March Madness Makes It “Official”: State Farm Embraces the Reasonable Expectations Doctrine and Rejects Linguistic Literalism
William S. Boyd Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas
Insurer advertisements have always been good fodder for policyholder lawyers and consumer advocates. “How,” they ask rhetorically, “can the “Good Hands” or “Good Neighbor” people do this to their customers?” “This,” depending on the case, may be denying a claim, doctoring an inspection report, chiseling about damage costs, rejecting a reasonable settlement, or some other action of purported bad faith. Courts have largely limited the use of such arguments on the ground that they are too populist and insufficiently “legal” and out of a longstanding view that all vendors are entitled to a little license for puffery. Whether vendors will continue to enjoy such deference in the post-AIG/Bear Stearns/Lehman/Citibank world remains to be seen. The answer is probably “yes” in light of the limited real change in attitudes that accompanied the fall of Enron/Global Crossing/Tyco and a myriad of dot.com companies only a few years ago.
Advertisements are historically viewed as sufficiently make-believe that they are accorded little attention in judging whether companies keep their express or implicit promises. Although the entire subject may be ready for rethinking, most observers are not particularly bothered by feel-good ads creating an image the company fails to observe in practice. Ads are ads and reality is reality – most of the time. Reading too much into an advertisement could be as unproductive as letting vendors say anything with impunity. And, as Freud and Groucho Marx remind us, sometimes a cigar is just a cigar.
But the latest television advertising campaign launched by State Farm Insurance Companies during the NCAA basketball tournament is something different in that it goes beyond merely painting the insurer in warm and fuzzy hues. In addition, two new State Farm ads in that campaign speak directly to a long-standing division of the legal profession regarding the proper approach to contract construction.
One ad features a hot dog vendor on a city street corner. The sign on his cart advertises that he sells “Hot Dogs” A customer orders a hot dog, with others about to line up to order. The first customer receives her food – a hot dog – with no bun, no mustard, no onions, no sauerkraut, no chili sauce, and no condiments of any kind. The customer raises a stink, to which the hot dog vendor replies something to the effect of “Read the sign. All it says is ‘hot dogs.’ Where did I say anything about a bun?” The perturbed customer, joined by others, replies that it’s not really a hot dog without the bun, as everyone knows. Some more verbal jousting ensues, with the customer and others promising never to come back and to discourage others from patronizing the slimy vendor. As the scene fades out, print and voice over asks: “Is your insurer selling you a hot dog without the bun?” The final printed words of the commercial are “Find Out. State Farm”
The second ad involves a car wash with cars being soaped up, and then returned to their owners, who immediately complain about the lack of a rinse. The car wash owner, like the hot dog vendor, points to the sign, which promises only a “car wash,” not a “car wash and rinse.” The customers are predictably outraged. As the camera zooms out from the scene, print and voice over again ask: “Is your insurer giving you a car wash without the rinse?”
Both these ads are part of a series entitled “Something’s Missing,” with other ads involving a “Shoe Shine” in which the vendor shines only one customer shoe rather than the pair, a “Foot Massage” in which only one foot is massaged, a “Bike Rental” without a seat, an “Ice Cream Truck” that sells popsicles without a stick (much to the consternation of several parents and adorable but disappointed children). The Foot Massage and Ice Cream Truck ads close with the line: “Is your insurance company giving you less than you expected?” The ads may be seen, at least as of March 21, on the website danielharmon.net and on coloribus.com, the latter for a fee that includes downloadability. Interestingly, two postings on Harmon website reflected the rough judicial division of text-vs-context and expectations regarding insurance. One observer had a reaction State Farm may have wished to avoid, stating “It is totally how you feel with insurance companies.” Another said that “[p]eople need to make up their minds. You know, it [the sign] says car wash, not rinse.”
The ads are pretty good (better than some of the early round college basketball games during which I saw “Hot Dog” and “Car Wash;” give me an insurance company ad over a No. 1 seed vs. a No. 16 seed any time). All the ads are clever, amusing, approachable, and convey the clear message that State Farm is an insurer that can be trusted to provide the insurance protection you need. On one level, the latest ad campaign is simply an extension of the company’s generally pretty good marketing (sometimes a cigar is just a cigar). But on another level, these latest ads reflect the company fully embracing the reasonable expectations concept and rejecting the idea that any literal interpretation of the “fine print” of an insurance policy (e.g., exclusions, conditions, tricky definitions) can defeat the policyholder’s objectively reasonable concept of what the policy should provide in coverage.
I’m not kidding. Remember then-Professor (later Judge) Robert Keeton’s summary definition of the reasonable expectations approach to insurance policy construction: the policy will be construed to meet the policyholder’s objectively reasonable expectations of coverage even though “painstaking” examination of the policy language would have negated those expectations. See Robert E. Keeton, Insurance Law Rights At Variance With Policy Provisions (Part I), 83 Harv. L. Rev. 961, 963-64 (1971). With its oily hot dog vendor and rip-off car wash (and the entire “Something’s Missing” ad campaign), State Farm has gone beyond even Keeton’s strong version of the reasonable expectations doctrine. Most states accept only what I call a “moderate” view of the doctrine, considering policyholder expectations only if the face of the policy is textually ambiguous. See Stempel on Insurance Contracts §4.09 (3d ed. 2006 & Supp. 2009)(Aspen Law & Business).
