The Butterfly Effect in Interpreting Insurance Policies

Abstract

When a court interprets a standard form contract, the court’s interpretation of the language does not just impact the parties in the case. It also impacts all of the entities who are using, or will be using, the contractual language at issue. It also impacts how other courts will interpret the same language even if the courts are in different jurisdictions. Because the drafters of standardized contract language often understand the far reaching impact of courts’ interpretations of standardized contract language, they are influenced by courts’ interpretations of the language when drafting or redrafting standardized contracts in response to courts’ interpretations of the language. Courts’ interpretations of standardized contract language also impact the behavior of repeat users of such language in seeking or avoiding judicial interpretation of the contract language. These ripple effects of courts’ interpretations of standardized contract language are commonly referred to as the “butterfly effect.” As the first type of standardized contract to be described as a contract of adhesion one hundred years ago, insurance policies are an area where the butterfly effect commonly manifests. This article examines the butterfly effect in interpreting insurance policies.

Keywords: insurance, butterfly effect, standardized contract, contract of adhesion, ANI, Lorenz, ISO, American Nuclear Insurers, pollution exclusion, environmental contamination, ensuing loss, data loss, cyber risk