My students in Insurance described feeling saturated by political debates, and I sympathize. Today, I won’t be blogging about a current crisis or pressing First Amendment lawsuit. Instead, I want to demonstrate how thinking about a purer legal issue – arising in an Insurance case about whether a particular contract term should be void as a matter of public policy –gives us perspective on more abstract questions involving freedom to contract and the scope of the judicial role in shaping public policy. Contemplating these questions outside of our fraught political climate may be helpful in thinking through current issues.
Contracts are generally enforced as written, unless their terms violate a state’s specific public policy, either codified by the legislature or articulated by judges. “Public policy” is why courts will not enforce the terms of a murder-for-hire contract, or an organ-sale contract, even though the parties freely bound themselves by the contract’s terms. Those are easier cases. Cases involving public policies not specifically covered by statutory prohibitions are much more difficult and complex. How much power one believes a judge should possess to nullify an insurance contract depends on one’s views about autonomy, insurers and their motives, and the role of judges versus private parties in ordering society.
An illustrative case, Strickland v. Gulf Life Insurance Company, 240 Ga. 723 (Ga. 1978), is excerpted in the casebook, Insurance Law and Regulation: Cases and Materials, by Kenneth Abraham and Daniel Schwarcz. Strickland involves whether an accident insurer must pay for Strickland’s severed leg when the insurance policy covers dismemberment only if it happens within 90 days of an accident. Plaintiff Strickland injured his right leg, but doctors tried to save the leg for 118 days before it was ultimately amputated, longer than the coverage provision. Thus, because the insurance policy explicitly did not cover the leg severance, the Georgia Supreme Court considered whether the 90-day time limit was void as a matter of public policy. If void, the insurer would have to provide coverage despite the terms of the contract.
Strickland is a great case for considering freedom of contract versus the ability of judges to promote the public policy interests of the state. The defendant, insurer, argued that the court should apply the contract as written. Enforcing this provision as written honors the choice made by the parties. The 90-day time limit allows insurers to causally connect dismemberments to accidents instead of spending money investigating whether a leg amputation occurred for some other health reason, not accounted for by the price of the accident policy (which is priced based on the insurer’s risk calculations about the expected value of losing a leg from an accident). This bright-line 90-day rule lowers administrative costs, thus lowering premiums and allowing insurers to more accurately calculate risk. Ultimately, enforcing the policy as written may lead to a more competitive insurance industry, ultimately benefitting consumers. Plus, Strickland and the insurer contracted for these terms, so voiding this policy would undermine the choice we all have in selecting the right coverage based on our risk aversion tendencies and ability to pay insurance premiums. Perhaps Strickland opted to have this cheaper insurance policy instead of a more expensive policy that would have covered this loss.
Strickland argued that the contract should be void as a matter of public policy. The 90-day time limit is not the only way to ensure that amputations are related to the accident covered by the policy; it can be just one piece of evidence courts consider in assessing whether the amputation was really caused by the accident. More importantly, the policy placed Strickland in an unconscionable position. He was forced to decide if he should continue trying to save his leg but potentially not receive his amputation expenses, or if he should prematurely sever his leg just to avoid potentially staggering medical costs. Insurance contracts are contacts of adhesion, meaning insurers provide standard terms, so Strickland may not have had much meaningful “choice” in the 90-day time limit, if other providers didn’t offer longer time frames.
Most jurisdictions uphold these sorts of time constraints in accident-policy coverage. In fact, even Georgia upholds very harsh insurance provisions, such as coverage only if a policyholder loses his “entire” sight, as opposed to losing his sight for all practical purposes. However, this case is different. Not only are the coverage terms harsh, and potentially draw too strict a line, but they force policyholders into an unfathomable position.
Instead of declaring this time limit void outright, the Strickland majority made an interesting decision. The Strickland court had a particular view that the advantage of courts is that they can take evidence on a case by case basis instead of being somewhat stuck, like a legislature, with a blunt rule. The lower courts had not gathered any evidence of whether this policy should be void, but decided this issue as a matter of law because of the terms of the policy. So, the Georgia Supreme Court remanded the case for the trial court to consider several factors: (1) the present state of medical science on rehabilitation of limbs; (2) whether the insured had a choice of other policies; (3) whether the time limitation was related to the economic risk of insurance company; and (4) whether there was a relationship between the time limitation and the difficulty of proving causation.
All of these factors affect whether this contract should be void as against public policy. The first consideration affects how many people will be given an unreasonable choice before doctors know whether a leg can be saved. The rest of the factors affect whether a provision of this nature was necessary for insurers in assessing and spreading risk and lowering administrative costs, and whether the policyholder made a real choice in selecting this type of limitation.
I remain torn about the Strickland approach (which, again, is a minority approach). I can imagine signing this type of contract and then being stuck with a terrible choice, between saving my leg and my financial stability. The state of Georgia might want to preclude this social ill using the force of law. However, overriding the will of the parties to a contract elevates a judge’s view of what is best over the behavior of an entire industry of insurers and consumers, potentially wreaking havoc in the industry. If an insurance policy can be voided too easily, the insurance market cannot be secure in its terms, and Strickland gives us no easily discernible rules to follow for the future on when a contract will be voided. The Strickland court, counterintuitively, may have afforded itself too much law-making power while simultaneously providing too little legal guidance.