The Role of Courts in the Evolution of Standard Form Contracts: An Insurance Case Study

Abstract

Standard form contracts are a pervasive feature of modern commercial life, for ordinary consumers and big businesses alike. Yet remarkably little is currently known about how and when these contracts evolve in response to judicial decisions that interpret and apply them in individual disputes. Homeowners insurance policies offer a particularly fertile ground for studying this issue due to both the prominence of the insurance law doctrine that ambiguities are interpreted against the drafter and the historic standardization of insurance policies across different insurers. Utilizing a unique hand-collected dataset, this Article empirically investigates the links between innovation in the dominant “ISO HO3” homeowners policy and published caselaw interpreting that contract. The results demonstrate that judicial caselaw has indeed played a vital role in the evolution of homeowners insurance policies over the last fifty years, forcing insurers to spell out their obligations more precisely and clearly. Notably, judicially prompted changes to policy language have often expanded coverage, suggesting that judicial scrutiny can empower regulators and market intermediaries to secure drafting concessions in revisions to homeowners policies. Normatively, these results provide strong support for insurance law’s central doctrine that ambiguities are interpreted against the drafter. When considered in light of prior research demonstrating that some homeowners insurers have recently begun departing from the ISO HO3 policy in ways that systematically restrict coverage, this Article’s results also suggest that states should strongly consider requiring homeowners policies to provide coverage that is no less generous than the ISO HO3 policy. With respect to contract law more generally, the Article’s findings suggest that contractual innovation, particularly when prompted by caselaw, operates quite differently in different market and regulatory settings.