Contra Proferentem, Rugs and Consumer Losses
Last week I commented on the tension between an insurer’s role as a profit making entity and their obligation to act as fiduciaries when they provide group health, life or disability insurance under an ERISA plan. One of the frustrating things about how the federal judiciary has resolved this tension is that it has often ignored well established principles of insurance law that have been developed by courts over many decades. ERISA itself makes clear, at 29 U.S.C. Sec. 1144(b)(2)(A), that Congress intended to leave in place state laws regulating insurance companies. Nevertheless, many federal courts have gutted important principles of insurance law and left consumers with less protection against insurer misconduct than individuals had before ERISA was enacted. Here’s an example. Every state in the country has held that when the terms of an insurance policy are ambiguous as to whether a loss is covered, the insurance company loses and the consumer gets the coverage. Why? Because the insurer wrote the policy and is almost always much more sophisticated of the two parties. This legal principle, known as contra proferentem, has done much to make sure that insurers don’t get away with putting unclear language that can be interpreted as either covering or excluding a loss in their policies and then weasel out of paying when there is a claim. However, many federal courts have ruled that contra proferentem does not apply in ERISA cases. Consequently, you have overreaching and abuse by insurers. This is just one of many ways in which basic principles of insurance law protecting insureds have been swept under the rug since ERISA was passed in 1974.