Max True Plastering Co. v. United States Fidelity & Guaranty Co.
912 P.2d 861, 1996 WL 80747 (1996)
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Rule of Law:
The doctrine of reasonable expectations may be applied to the construction of insurance contracts in Oklahoma when policy language is ambiguous or when exclusions are masked by technical or obscure language or hidden within policy provisions.
Facts:
- Max True Plastering Company (True) purchased a fidelity bond from United States Fidelity and Guaranty Company (USF & G), sold by agent Jeff R. Johnson, insuring True for losses from employee dishonesty.
- In the summer of 1991, True discovered that employees in its Dallas office had formed a separate corporation, LCR, Inc., and were diverting True's business opportunities to it.
- True filed a lawsuit against LCR and the employees in October 1991 regarding this business diversion.
- In June 1992, True notified the agent, Jeff R. Johnson, of the losses due to employee dishonesty and claimed coverage under the USF & G policy.
- USF & G denied coverage on August 16, 1993, asserting that True failed to comply with the policy’s notice and proof of loss requirements and that the claimed losses (such as diversion of job opportunities and lost profits, considered intellectual property) were not covered by the policy.
Procedural Posture:
- Max True Plastering Company filed suit against USF & G in a trial court on August 30, 1993, seeking to recover under the insurance policy.
- USF & G filed a third-party petition against Jeff R. Johnson and his agency on July 28, 1994, claiming indemnity if True prevailed.
- USF & G and Johnson both filed motions for summary judgment on December 2, 1994.
- True filed an objection to USF & G’s motion for summary judgment on December 9, 1994, arguing for coverage under the policy’s plain reading or due to his reasonable expectations.
- The trial court, finding no controlling precedent in Oklahoma law for the legal questions, certified two questions of law to the Oklahoma Supreme Court on July 14, 1995, under the Uniform Certification of Questions of Law Act.
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Issue:
1) Does the doctrine of reasonable expectations apply to the construction of insurance contracts in Oklahoma? 2) If so, what circumstances give rise to the doctrine’s operation?
Opinions:
Majority - Kauger, Vice Chief Judge
Yes, the doctrine of reasonable expectations may be applied to the construction of insurance contracts in Oklahoma, and it operates when contract language is ambiguous or when exclusions are masked by technical or obscure language or hidden within policy provisions. The Court reasoned that insurance contracts are contracts of adhesion, meaning they are standardized and offered on a 'take it or leave it' basis due to the uneven bargaining power between the insurer and the insured. While Oklahoma law already includes interpretive rules favorable to insureds (e.g., construing ambiguities against the insurer, strict construction of exclusions), these are often inadequate to address modern insurance practices. The reasonable expectations doctrine provides an additional interpretive tool, ensuring that the objectively reasonable expectations of an insured concerning coverage are honored, even if a painstaking study of the policy might suggest otherwise. However, the doctrine is not intended to allow wholesale rewriting of insurance policies, but rather to prevent 'traps' created by ambiguous clauses or cleverly drafted, hidden exclusions. The Court cited previous Oklahoma cases that, while not explicitly naming the doctrine, considered the reasonable expectations of the parties, particularly in contexts like uninsured motorist coverage and obligations to defend. The Court specified that the doctrine applies to ambiguous terms, which are susceptible to more than one meaning by an ordinary person, and to exclusions that are technical, obscure, or hidden, which could defeat the dominant purpose of the transaction.
Analysis:
This case marks a significant development in Oklahoma insurance law by formally adopting the doctrine of reasonable expectations. It provides greater protection for insureds, particularly against sophisticated drafting by insurers that might obscure policy limitations or exclusions. The ruling reinforces the principle that insurance contracts, due to their adhesive nature, are interpreted differently from standard commercial contracts, prioritizing the insured's objective understanding. While limiting the doctrine's application to ambiguities and hidden exclusions, the decision ensures that courts will not enforce policy terms that undermine the core purpose of the insurance from a reasonable policyholder's perspective, potentially impacting future disputes over coverage denials based on fine print.
