Life Insurance, Good Health, and the Reasonable Expectations Doctrine

Wow, here is a great insurance coverage story out of the Massachusetts Lawyers Weekly, concerning a state trial court decision over the impact of a particular clause in a life insurance policy. The case involved a life insurance policy containing a clause under which the policy only became effective if the insured was in good health at the time of issuance. The life insurer had a medical exam conducted on the applicant for the coverage, and found him to be healthy enough for the policy to be issued. Two weeks later, however, he was found by his own physicians to have a terminal disease. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

The state trial court, probably rightly so, ruled against the insurer, restricting the good health clause to limiting coverage if the insured knew or should have known that he was not in good health, and rejected the insurer’s argument that the clause instead applies on an objective level and precludes coverage if the insured was not in good health at the time of issuance, without regard to what the insured or anyone else actually knew at that time. The court’s choice seems to me to be a reasonable and fair result. But what is really interesting about it is that in doing so, the trial court rejected 85 year old precedent to the contrary, finding that it was outdated and that changing the rule to instead apply in the manner selected by the trial court better conformed to the reasonable expectations of the insured.

I have talked before in this blog about the reasonable expectations doctrine, and about the idea that it can be understood as a tool for the court to look at an insurance contract and give it the most realistic and sensible interpretation for the parties given that the parties themselves at the time of contracting are limited in their ability to anticipate the future events over which they are contracting and have only a finite capacity for capturing all possible contingencies in the policy language. This case represents a perfect example of that use of the doctrine, particularly so given the extraordinary rarity of the fact pattern at issue. Really, what reasonable insured or insurer - particularly after the insurer had arranged for a pre-coverage medical examination of the applicant - would have anticipated this exact fact pattern? And for that matter, what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill?