1 E.g., Bergholm v. Peoria Life Insurance Co. 284 U.S. 489 (1932). Grisby v. Coastal Marine Service 412 F. 2d 1011 (5th Cir. 1969). Cert. den. 396 U.S. 1033 (1969). In Israel: Dinary v. Lloyds Underwriters (1972) (I) 28 P.D. 589; Shoresh v. Sahar (1973) (I) 28 P.D. 207; Bankers and Traders Ltd. v. Khader (1974) (I) 29 P.D. 827.

2 Some of those rationales will be elaborated upon infra part II.

3 Chief Justice Doe in Delancey v. Insurance Co. 52 N.H. 581, 587–88 (1873).

4 Flesch, , Marks of Readable Style; A Study in Adult Education (1943)Google Scholar; Flesch, , How to Test Readability (1951)Google Scholar; Flesch, , The Art of Readable Writing (1949).Google Scholar The scientific derivation of Flesch's readability formula is given in his article “A New Readability Yardstick” (1948) 32 Journal of Applied Psychology 221. It seems that the formula has been widely accepted as accurate and frequently applied in the readability literature.

5 Harding, , “The Standard Automobile Insurance Policy: A Study of Its Readability” (1967) 34 J. of Risk and Insurance 39.CrossRefGoogle Scholar The tested policy was the family automobile policy which appears in the specimen policy pamphlet prepared by the Health Insurance Institute and the Insurance Information Institute in consultation with the American Risk and Insurance Association.

6 A life insurance contract (Northwestern Mutual's), which was also tested, scored 34.56. Though this is obviously a much better result, the document is still at the bottom of the “difficult” readability class.

7 St. Paul's July 1975 Personal Liability Catastrophe Policy. See also St. Paul's news release concerning this policy (undated, not numbered, but readable).

8 INA form K.K–3121 of December, 1974. The quoted passage is derived from INA Businessowners Insurance Sales brochure.

9 ISO Today (1972) 1–2.

10 Recent examples are the ISO California forms MLB 700 and MLB 701 of May, 1976.

11 This trend is noticeable also outside the insurance industry. The list of customers receiving service from language simplification firms includes banks (Bank of America, Bank of California, Citibank, Crocker National Bank), securities firms (Investors Group of Invts.) and many others. See, in general, “Translating Legalese Into English” Business Weekly 25 Oct. 1976 at 94. See also: “Insurers Start to Offer Homeowners Policy In Simple Language; Some Coverage Changes” The Wall St. J. 5 Dec. 1977.

12 Young, , Cases and Materials on the Law of Insurance (1971) 79.Google Scholar

13 Harding, op. cit. supra n. 5, at 39.

14 It is both impossible and unnecessary to cite all the relevant cases. Strong representative dicta may be found, e.g., in Mohan v. Union Fidelity Life Insurance Co. 207 Pa. Supp. 205, 216 A. 2d 342 (1966); Grisby v. Coastal Marine Service 412 F. 2d 1011 (5th Cir. 1969), cert. den. 396 U.S. 1033 (1969). In Israel, too, judges have expressed their opinion that language complexity should be a significant factor in allocating insured losses. A strong example is “Manoah” Ltd. v. Confidencia Ltd. (1975) (III) 30 P.D. 56, per Cohn, J.

15 This language “simplification” was introduced by Crocker National Bank of San Francisco. See Business Week, 25 October 1975 at 95. On the connection between language simplification and sheer length see: “The Rebellion Against a Plain English Law”, Business Week, 23 Jan. 1978.

16 It should be noted that most readable policies are not drastically longer than the old forms which they substitute. A close examination of old and new forms reveals the reason why. In the process of redrafting, entire paragraphs and phrases are discarded as unnecessary. This cutting procedure appears to be an excellent idea. On the other hand, words and sentences that are not discarded altogether tend to become much more lengthy in their readable form. One illustration would suffice. St. Paul's Family Security Umbrella Policy started with these words: “In consideration of the payment of premiums as herein provided, and subject to all exclusions, limitations, reductions (if any) and other terms of this Policy, the Company hereby insures the Named Insured against the losses specified in this Policy”. At the policy's present (readable) reincarnation this whole preamble was dropped. As a result of this and other cuts the overall size of the new policy increased only from five pages to eight. For empirical evidence on the connection between language simplification and informational overload see: Davis, , “Protecting Consumers from Overdisclosure and Gobbledygook: An Empirical Look at the Simplification of Consumer Credit Contracts” (1977) 67 Va.L.R. 841.CrossRefGoogle Scholar