Even if text limiting customer rights is short, simple and in plain sight (e.g., “hot dogs” or “car wash”), State Farm now condemns those (like the ads’ unscrupulous vendors) who would read such language too literally and in doing so disappoint consumer expectations. The next time State Farm or another insurer argues that a court should interpret policy text as written and without context, I hope the judge and jurors watched enough basketball this Spring to realize that such a position is completely inconsistent with the company’s marketed image.
Further, the current ad campaign is only a continuation of State Farm’s march toward marketing statements that do logically bear on the proper approach to resolving disputes over the application of its policies. The “good neighbor” campaign for which the company is famous was largely mere feel good, although policyholder lawyers had a point in suggesting that those commercials at least suggested that a good neighbor company would not engage in classic bad faith practices such as trying to pay less than fair value on claims or engage in self-serving claims evaluation or defense of third-party claims. In its most recent ads, however, State Farm has spoken more directly to the issue of what policyholders should expect of the company, although the insurer has been inching toward this admission for some time.
About two years ago, for example, State Farm ran an ad in which Seattle Seahawks quarterback Matt Hasselbeck was first protected by pro-sized offensive linemen (representing State Farm) and then by Pop Warner league kids on the offensive line, with the predictable result that he was unceremoniously sacked when teamed with the latter group. Moral of the story: State Farm policies and practices give adequate protection apt for the policyholder while their competitors may not. The advertisement disappeared as the Seahawks’ fortunes sank last fall but it remains an admission of sorts by the company.
In another ad running at the same time, an attractive young woman is in turn (a) stuck in the middle seat of a crowded airplane, seated between two loud, corpulent, drunk, obnoxious men and then (b) comfortably seated on the aisle in a more spacious plane being served a reasonably decent meal undisturbed by the male beasts that had tormented her on the previous flight. The moral again is that with State Farm you get better coverage and service than with its competitors.
Both ads also noted that you might have to pay “a few pennies more” for the higher end State Farm product. Translation: this insurer is not a deep discounter but does promise to meet your insurance needs. Following those ads, State Farm launched the “I’m there” television ads in which people at various stations in life talk about their need for financial security and protection against risk, a need they are ready to fill by purchasing State Farm insurance products from a local agent familiar with their station in life. Translation: this insurer will provide what you need and what is apt for your needs.
Taken together, the evolutionary continuum of State Farm’s television advertising has moved from warm-and-fuzzy image polishing to consistently more concrete promises that the company will provide insurance that meets the policyholder’s reasonable expectations and will give the policyholder treatment that goes beyond mere fairness or accommodation. Although the company’s marketing mavens probably never set foot in court or attended law school, they have in effect embraced the reasonable expectations concept as well as the standard of good faith and fair dealing that requires an insurer to give equal or better consideration of the policyholder’s interests rather than favoring the insurer’s interests. The company has now made these commitments to the world at large. It logically should have a hard time should it make contrary arguments in court.
But let me not simply tweak State Farm. Although I have been critical of the company’s performance in perhaps its most famous case (see Jeffrey W. Stempel, Litigation Road: The Story of Campbell v. State Farm (West 2008), I have also been a State Farm policyholder (of multiple policies with significant premium payments) for the past 20 years and have generally been pretty happy with the company’s performance, particularly after my then-teenaged son cracked up the family car three weeks after getting his license. The insurer’s response was swift, professional, and fair, including repair at a more high quality body shop that was more expensive than others in town. Because State Farm is the largest carrier and probably the most heavily advertised, its generally well-done commercials stand out, making it an easier target than some of its lower-profile competitors.
But for me, the State Farm ads go beyond the company in that they lay down a gauntlet for the entire insurance industry, one that suggests that insurers should not say one thing to market their products and then say inconsistent things when trying to avoid providing coverage or paying a claim. At the very least, lawyers, judges, and juries should not let them get away with it. Beyond this, it seems that insurers themselves recognize that they are not selling mere words on parchment. They are selling risk management products designed to accomplish a particular purpose. In light of this reality, one might expect to see at least a little restraint among insurers in their attempts to take a hyper-literal approach to policy text (particularly exclusions that are supposed to be strictly construed against insurers) when it serves their purpose. For example, perhaps State Farm may not want to push the envelope so much in arguing that the anti-concurrent causation clause in its policies allows it to escape a considerable amount of responsibility for hurricane-related damage to policyholder property.
More egregiously, Great American recently asserted the pollution exclusion as a ground for avoiding coverage when a building owner and property manager was sued over allegedly inadequate building design and management that contributed to deaths from a rapidly spreading fire. The defense was later withdrawn, but only after substantial howls from the public and sharp criticism in the local newspapers. The public immediately knew what many courts have failed to grasp in their occasionally amazingly broad application of the pollution exclusion to deny claims. But you can hardly blame the public for being ahead of some courts on these matters. The public has been watching TV, while the poor, under-informed courts are often awash in briefs inconsistent with those company-defining commercials. Perhaps a little time on the couch during the basketball tournament would prove an eye-opener for some jurists.