc rcasclnable expectations
tively reasonable."' (citing lWelhone)
Again, the court considered the
separâte argument that the provis.ion
was invalid by reason of violation of
the reasonable expectatìons of the
insurecl, the implication being that a
provision can be voided on that basis
alone. In neither StutVnar nor
Liuengood drd the court say that it
could not or would not consider'the
cloctrine without an undedying ambiguity in the pol,rcy. However, proponcnts of the ambiguiry requirement
could argue that statement was imphcit in the court's assertion of a
"clear exclusion from coverage."
Cases in which clear exclusions
from coverage are deemed to
defeat the insured's reasonable
expectations
A)
Montana Supreme Court
Decisions
The Montana Supreme Court has
issued a line of decisions in each of
u¡hich the court appears to make a
reasonable expectations inquiry but
concludes that the insured's expectation of coverage cannot be reasonable in the face of a clear exclusìon
from coverage.'fhe quesrion is
whether the court in those cases is
applying the reasonable expectations
doctrine by making the inquiry absent
ambiguiry or whether the cases stand
for the proposition that where there
is no ambiguity, the reasonable expectations doctrine does not apply. The
court appears to be applying the
doctrine to conclucle that the expectation is not reasonable given a clear
exclusion from covetage. If so, the
cases further reflect that the court is
doctrine ts inapplicable where the
terms of the poltcy at issue clearly
dernonstrate an intent to exclude
coverage." (Citing ll/elhone) The reason, of course, is that '[e]xpectarions
which are contrary to a clear exclu-
In the eadiest instance, attorney
Wellcome appealed to the Ninth
Circuit Judge Ilatfield's decision in
sion from coverage are not 'objec-
his case agaìnst Home Insurance
following l(eeton.
Tnr¡r TrurNos - Su¡vr¡vrpn 2008
Company (discussed above). The
tions in the face of an unclear (am-
Ninth Circuit, in Lurn, certified to the
biguous), exclusion from coverage?
At any rate, the case was the fìrst of a
line of reasonable expectations cases
Montana Supreme Court the questions (1) whether ambþiry in the
contract required Home to cover the
sanctìons, and Q) whether the doc-
trine of reasonable cxpectations required Home to do so27. Notably, the
Ninth Circuit cerufied ambiguiry and
reasonable expectations as two separate issues in a case in wtuch trial
court judge Hatfìeld had posited that
reasonable expectations could not
exist absent ambþity.
On certifìcation, the Montana
Supreme Court held that the policy's
exclusion of coverage for sanctions
was not ambiguous.
Ât that point, it
could have said that the issue of rea-
sonable expectations was moot, there
being no ambiguity. Instead, rhe courr
concluded that the doctrine of reasonable expectatjons did not requirc coverage in tle case saying: "Expectations
which are contrary to a clear exclusion
om coverage afe not 'objectively
reasonable' as we used that term in
Ro/el'The court said, "fn neither
Ro1le nor Braøn dtd we apply the doctrine to require covefage where the
clear policy language excluded the
coverage" (an assertion that is not
true, since, in Ro/e, the court did require llodily Injury coverage where the
household exclusion cleaily excepted
it.) Nevertheless, the court appeared to
apply the doctrine to find that the
expectation was not reasonable.
So, what was the basis of
IVelhome? The court appearecl to apply
the reasonable expectations doctrine
and founcl that the expcctalion was
not reasonable in the face of a clear
exclusion from coverage. Did the
court consider the exclusion from
coverage clear because Vlellcome was
Or, was it (as an ambiguiry
a lawyer?
'eponent mrght argue) because one
.n only consider reasonable expecta-
Truar TnrNos
-
Surra¡rlpn 2008
in which the courts found no ambi-
guiry made the reasonable expectations inquiry, and then determined
that the insured had no reasonable
expectation in the face of a clear
exclusion from coverage.
In Støtrynan u. Safeco Int. Co. of
Ameica,z8 in 1997, the wife who was
injured in an auto driven by her husband recovered the Bodily Iniury (BI)
limit of $100,000 from their auto
policy and then asserted a claim ro
the Underinsured Motorist coveragc
limit of $100,000. Safeco refused on
the ground that the UIM coverage
contained an "owned auto exclusion"
effectively denying coverage if the
person was injured in an auto owned
by a relarive. The court rejected argr.rments that there was any ambþity as
to whether a spouse was a "felative,"
and also held the exclusionary clause
did not violate public policy because
there is no statutory requirement for
UIM coverage in Montana.