17 Flesch's methods include beside testing readability, gauging what he calls “human interest score”. This score, also on a scale of 0 to 100, categorizes reading materials as dull (0–10), mildly interesting (11–20), interesting (21–40), very interesting (41–60) and dramatic (61–100). This score is arrived at by the application of another mathematical formula. (See Flesch, , How to Test Readability (1951) esp. at 9Google Scholar). The human interest score is based on the percentage of personal words (pronouns, words that have masculine or feminine natural gender, etc.) as well as on the percentage of so called “personal sentences” (sentences marked by quotation marks, questions, commands, requests, exclamations, etc.). The “human interest” scoring technique is based on sampled paragraphs, and therefore does not take into account — like the readability test — factors such as absolute length. It is also submitted, that though some of the new policy forms have been rewritten to include many personal words and sentences, to describe those forms as “dramatic”, or even as “mildly interesting” would be an unforgivable overclaim.

18 This expert has further noted: “By the time he has found his way to the end of an insurance policy, the alert and unusual householders (layman as attorney) cannot know what he is covered for — because there is more in an insurance policy than he can read and retain, even if he understood each word as he read it… The reading has left him — nay, made him — ignorant”. Mellinkoff, , The Language of the Law (1963) 402.Google Scholar By contrast, if one reads a well written work of fiction, e.g., Tolstoy's War and Peace, bulk does not necessarily lead to ignorance.

19 Kimball, and Pfennigstorf, , “Legislative and Judicial Control of the Terms of Insurance Contracts: A Comparative Study” (1964) 39 Ind. L.J. 674.Google Scholar

20 Young, op. cit. supra n. 12.

21 See, in general, Leff, , “Contract as Thing” (1970) 19 American U.L.R. 131.Google Scholar

22 See generally, Williston, , A Treatise on the Law of Contracts (3rd ed., 1963, Supp. 1976) § 900, esp. at p. 29.Google Scholar

23 This author assigned a readable combination automobile insurance policy to a group of insurance law students at the University of Southern California Law Center. The students were requested to answer (from memory) a series of simple informational questions about the policy: the type of motor vehicles covered, persons insured, excluded events. None was sure about the answers and most could not offer unambiguous information even after examining the policy.

24 Gerhardt v. Continental Insurance Companies, 48 N.J. 291, 255 A. 2d 328 (1966), applying Bauman v. Royal Indemnity Co., 36 N.J. 12, 21, 174 A. 2d. 585, 589 (1961).

25 Mutual of Omaha v. Russell 402 F. 2d 339 (10th Cir. 1968) cer. den. 394 U.S. 973 (1969). Since many insurance buyers are ignorant of detail, special care must be taken by careful underwriters that variations in detail will not frustrate stereotypie expectations. Should, for instance, a scrupulous automobile liability carrier limit coverage to accidents involving the named insured, to the exclusion of others driving the car with the insured's permission? The Insurance Commissioner of the State of Maine took the position that such an exclusion is impermissible, and refused to authorize the form. The Supreme Court of that jurisdiction overruled the Commissioner by a majority vote: American Fidelity Co. v. Mahoney 174 A. 2d 446 (Me. 1961). The court was reluctant to obstruct market versatility, where even a superficial reading of the policy would have disclosed its pitfalls. A red letter inscription across the top of the policy stated: “This is not a Standard Automobile Policy … It protects the individuals, named in the policy, against liability due to their operation of an automobile, but in general does not cover operation of the insured's automobiles by others. Please read your policy”. It is submitted that absent such a clear warning, policies greatly at variance with normal stereotypes should not be authorized.

