Coverage Information in Insurance Law

By Daniel Schwarcz. Full text here.

The central goal of insurance law is to clarify, produce, and disseminate information about the scope of insurers’ coverage obligations to policyholders. This Article examines how insurance law and regulation seek to achieve these objectives, and to what ends. To do so, it distinguishes among three different types of coverage information: (1) purchaser information, or coverage information that is communicated to policyholders at the time they purchase coverage; (2) policy information, or coverage information that is contained within the four corners of the insurance policy; and (3) judicial information, or coverage information that is ascertainable only after researching judicial opinions resolving coverage disputes. This Article shows how each of these three forms of coverage information can promote more efficient insurance markets, in ways that are frequently overlooked or underappreciated by courts and commentators. For instance, improving policy information helps limit insurers’ discretion and curbs their ability to engage in opportunistic behavior at the point of claim or sale. Such information can also enhance the unique process of state insurance regulators’ review and approval of policy forms. The Article’s framework not only helps illuminate the underlying structure of insurance law; it also sheds new light on various long-standing disputes in the field, which often require prioritization and trade-offs among the three different types of coverage information. For instance, this Article suggests that one important reason for embracing a sophisticated policyholder exception to the ambiguity rule is that doing so produces judicial information at the expense of policy information, a sensible trade-off with respect to sophisticated policyholders. Similarly, this Article argues that, contrary to the ordinary rule, courts should generally refuse to admit extrinsic evidence to disambiguate policy language when it comes to consumer-oriented policies. Doing so can undermine the production of policy information when purchaser information is present, despite the fact that these two types of information serve very different purposes in the insurance context. More generally, this Article suggests that a substantial number of perennial disputes in insurance law can be helpfully analyzed by reference to their impact on purchaser information, policy information, and judicial information.