The Statrynan court then
addressed the doctrine under its
heading "8. Reasonable Expectations
Doctrine," important to our discuss-ion because the court had already
found the owned auto exclusion was
not ambiguous. The insured's contention was that the provision was void
for violation of her reasonable expectations. The court summarily rejected
that argument on the ground that
"the reasonable expectations doctrine
is inapplicable where, as we have
found here, the terms of the insurance policy cleady demonstrate an
intent to exclude coverâge. (Citing
lVelhont e) Rat her,' [el xpectations
which are contrary to a clear exclusion from coverâge are not 'objectively reasonable."' (Citing II/ellcone)
,trguably, rhe srarement is a principie
by which one resolves the issue of
whether a provision is void by reason
of
the insured's reasonable expectâ-
tions. However, proponents of the
theory that ambiguiry is a precondition to consideration of the reasonable expectarions doctrine could argue
that only in the face of an unclear
(i.e., ambþous) exclusion can one
consicler reasonable expectations.
In the 2000 case of Babcock u.
Farmer¡ Ins. Exchange,2e Babcock was
towing a borrowed horse trailer that
broke loose frr¡m her pickup truck
and crashed into a fence. Her insurer
paid the 9500 collision coverage bur
refused to p^y the 94,500 loss to the
trai,ler under the liabiliqr coverage
because of exclusions to coverage for
properry owned or transporred by the
insured or rented or ìn the charge of
the insured. The court found the
plain and ordinary language of the
exclusions defeated coverage and
then discussed reasonable expectations at the end of the decision,
asserting that "The doctrine of rcasonable expectations does not apply
to create coverage where 'the terms
of the insurance policy clearly demonstrate an intent to exclude [such]
coverage." (Citing Stutrynan) The
court found the liability exclusions
"are not ambiguous on their own
terms nor
they ambiguous in light
^re
of Babcock's pohcy as a whole.
Babcock's policy clearly demonsrrares
an intent to exclude liability coverage
for the darnage to the l¡orrowed
horsetrailer..."
-fhe court in
l,ierboe u. StaÍe Fanz
Møt. Aato. Ins. C'0.,30 in 2003, enforcecl State Farm's "no coverage"
provision in its Medical Pay coverage
which provision contained an exclu-
sion for injury sustained while occupying an owned auto "not insured
under this coverage." Hence, the
Pacn 41
exclusion limited the insured's Med
Pay coverage to that on the auto in
which she was riding, in effect acting
as an antj-stacking provision. The
court found the exclusion "clear and
unambiguous" and rejected Lierboe's
reasonable expectatìons argument on
the ground that "[e]xpectations which
are contrary to a clear exclusion from
coverage are not objectively reasonable." (Citing Stut4wan and lØel/cone)
The court said there wâs no coverâge
on any vehicle not occupied, so there
wâs no stacking issue. It also said that
Lierboe had no reasonable expectation of coverage under the second
policy, because she did
not quaüfy
as
an insured under more than one Med
Pay coverage. Â.gain, the inquiry
appears to have been whether the
provision was void for violating reasonable expectations, not whether
reasonable expectations could resolve
an ambiguity.
\n
Cenerali-U.S. Brancb
u.
4/exander,3173 P.3d 800. (2004) the
court seemed to recognize the fine
line betu¡een ruÌing the reasonable
expectations doctrine inapplicable in
the face of a clear exclusion and
finding the insured's expectations
unreasonal¡le
in the face of a clear
\ùØe
have helcl that "[e]xpectations that are contrary to a
clear exciusion from coverage
âre not 'objectively reasonable,'
although the "reasonable expectations doctrine" does not
apply in situatjons "rvhere
clear policy language excluded
the coverage."
Hatnilron
u.'trini!
Uniuer¡al Ins.
32
Co. (2006), the Montana Supreme
Court upheld an "owned vehicie"
:xclusion whcre it was alleged to
¿iolate reasonable expectations
P¡rcp,42
23, was injured whle driving hLrs
uninsured Toyota pickup truck. He
lived with his parents who insured
three vehicles with Trinity under
policies provicling UIM coverage.
