Darner Motor Sales v. Universal Underwriters Ins. Co.

Supreme Court of Arizona, En Banc
140 Ariz. 383, 682 P.2d 388 (1984)

ELI5:

Rule of Law:

An insured may use doctrines like equitable estoppel and reformation to enforce an agent's oral representations of coverage that contradict the clear, unambiguous terms of a standardized, boilerplate insurance policy. The insured's failure to read the policy is not, as a matter of law, an absolute bar to recovery when the insurer had reason to believe the insured would not have accepted the policy had they known it contained the conflicting term.

Facts:

Darner Motor Sales, Inc., an automobile sales and leasing business, purchased a 'U-Drive' insurance policy from Universal Underwriters Insurance Company through its agent, John Doxsee.
The policy provided liability coverage for Darner Motors' car lessees in the amount of $15,000/$30,000.
In 1975, Darner Motors purchased a comprehensive 'Unicover' umbrella policy from Universal, also through Doxsee.
Upon reviewing the renewed U-Drive policy, Joel Darner noticed the lessee coverage was still at the lower 15/30 limit and expressed concern to Doxsee that this did not reflect their agreement for higher limits of 100/300.
Doxsee allegedly assured Darner that the umbrella policy would provide the additional coverage, bringing the total lessee liability limit to 100/300.
Relying on Doxsee's verbal assurances, Darner did not read the lengthy, boilerplate Unicover umbrella policy upon receiving it.
Approximately 20 months later, a Darner lessee, Dwayne Crawford, negligently injured a pedestrian while driving a rented car under a rental agreement that represented coverage of 100/300.
When a claim was made, Universal paid only the $15,000 limit from the U-Drive policy and denied further coverage, asserting that the umbrella policy's definition of 'insured' excluded lessees.

Procedural Posture:

A pedestrian who was injured by Darner's lessee, Dwayne Crawford, successfully sued Crawford and recovered a $60,000 judgment.
Universal paid $15,000 of the judgment, and Crawford sued Darner Motors for the remainder based on the rental agreement's coverage warranty.
Darner Motors filed a third-party complaint in the trial court against Universal and Doxsee for indemnification on theories of estoppel, reformation, negligence, and fraud.
The trial court granted summary judgment in favor of Universal and Doxsee.
Darner Motors, as appellant, appealed the summary judgment to the court of appeals.
The court of appeals affirmed the trial court's judgment in favor of appellees Universal and Doxsee.
Darner Motors petitioned the Supreme Court of Arizona for review.

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Issue:

Can an insured party use doctrines such as equitable estoppel or reformation to enforce an agent's oral representations of coverage that directly contradict the unambiguous written terms of a standardized insurance policy, especially when the insured failed to read the policy after receiving it?

Opinions:

Majority - Feldman, Justice.

Yes. An insured can use doctrines like equitable estoppel to enforce coverage representations that contradict the policy's written terms. The court formally adopts the doctrine of reasonable expectations as articulated in the Restatement (Second) of Contracts § 211, which holds that a party is not bound to a standardized boilerplate term if the drafting party had reason to believe the adhering party would not have assented to the contract if they had known it contained that term. Traditional 'four corners' contract analysis is ill-suited for standardized adhesion contracts like insurance policies, where terms are not negotiated. The 'dickered deal' between the parties should prevail over contradictory boilerplate. Therefore, Darner's failure to read the policy is not an absolute bar to recovery; it is a question of fact for the jury whether such reliance was reasonable. Darner may proceed on his claims of estoppel, reformation, negligence, and fraud.

Dissenting - Holohan, Chief Justice

No. The unambiguous written terms of an insurance policy should be controlling. The majority's decision overrules established precedent and makes the written policy irrelevant, replacing the certainty of a written agreement with a 'swearing contest' between the insured and the insurance agent. This creates profound uncertainty for the insurance industry and others that rely on standard form contracts. The decision effectively encourages insureds not to read their policies, rewarding ignorance and creating a remedy that is far worse than the perceived problem.

Concurring - Cameron, Justice

Yes. The majority correctly applies modern contract principles to standardized forms. The dissent mischaracterizes the holding; the written policy is not irrelevant. Boilerplate terms remain enforceable unless the drafter had reason to know they would be unacceptable to the other party or conflict with the core purpose of the transaction. The decision does not reward ignorance but recognizes the commercial reality that such forms are rarely read. It rightly holds that the reasonable expectations induced by an agent's words or conduct should be protected, requiring agents to be truthful about how boilerplate terms may affect the negotiated deal.

Analysis:

This case represents a landmark shift in Arizona insurance law, moving from a strict, literalist interpretation of contracts to the modern 'reasonable expectations' doctrine. By formally adopting Restatement (Second) of Contracts § 211 for standardized agreements, the court significantly weakened the traditional parol evidence rule and the 'duty to read' in the context of adhesion contracts. This decision empowers consumers by allowing them to hold insurers to their agents' oral promises, even when those promises contradict the policy's fine print. Consequently, it places a higher burden on insurers and their agents to ensure that coverage representations are accurate and that significant limitations are clearly communicated to the insured.

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