26 It would be futile to cite all the cases. A few illustrations, however, may be useful. Illustration I. The insured desired to take out fire insurance on some commercial aircraft. He was advised that the best way to do it was to insure the hangars with their contents. This was done and the crafts were damaged by fire within the hangars. The policy stated, inter alia, the following exclusion: “Excepted property: this policy shall not cover … aircraft.” The court decided that the policy was ambiguous and held for the insured: Fidelity-Phoenix Fire Insurance Co. v. Farm Air Service, Inc. 255 F. 2d 658 (5th Cir. 1958). Illustration II. The consumer was comprehensively insured against liability risks. Liability for intentional torts was specifically excluded. The insured got involved in an altercation with another person and caused him substantial personal injuries. The court found several ambiguities in the exclusion: the print was too fine, the location of the exclusion in the policy was too inconspicuous. The court also held that though the insured may have intended to assault his victim there was no indication that he actually desired to inflict upon him the injuries actually sustained, and hence that the tort was not “intentional” within the policy meaning: Gray v. Zurich Insurance Co. 65 Cal. 2d 263, 419 P. 2d 168 (1966). The California lead was followed in many jurisdictions, e.g., Zurich Insurance Co. v. Rombough 384 Mich. 228, 180 N.W. 2d 775 (1970); Hanover Insurance Group v. Cameron 122 N.J. Super. 151, 298 A. 2d 715 (1973). Illustration III: An air trip life insurance policy excluded in bold type across the top of the document, trips taken aboard unscheduled air carriers. The insured's craft encountered mechanical problems and could not take off on time. The insured was referred to an unscheduled air carrier who would chart special flights to accomodate grounded passengers. The chartered flight crashed and the insured sustained mortal injuries. The court found ambiguities in the exclusion and held for the consumer: Steven v. The Fidelity and Casualty Co. of New York 58 Cal. 2d 862, 27 Cal. Rptr. 172, 377 P. 2d 284 (1962).

27 The most widely cited articulation of that rule of substantive law belongs to Professor Keeton. Keeton claims that the consumer develops a set of reasonable expectations. These expectations cannot, as a matter of substantive law, be contracted away: “The objectively reasonable expectations … regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations”: Keeton, , “Insurance Law Rights at Variance with Policy Provisions” (1970) 83 Harv. L. R. 961CrossRefGoogle Scholar, and 1281: Keeton, , “Honoring Reasonable Expectations in the Interpretation of Life and Health Insurance Contracts” A.B.A. Sect. Ins., N. and C.L. 213, (1971).Google Scholar It it submitted that one can safely omit the word “painstaking” from the above quotation. Many of the disregarded contract provisions have been plain and conspicuous.

28 The two pioneer observers of this phenomenon in the United States are without a doubt Professors Karl Llewellyn and Friedrich Kessler: Llewellyn, , “What Price Contract? An Essay in Perspective” (1931) 40 Yale L.J. 704CrossRefGoogle Scholar; Kessler, , “Contracts of Adhesion—Some Thoughts About Freedom of Contract” (1943) 43 Colum. L.R. 629.CrossRefGoogle Scholar

29 A “formational defect” is one which affects the contracting intentions of the parties. Mistakes, fraud, duress, forgery and undue influence are some examples in point. The substance of the contract, on the other hand, is the aggregate of the consensual norms themselves. A “substantive defect” exists, where one or more of those norms cannot be reconciled with the beholder's set of values. See Kornhauser, , “Unconscionability in Standard Forms” (1976) 64 Cal. L.R. 1151.CrossRefGoogle Scholar

30 Llewellyn, , “What Price Contract? — An Essay in Perspective” (1931) 40 Yale L.J. 704CrossRefGoogle Scholar; Llewellyn, , Book Review (1939) 52 Harv. L.R. 700CrossRefGoogle Scholar; Llewellyn, , The Common Law Tradition (1960) 370Google Scholaret seq.; Kessler, , “Contracts of Adhesion— Some Thoughts About Freedom of Contract” (1943) 43 Colum. L.R. 629CrossRefGoogle Scholar; Radin, “Contract Obligation and the Human Will” ibid. 575; Oldfather, , “Toward A Usable Method of Judicial Review of the Adhesion Contrator's Lawmaking” (1968) 16 Kansas L.R. 303Google Scholar; Benfield, , New Approaches in the Law of Contracts (1970) 74–76Google Scholar.

