| An insurance policy, like every other type of contract, imposes upon each party an implied duty of good faith and fair dealing in its performance and its enforcement. This duty requires the insurer and the insured to perform so as not to impair or destroy the right of the other to receive the benefit of the agreement. The duty also incorporates the concept of avoiding "unconscionability" in executing the policy.
What is unconscionability?
An unconscionable contract is one that is so one-sided in favor of the party with the bargaining power so as to oppress the other party in an overreaching manner. In the insurance context, an unconscionable policy so favors the insurer and so disfavors the insured. Such a policy usually causes unfair surprise to an insured when he seeks to recover under the policy and is denied.
There are several types of unconscionability. Procedural unconscionability relates to the form of the policy, including the use of fine, small print or the placement of a provision on the last page of the policy, in an attempt to hide material terms of the policy. Substantive unconscionability refers to incomprehensible language used to confuse an insured as to a material term. No-choice unconscionability involves an insured's inability to bargain to change a particular term because of standardized language used throughout the industry. Unconscionability per se refers to provisions that violate public policy.
Unconscionable terms
An insurer may attempt to include unconscionable terms so as to limit coverage or assert defenses to coverage, expand the scope of exclusions from coverage, or increase its rights to terminate the policy.
Effect of unconscionability
If an entire policy or a policy provision is found to be unconscionable, several options are available. The entire policy may be held void, all provisions except the unconscionable provision may be enforced, or the entire policy may be enforced with a limitation on the application of the unconscionable provision to avoid any unconscionable result. These options are available even if the insured manifested fully informed consent.
Thus, because of unconscionable terms in the policy, some courts find that an insurer waives or is estopped from asserting certain rights that it has under the policy even if the insured does not show that the insurer voluntarily relinquished such right or that the insured detrimentally relied on a certain provision. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |