The No-reading Problem Of Insurance Contracts And Its Regulation

During the formation of insurance contracts,the consumers seldom read the standard form terms that insurers offer.This phenomenon of no-reading or “signing without reading” is very common in the process of insurance contracting all over the world.The reasons of failure to read can be roughly categorized into three somewhat overlapping groups:(1)rational reasons,insurance consumers incur costs in reading standard-form language,they rationally could decide that such costs outweigh the benefits;(2)social reasons,even if they rationally decide the benefits of reading outweigh the costs,insurance consumers face social pressures(often arranged by insurers)against investigating the details of the policy;(3)cognitive reasons,insurance consumers might not react rationally to the presence of exploitative terms in insurance standard-form contracts.Therefore,failure to read should not be regarded as negligent ignorance or moral wrong deserved punishment,it is due to individual's bounded rationality and cognitive biases,thus can be regarded as a rational choice or rational ignorance.Reading the fine terms is no longer a reasonable standard of care.The enthusiastic defenders of the market think that the no-reading problem doesn't warrant worry and legal regulation,whereas admit that most of the policyholders does not read insurance contracts.Because the insurers compete for marginal consumers,in competitive markets,insurers will generally have an incentive to draft fair and efficient form contracts to all consumers so long as a sufficient percentage of consumers(marginal consumers)are informed about the content of contract terms,act rationally to maximize their utility on the basis of that information,and look for better policies.The theory of minority informed readers generally fails: too few insurance consumers are likely to be informed,and insurers can differentiate between informed consumers and uninformed consumers with use of policy endorsements.The available empirical evidence suggests that consumer information and rationality in insurance markets is limited,and comparatively small levels of imperfect consumer behavior can lead to inefficient policy terms.The lack of reading is said to cause two problems.First,the policyholder cannot be taken actually to consent to the legal relationship the form contract creates if the policyholder is ignorant of that relationship.Second,competition cannot cause insurers to improve insurance contract quality because policyholders cannot shop comparatively for terms of whose existence,they are unaware.Moreover,instead of promoting informed insurance applicant assent through quixotic attempts to have insurance applicants read ever-expanding disclosures,insurance contract law should focus on insurance consumers' tendency of optimistic expectation of insurance contract content-situations in which policyholders expect more favorable terms than they actually receive.Under the optimistic expectation,the policyholders' willingness to pay is more,the quality of the policies tends to be lower.The no-reading problem can be regulated through two paths,that is,procedural regulation and substantive regulation.The procedural regulation aims to improve the contracting process itself by regulating the contracting behavior directly.This aim is concerned with improving the conditions of the many individual transactions through which insurance is bought and sold,thereby promoting private autonomy and improving the insurance market as a whole.The procedural regulation defines the rules of contract formation,attempts to offer more opportunities to read,reduces the reading costs,promote reading,cures deficiencies in the process of assent,and addresses impediments to full and fair contracting such as moral hazard and adverse selection that potentially undermine the market for insurance.In insurance contract law,the complete expression of duty to read doctrine is as follows: an insured has a duty to read,understand and know the contents of the insurance contract before signing and to examine the coverage provided;except as against fraud or duress,an insured is conclusively presumed to read,understand,and assent to the terms that he had the opportunity to read before signing,whether or not he had read or had the ability to read them.Under the logic of an opportunity to read,it is said that insureds chose to manifest assent without actually reading,and thus to be bound to the boilerplate terms.The behavior related requirement of reading contract is not a “duty” but an “unreal duty” in favor of an insured himself.Presumption of “sign as assent” is traditionally founded on the high probability relation between “sign” and “assent” and avoidance of difficulties in proving subjective intent,these two bases are contrary to modern insurance contracting practice,and “sign” now is only the symbolic beginning of contractual relationship,most actual insurance transactions do not involve insureds' subjective assent to many of the policy provisions.Insureds' reasonable expectations need more protections by law than insurers' reliance on insureds' signs.Insurance contract law should and can abandon the duty to read rule.The insurance law may consider introducing “surprising clauses”.One of the central goals of insurance law is to promote more specific and clear information in the insurance policy itself about the precise scope of coverage that is available for specific types of losses.The ambiguity rule is insurance law's most important effort to promote policy clear,specific,definite and plain.The clear and plain policy indeed has a variety of potential benefits to the varied actors in insurance marketplaces: first,it can empower policyholders to independently assess the legitimacy of an insurer's claim denial,thereby mitigating the risk that an insurer will unreasonably delay or deny a claim;second,it facilitates market intermediaries to study insurance policies and disseminate the information obtained from them,so as to form social pressure and reputation pressure which can force and motivate insurers to provide fair and efficient insurance policies;third,it can play an important role in insurance markets by facilitating more effective form review of insurance policies by insurance