31 Slawson, , “Standard Form Contracts and Democratic Control of Lawmaking Power” (1971) 84 Harv. L.R. 529CrossRefGoogle Scholar; Slawson, , “New Approach to Standard Forms” (1972) 8 Trial 49Google Scholar; Slawson, , “Mass Contracts: Lawful Fraud in California” (1974) 48 S. Cal. L.R. 1.Google Scholar

32 Standardization is, of course, cost efficient. “Standardizing contracts is … a counterpart of standardizing goods and production processes”: Llewellyn, Book Review, cit. supra n. 30.

33 Section 15 enumerates several different situations of “restrictiveness”. A few examples are: A term that authorizes the proferor, acting alone, to alter contractual provisions; a term that restricts the consumer's access to the judicial process; and a term that refers future disputes to arbitration while giving the proferor a preference with respect to choosing the arbitrator or the place of arbitration.

34 The leading case preceding the statute is Zim v. Maziar (1962) 17 P.D. 1319.

35 E.g., Lagil Trampulin v. Nachmias (1973) (I) 29 P.D. 63.

36 A detailed proposal how to apply the fairness test has been elaborated elsewhere: Procaccia, , “The Binding Effect of Standard Form Contracts as a Function of Market Structure” (1978) 9 Mishpatim 25.Google Scholar

37 Dawson, , “Unconscionable Coercion: The German Version” (1976) 89 Harv. L.R. 1041CrossRefGoogle Scholar; Squires, , “A Skeptical Look at the Doctrine of Reasonable Expectations” (1970) 6 Forum 252.Google Scholar

38 Schwartz, , “Seller Unequal Bargaining Power and the Judicial Process” (1974) 49 Ind. L.J. 367Google Scholar; Schwartz, , “A Reexamination of Nonsubstantive Unconscionability” (1978) 63 Val. L.R. 1053.CrossRefGoogle Scholar

39 Let D–D represent the demand curve of the commodity in question, and S–S its initial supply curve, before increased production cost is superimposed. At this initial stage Q₀ commodity units are made, priced at P₀ currency units per one commodity unit. If producers are forced to sell a “better” product, Schwartz argues that the supply curve should be shifted northwestward to S¹–S¹; as a result quantity should increase to P₁ and society as a whole should suffer a deadweight efficiency (or utility) loss, represented by the space FE¹EGO. (Schwarta mistakenly refers to the triangle EE¹A).

This is so, because before the supply shift, producers' utility was represented in the diagram by their revenue P₀Q₀ minus their expenses – the space below the supply curve S–S. Consumers derived utility represented by the triangle BEP₀. After the shift producers' utility changed to P₁Q₁ minus the space below in the new supply curve S¹–S¹ while consumers' benefit shrank to the triangle BE¹P¹. The combined utility of producers and consumers is smaller after the supply shift. The diagram shows that the difference is depicted by the space FE¹EGO.

40 Prof. Schwartz recognizes, in his writings, that informational deficiencies may alter the validity of his analysis. In both his relevant papers Schwartz assumes away such informational problems.

41 A perfect market is supposed to work differently, of course. Though the participants may start out in a state of ignorance, their very participation is supposed to release a continuous flow of information, which enables them to shift to continuously better market decisions. Theoretically, they may then reach a state of perfect information, and cease shifting positions. Thus, in a competitive market efficient equilibria are a by-product of perfect information. See Kirzner, , Competition and Entrepreneurship (1973) 9.Google Scholar

42 It seems that “negotiation” with the insurance departments is sometimes the only restraint on underwriters' omnipotence. See, for example, in the matter of Air Trip-Ticket Accident Insurance, New York State Insurance Department hearing (1970). In that case the Department ruled that air-trip accident policy forms should not be approved, as the expected ratio of benefits paid to premiums charged would be too low.

43 Clark, , Competition as a Dynamic Process (1961) 13.Google Scholar

44 Macbeth, Act. I, Scene V.

45 Policy standardization may also occur through legislative devices, such as in the case of the 1943 New York Standard Fire Insurance Policy, which is statutorily or administratively required in virtually every jurisdiction in the U.S. as a necessary part of the basic fire policy. Policy forms prescribed by the state are not, however, within the scope of this paper.

