What are 'reasonable expectations'?

Minkler v. Safeco Ins. Co. of America, 49 Cal. 4th 315 (2010), unanimously declared: "'If contractual language is clear and explicit, it governs.' If the terms are ambiguous [i.e., susceptible of more than one reasonable interpretation], we interpret them to protect 'the objectively reasonable expectation of the insured.' Only if these rules do not resolve a claimed ambiguity do we resort to the rule that ambiguities are to be resolved against the insurer .... The existence of a material ambiguity in the terms of an insurance policy may not, of course, be determined in the abstract, or in isolation."

This quote mainly cited Civil Code sections and Bank of the West v. Superior Court, 2 Cal. 4th 1254 (1992) (term "cannot be found to be ambiguous in the abstract"; policy "must be construed in the context of that instrument as a whole, and in the circumstances of that case," along with application of "common sense").

Since its seminal decision in AIU v. Superior Court, 51 Cal. 3d 807 (1990), the California Supreme Court has, at times, stressed a straight 1-2-3 test, applying in essence the above Minkler quote. See, e.g., Boghos v. Certain Underwriters at Lloyd's of London, 36 Cal. 4th 495, 501 (2005) ("no ambiguity" in arbitration clause). Some of its other decisions, though, have followed a "middle ground." See, e.g., Powerine Oil Co. Inc. v. Superior Court (Powerine II), 37 Cal. 4th 377 (2005) ("literal language of the policies controls, as does the objectively reasonable expectations of Powerine the insured").

In any event, how should an ambiguity argument be evaluated? According to Waller v. Truck Ins. Exchange, 11 Cal. 4th 1 (1995), a judge should "not strain to create an ambiguity where none exists." Additionally, an insured's unexpressed subjective intent or understanding is inadmissible to prove an intent different from either the written terms or the parties' mutual understanding. St. Paul Mercury Ins. Co. v. Frontier Pac. Ins. Co., 111 Cal. App. 4th 1234, 1246 (2003). An insured's subjective belief regarding coverage is thus irrelevant. Bank of the West, 2 Cal. at 1264-65. See also State of Calif. v. Allstate Ins. Co., 45 Cal. 4th 1008 (2009) (ambiguity also interpreted to protect "objectively reasonable expectations").

More is accordingly required than the mere presence of an ambiguity: "(A)n ambiguity may be construed against an insurer only if the insured had an objectively reasonable expectation there would be coverage under the policy consistent with the ambiguity." Clarendon America Ins. Co. v. North American Capacity Ins. Co., 186 Cal. App. 4th 556, 573 (2010). Such an expectation controls even if the parties had no actual, mutual understanding. Cooper Cos. v. Transcontinental Ins. Co., 31 Cal. App. 4th 1094, 1104 (1995).

The standard of "objectively reasonable expectations" is measured as of the policy's inception, not later when for example the loss took place. In other words, at that inception, what did the insurer believe a reasonable insured would understand? Civ. Code Section 1649; Safeco Ins. Co. of America v. Robert S., 26 Cal. 4th 758, 766 (2001) (in applying "illegal acts" exclusion, immaterial whether insureds knew about the illegality of their acts).

This standard may sometimes restrict rather than expand coverage; for instance, an insured cannot recover benefits a reasonable (i.e., objective) policyholder would not expect. Old Republic Ins. Co. v. Superior Court, 66 Cal. App. 4th 128, 144 (1998) (disapproved on other grounds in Vandenberg v. Superior Court, 21 Cal. 4th 815, 841 n.13 (1999)); see also Sequoia Ins. Co. v. Royal Ins. Co. of America, 971 F.2d 1385, 1390 (9th Cir.1992) (applying California law).

Probably nowadays, the main area of uncertainty in policy interpretation relates to the courts' use of "objectively reasonable expectations" and "reasonable expectations." This use could be criticized as inconsistent. This observation is illustrated by the decision of Sequiera v. Lincoln Nat'l Life Ins. Co., 279 Cal. App. 4th 143 (2015).

In October 2009, the city of Vacaville changed its life insurance to Lincoln National Life. Donald Sequeira completed enrollment forms for Lincoln's basic and supplemental coverages, which were to become effective Jan. 1, 2010. Before then, Sequeira made two premium payments via paycheck deduction.

According to the supplemental coverage, a "Full-Time Employee" became eligible on "the day you resume Active Work, if you are not Actively at Work on the day you become eligible." That coverage defined "Active Work or Actively at Work" as "the full-time performance of all customary duties of an employee's occupation at the EMPLOYER'S place of business." On Jan. 1, 2010, when both coverages were issued, Sequeira did not work because it was a paid holiday. The next day, a Saturday, he was hospitalized and died four days later.

Lincoln paid the basic benefits but denied the supplemental benefits, because Sequeira did not report to work or work from Jan. 1 to the date of his death. Sequeira's wife sued. The trial court granted summary judgment in favor of Lincoln.

The Court of Appeal reversed, finding ambiguous the definition of "Active Work" and "Actively at Work": Did it require a physically present employee or the simple status of a full-time employee? In resolving this ambiguity, the court opined "Sequeira reasonably expected that the supplemental policy was effective before his death." And, Sequeira "certainly would not expect that the coverage he paid for would be ineffective because he took New Year's Day off from work and became ill the next day." Such statements suggest the court focused on Sequiera's subjective thoughts (i.e., his "reasonable expectations") in early January 2010.

Many times, the timing and this tension may not be critical. Occasionally, the definition of "objectively reasonable expectation" may be awkward to apply. Yet, if the legal test is "objectively reasonable expectations" (following Civil C. Section 1649 and many appellate decisions) the proper analysis should be followed. That is, at the inception of the supplemental coverage, what did Lincoln objectively believe was Sequeira's understanding?

If the judicial goal is implementing statutory rules to all contractual disputes (insurance or otherwise, as discussed in AIU), why should "reasonable expectations" under any banner have a particular force in the insurance arena? In any event, selection of the "correct" test may be important in resolving some policy interpretation disputes inasmuch as application of "reasonable expectations" is usually beneficial to the insured (e.g., "this is what the insured herself wanted"). The insurer would naturally prefer another avenue, especially to avoid that evident "tilt" towards the insured, by looking at the insurer's objective belief with respect to the insured's understanding at the policy's inception.