regulators.The insureds' duty to explain is the most important tool to regulate no-reading problem procedurally in the insurance law of our country,which performance must be active and incurs a very high cost.Because the insurance applicants have limited willingness and ability to incur the cost of searching,handling and using information,the formal information obligation and the active explanation duty both have limited effect to promote insurance contract autonomy.There are three basic principles for designing effective mandatory disclosures: first,insurers' disclosures must focus consumers' attention on a small number of key pieces of information directed to solving specific regulatory problems;second,regulators should design and test mandatory disclosure forms to populate with relevant product and consumer characteristics;third,insurance consumers must receive information disclosures at the appropriate time to capture consumers' attention and inform their decision-making.The procedural regulation should be completely reformed according to these three principles,instead of simply returning to the formal information obligation.This Article propose a system under which insurers are required periodically to engage in a process of “term content substantiation” through which insurers would learn whether their policyholders held accurate beliefs about the terms of their insurance policies.Terms that meet or exceed the median insured's expectation would be enforceable even if buried or only available on request.But insurers could enforce unexpected,unfavorable terms only if they are disclosed in a “warning box” that has a government-provided standard border.To prevent overuse of the box,insurers would need(1)to exclude terms from the box that meet or exceed insurance consumer expectations and(2)to order terms in the box in descending order of insurance consumer importance.Such a system of term content substantiation coupled with targeted warnings about unexpected terms jettisons as unworkable the duty to read ideal.It instead economizes on insureds' scarce attention by increasing the salience of those terms that are most likely to inhibit informed consent.Term content substantiation lets the representative insured determine what insurers disclose and thus democratizes the content of insurance policies.Substantive authorizes public policymakers such as courts and insurance regulators to review the fairness of the content of insurance contract,with the aim to realize the reasonable expectation,but regardless of whether the insurance applicant has an opportunity or ability to read the contract before sign.Judicial regulation of the terms of insurance policies,which takes place largely,though not entirely,by means of interpretation,such as contra proferentem and the doctrine of reasonable expectations.The doctrine of reasonable expectations allows courts to overturn express contract language if the term contradicts the consumer's reasonable expectations.The theoretical construction of substantive regulation has traditionally started from the perspective of lack of agreement and common meaning of the contract parties,mainly including the theory of blanket consent and the theory of presumed non-enforceability of standard clauses.The pseudo-contract theory provides a new tool for evaluating the enforceability of the insurance standard clauses.The insurance standard terms can be divided into two categories: one is the real contract clauses,which have contributed to the formation of the common meaning of the parties of insurance contract;one is pseudo-contractual,which have no contribution to the formation of the common intention of parties,and thus has no binding force.Four conceptions of insurance that have operated in the debates about the justification of regulations on no-reading problem in recent decades.These are the contract,public utility/regulated industry,product,and governance conceptions.The contract conception understands insurance as a voluntary agreement between an individual policyholder and an insurer,subject to the constraints and rules of formation and interpretation that are ordinarily placed on such agreements by the law of contracts.Under the public utility conception,insurance is an essential good,legal regulation should aim to promote public interest.The product conception sees insurance more as a tangible good than a promise to perform financial services,so it is necessary to introduce standard coverage,set minimum guarantee level and control the quality of the policy.The governance conception emphasizes the social function of insurance,helps us to understand insurance rights and obligations as running not only de jure between insurers and policyholders,but also de facto among policyholders.Therefore,the regulation of no-reading problem cannot be regarded as a purely contractual issue.It is not our concepts,but our political,economic,and social values that underlie and underwrite the regulation doctrines and practices.The interpretation and application of insurance law should take into account its multiple values and goals,rather than on a single principle.Procedural regulation tends to be inefficient or ineffective,it not only fails to ensure the implementation of insurance contract autonomy,but also fails to guarantee the fairness of the insurance contract.Telling insurance consumers more than they want to know in language they don't understand should not have legal consequences.However,in the existing legislation and judicial practice in our country,insured's explanation obligation is the main path to regulate no-reading problem,this over-emphasis on procedural regulation is neither feasible nor desirable.Legislators,courts and commentators should move to the substantive regulation as the main path.Substantial regulation can ensure that the insurance contract in accordance with the minimum quality standards,it also has the function of force disclosure of information.A central goal of insurance law is to clarify,produce,and disseminate information about the scope of insurers' coverage obligations to policyholders.Both substantive regulation and procedural regulation are beneficial to the realization of this goal.The solving of no-reading problem should mainly rely on substantive regulation,with procedural regulation as complementary.