46 For a detailed evaluation of this policy, its history and development, see Keeton, , Insurance Law (1971) §2.11, pp. 73 ff.Google Scholar Keeton describes how the familiar clauses of the standard automobile policy, e.g., definitions of the term “insured”, the “drive other car” coverage or the reference made to the financial responsibility statutes came about through a concerted industry effort, and always in a uniform shape.

47 “[C]ontinuing decreasing cost is incompatible with perfect competition. If every, or even any firm in an industry could always bring down its marginal and average cost in the long run merely by expanding its output… it would soon expand to become an important fraction of the industry. In short, it would expand to become some kind of monopolist, ceasing to be a price taker and now having some measure of control over the price it gets.” Samuelson, , Economics (10th ed.; 1976) 485.Google Scholar

48 This uniformity is partially mitigated by some optional endorsements, also in standardized form.

49 Keeton, op. cit., 86.

50 Ibid., 87.

51 Schwartz, op. cit.

52 See section III.B.3, supra.

53 Assuming the better contract offered by producers forces up their supply curve from SS to S¹S¹ and consumers respond to the better product by a demand shift from DD to D¹D¹ quantity may actually increase from Q₀ to Q₁. No efficiency loss need by suffered. The missing element in Schwartz's analysis is a correct recognition and analysis of the demand shift. His diagram showing a deadweight efficiency loss holds consumers' demand as a constant, in spite of the undisputed product improvement. Schwartz justifies his position by asserting that “[S] ellers do not mistakenly ignore buyers' preferences. According to that assumption, if increased demand would offset increased costs, then sellers already would have

exploited such an opportunity for increased profits. Thus even though consumer demand may increase, such an increase will not offset the increased cost of offering a greater variety of contracts”. Schwartz, , “A Reexamination of Nonsubstantive Unconscionability” (1978) 63 Va.L.R. 1069Google Scholar, n. 33. This argument seems to me erroneous. The error lies in contrasting consumers' “demand” with producers' “costs”. In fact, producers are not interested in “demand” nor in revenue per se, but only in profit, which is revenue minus cost. Thus, production will not be stepped up unless marginal revenue should exceed marginal costs. It is quite possible, then, that increased production will enhance both total revenue and consumers' welfare (or utility), and yet be repudiated by producers for failure to generate a marginal profit. A deadweight efficiency loss is defined as the combined disutility suffered by consumers and by sellers together. This magnitude is meaningless to a rational producer, as he is interested in his own separate utility. If a given measure may diminish a producer's separate utility, the producer will not voluntarily opt for it, even if the measure in question will cause such utility to consumers, so that the combined utility to producers and consumers should be a positive magnitude.

54 Left, “Contract as Thing” (1970) 19 Am. U.L.R. 131.

55 See supra section III.B.4.

56 See supra n. 27. See also: Keeton, , Insurance Law (1970)Google Scholar chapter 6, especially at Section 6.3.

57 See supra n. 31.

58 For writings advocating the warranty approach as a tool of insurance policy adjudication see: Comment, “The Application to Insurance Contracts of the Implied Warranty of Sale Law” (1925) 35 Yale LJ. 203; Note, (1976) 9 Akron L.R. 584. An objection to such an application of the law of warranties was raised in Note, (1976) 64 Georgetown L.J. 987. This discussion seems to be an offshoot of a larger issue, namely whether the law of warranties is in principle applicable to service transactions, as opposed to sale of goods. See generally, Farnsworth, , “Implied Warranties of Quality in Non-Sales Cases” (1957) 51 Colum. L.R. 653CrossRefGoogle Scholar; Miller, , “‘Sale of Goods’ as a Prerequisite for Warranty Protection” (1969) 24 Bus. Law 847Google Scholar; Greenfield, , “Consumer Protection in Service Transactions—Implied Warranties and Strict Liability in Tort” (1974) Utah L.R. 661.Google Scholar

59 U.C.C., § 2–315. The second official comment (1972) to this section has this to say: “A ‘particular purpose’ differs from the ordinary purpose for which the goods are used in that it envisages a specific use by the buyer which is peculiar to the nature of his business whereas the ordinary purposes for which goods are used are those envisaged in the concept of merchantability and go to uses which are customarily made of the goods in question….” Since most insured do not have particular disclosed needs, the concept of warranty of fitness for a particular purpose should not be extended to them. One does not use a word of art, unless one means exactly what it says.