After settling for the tortfeasor's BI
limits, he claimed the UIM benefìts
under his parents'poLicies, and Trinity refused on the basis of the owned
of the
doctrine could not be mer. Notabiy,
the court treated reasonable expectations as â separate issue after it had
alreacly held that the exclusion was
unambiguous. Once again, the court
couìcì have said
it could not consider
the doctrine if there was no ambiguiry. Instead, it said that "expectations
that are contra'ry to a clear exclusion
from coverage Me not objectively
vehicle exclusion.
The Flamiltons claimed the ex-
reasonable."
clusion should be invalidated as con-
B) Federal Court Decisions
 strong federal court decision
trary to their reasonable expectations.
The court specifically noted that they
were not claiming it was ambiguous
but complained instead that a person
had to look to several places in the
pol.icy to determine whether coverage
was provided. The court refused the
argument of invalìdiry on the twin
grounds that (1) the reasonable expectations doctrine is inapplicable in
the face of a clear exclusion from
ìiabitiry expectations contrâry to a
clear exclusion are not objectively
reasonable, and (2) "it is not objectively reasonable for an insured to
expect to receive underinsured motorist coverage for a vehicle for which
he or she has not purchased any automobile insurance."
Fìnall¡ in Newbary u. State Farm
Fire qÞ Cas. Ins. Co. of Bloonington,
exclusion:
In
.insured. There, Zack Hamjkon, age
Ill.,33 State Farm's Medical Pay coverage hacì an exclusion
from coverage
"to the extent workcrs compensation
benefits are required to be payable."
Newbury was injured in a work related vehicle/pedestrian acciclent.
State Farm refused to pay his $17,230
in medicals on the grounds that work
comp hacl paid them so that they
were cleady exclucled.
The Montana Supreme Court
founcl the exclusion unambiguous
and clearly demonstrated an intent to
exclucìe coverâfle so that the requirements of the reasonable expectations
by Judge Molloy, I-Ianson u. Enþloyrs
Matual Casøa/ry Co.,3a is consistent
with the holdings of the Montana
Supreme Court. The case involved
the frustrating situation where the
insurer of a closely held family cor-
poration issues a policy providing
coverages for "bodily injury" but
makes the corporation, which cannot
suffer "bodily injury" the named
insured. In Hagu'u. American lYe¡t
Co.,3s Judge Hatfield in 1989
held, "\X/here an automobile liabiliry
policy containing the 'farnily member'
Insør.
terrninology has been issued to a
closely heid corporation, it is entirely
legitimate to conclude the readily
identifiable offìcers and shareho.lders
of that corporate entiry fall within the
purview of that terminology."
Hanscin, rvho was injured as a
peclestrian by an underinsured motorìst was a principal in a family closely
held corporation. To the insurer's
assertic¡n that he was not an insurecl,
I-Ianson argued that coverages applying only to "bodily injury" cannot be
suffered by a corporation, so that a
reasonable consumer would have a
reasonable expectation that the coverage would apply to the family members or officers involved in the
corporation.
Wrthout finding any ambiguiry
Juclge Molloy applied the reasonable
Tmer TnnNos - Sutr¡nlr¡n 2008
expectations doctdne but found that,
because llanson was a pedestrian,
.nd the policy only provided UM/
JIM to other than named insureds if
they were occupying an insured vehicle, Hanson could have no reasonàble expectation of coverage. In fact,
Molloy said "Thus, the clear language
of the insurance contract
rebuts
Plaintiffs' reasonable expectations
argument, which is not saved by
resort to policy arguments." (Ihe
court found for plaintiff, however,
on other grounds.) This was a case
in which, fìndrng no ambiguiry the
judge made a reasonable expectations
inquiry and determined that there
was no ground for the insured's
expectation that the policy would
provide UIM coverage to pedestrians.
However, the case allorvs reasonable
expectations inquiry without any
ambiguity.
Conclusion
Analyzing reasonable expectâLions cases in Montana reveals that
rypically "reasonable expectations" is
the last issue discussed in court decisions. This may be because counsel
advocates the clocuine last in briefs,
perhaps reflecting a lack of certainty
about the doctrine's effectiveness.