60 U.C.C., § 2–314 defines merchantable goods as such that (inter alia) “pass without objection in the trade under the contract description.” Official comment 2 (1972) states that “[g]oods … must be of a quality comparable to that generally acceptable in that line of trade …” It follows that a standard form used on an industry-wide basis will probably not be vulnerable to attack on merchantability grounds. On the other hand, the same section requires that goods must be “fit for the ordinary purposes for which such goods are used”. It may be contended that a given standard form fails to satisfy this test even if used extensively in the “trade”.

61 C. and J. Fertilizer, Inc. v. Allied Mutual Ins. Co. 227 N.W. 2d 169 (Iowa, 1975); Ferguson v. Phoenix Assurance Co. 189 Kan. 459, 370 P. 2d 379 (1962). Contra: Lichtentag v. Millers Mutual Fire Ins. Co. 250 So. 2d 105 (La. App. 1971).

62 Left, op. cit. supra n. 54, seems to be aware of this difficulty. He expressly states, in his paper's conclusions, that the article had to do with justifying regulation for quality, not with devising means to do it.

63 The most important contractual bona fide provision is under the German Civil Code: B.G.B. § 242. See also the Italian Codice Civile, § 1375; the French Code Civile, § 1134.

64 For authoritative commentaries on these sections in the German, Italian and French Civil Codes, see respectively: Cohn, , Manual of German Law (1968) vol. I, pp. 96–101Google Scholar; Enciclopedia del Diritto (1961) vol. IX, 956; Colin, et Capitant, , Traité de Droit Civil (1959) vol. II, 454.Google Scholar See generally: Tedeschi, , “Frustration of Purpose” (1975) 10 Is.L.R. 1.Google Scholar

65 Cohn, op. cit., preceding note.

66 See, in general, Ellinghouse, , “In Defence of Unconscionability” (1969) 78 Yale L.J. 757CrossRefGoogle Scholar; Danzig, , “A Comment on the Jurisprudence of the Uniform Commercial Code” (1975) 27 Stan L.R. 621CrossRefGoogle Scholar; Dawson, , “Unconscionable Coercion: The German Version” (1976) 89 Harv. L. R. 1041.CrossRefGoogle Scholar

67 To illustrate, assume that a property worth $100,000 must, to satisfy the coinsurance requirement, be fully insured. If the policy is for only $60,000, the insurer will compensate the insured for only 60% of any loss. The insured may be conceived as his own coinsurer for the remaining 40%.

68 Should losses and values be appraised as of the time of contracting or as of the time of loss? Should depreciation be or not be taken into account in the appraisal procedure? These and other ambiguities are resolved by conventions accepted in the business: the words are not ambiguous to the ones versed in their enforcement.

69 See, generally, Head, Insurance to Value (1971).

70 The consumer is usually required to be covered for a given percentage of the actual cash value of the property. The extent (if any) of the state of underinsurance depends, therefore, on the definition of the term “actual cash value”.

71 If fully insured and underinsured policyholders receive equal benefits in spite of a disparity in premiums, the fully insured policyholders overpay for their coverage, i.e., subsidize the partially insured policyholders. See generally, Procaccia, and Shafton, , “Coinsurance Clauses and Rate Equity” (Feb., 1978) Ins. L.J. 69.Google Scholar

72 Sometimes the premium structure is deliberately designed to achieve certain redistributional goals. One example is subsidized fire rates in the urban core. But absent a clear social and economic justification to redistribute resources among the premium payers, it is generally believed that each insured should pay a premium which reasonably reflects the probabilities of loss associated with his own exposure.

73 “Rate equity” is a state in which each premium payer is charged for his own expected losses. The absence of rate equity is characterized by a structure which utilizes premiums paid by some insureds to subsidize benefits paid out to others insured.

74 For an illustration of this problem see Marshall Produce Co. v. St. Paul Fir and Marine Ins. Co. 256 Minn. 404, 98 N.W. 2d 280 (1959). Some other common definitional issues relating to the term “fire” are: does it include water damage? Does it embrace “friendly fires”, i.e., fires that originate where they were intended to burn, such as stoves, kilns or fireplaces?

75 See supra part III, B. 1.