The confusion engendered because
the federal courts' require ambiguity
while the Montana Supreme Court
does not, makes for inconsistency,
.lack
of
clariry, and absence
of
for counsel.
Counsel need to keep clarity
assureclness
about thc reasonable expcctations
doctrine by presenting the doctrine's
base in unconscionabrlity and not
of
adhesion. Hence, it is
"I
consider
language that defeats it. To achieve
an equitable result, the court needs to
Harv. L. Rev. 961 961 (970).
Sulrunn 2008
research and comment and Pat Sheehy
2. 3't5 Monr. 1O7, 67 P,3 892 (2003).
3. 261 Monr. 386, 862 P.2d 1'146 (1993).
Rights at Vaiance uith Poliry Prouisions, S3
watch for unconscionable advantage
and give up the search for ambiguiry
which only yields torrured and unpreclictable decisions. To achieve this
change, advocates must have a clear
understanding of the reasonable
expectations doctrine and recognize
its importance and utìliry. The Montana Supreme Court tn Counlerpoint,
6 Id.
7. Id.1 Id. ar
Keeton, P.2à at 824.
Transamerica u. Ro2,/e
in
1919.
1.
trial þr1ary
11. 243
Mont. 125, 193 P.2 253 (1990)
1,2- 261
Mo¡t. 386,862 P.2d 1146
(1993).
13. 758 F.Supp 1388 (D Mont. 1991).
74.212Mont. 1, 898 P.2d 1220 (1995).
ambiguity even though a line of
in
.
9. Id. at 181, ó56 P.2d ar 824; qmting
the doctrine when it indicated the
belicf that it had becn rcquring
decisions issueci since 1979 said
otherwise. The federal courts, which
are supposed to be applying Montana
law, appear oblivious to the Montana
Supreme Court dec.isions on the
doctrine.
If "reasonable expectations" did
not apply absent ambiguiry what
would stop an insurer from drafting
clear but heinous exclusions to optional coverages like UIM and Med
Pay? Public policy protects the mandatory coverages of BI and UM,
because an exclusion must not infringe the coverâge required by statute. But, the public policy protecting
UIM and Med Pay is the doctrine of
rcasonabìe expectations of the insured as set out by Professor Keeton
and by the Montana Supreme Court
961
8. 202 Mont. 173, 656 P.2 820 ('1983).
Inc. u. E¡sex Ins. Co. (1998) muddled
15. 337
Mont. 509, 163 P.3
16. 316
Mont. 382,13 P.3 800 (2003).
17. 31 5
Mont.
107
, 67 P.3 892 (2003).
18. 627 F.Supp. 1405
(D Mont. 1986).
19. 758 F.Supp. 1315
(D Mont. 1991).
20.758 F.Supp. 1388 (D Mont. 1991).
22. Id.
22. 872 FSupp. 768 Q) Mont. 1994).
23. 45ó FSupp.2d 1205 Q) Mont. 2006).
24. 291 Mo¡t. 189,967 P.2 393 (1998).
25. 283 Mont. 259, 940 P.2 26. 292
Monr. 244,910 P.2d 1054 (1998).
21
. 257 Mont. 354, 849 P.2 190 (1993).
28. 284 Monr. 372,945 P.d 32 (1997).
29. 299 Mont. 407, 999 P.2 347 (2000).
30. 3't6 Mont. 382,
3'1. 320
Mont. 450, 87 P.3d 1000 (2004).
32. 465 lr,Supp.2d 1060 (D Mont. 2006).
33. 2008 M'r 1s6, 200 V/t, 1904397.
34. 336 F.Supp.2à 10'70 (D Mont. 2004).
The author thanks his research
35. 732 FSupp. 1072 (D.Mont. 1989).
as the onþ ancbor eaerJreÍ imagined b1 man,
þt
T'homas
-
assistant, 2L Chtìstopher Orman, for
4. Robett E. Kceton, Insørance I¿¡y
a glaernfl/ent can be held to the
Truar Tnnxos
assess the
narure of the security which â reasonably prudent layman would understand the poìicy is generally designed
to provide and act to protect that
expectation in the face of technical
ENDNOTES
ambigu.ity. Insurance policies are
contracts
imperative that courts
Ô
which
principlu of its conslitation."
Jffirson to Tbomas Paine, / 789
P¡cB 43