United Services Auto Ass'n v. Schlang

• Citation: 111 Nev. 486,894 P.2d 967
• Decision Date: 27 April 1995
• Docket Number: No. 23617,23617
• Parties: , 28 UCC Rep.Serv.2d 151 UNITED SERVICES AUTO ASSOCIATION, Appellant/Cross-Respondent, v. Lawrence SCHLANG, Respondent/Cross-Appellant.
• Court: Supreme Court of Nevada

Page 967

894 P.2d 967

111 Nev. 486, 28 UCC Rep.Serv.2d 151

UNITED SERVICES AUTO ASSOCIATION, Appellant/Cross-Respondent, v. Lawrence SCHLANG, Respondent/Cross-Appellant.

No. 23617.

Supreme Court of Nevada.

April 27, 1995.

Rehearing Denied October 19, 1995.

Vargas & Bartlett and Scott A. Glogovac, Reno, for appellant/cross-respondent.

Hampton M. Young, Jr., Reno, for respondent/cross-appellant.

OPINION

STEFFEN, Chief Justice:

This appeal addresses an issue of first impression in this jurisdiction concerning the meaning and effect of a medical payments (med-pay) clause in an insurance policy that limits payment to expenses incurred within three years from the date of the covered accident. Respondent/cross-appellant Lawrence Schlang contends that he satisfied the conditions of the clause by entering into a requirements contract prior to the expiration of the three-year policy period. He therefore claims that he is entitled to lifetime payments up to the limits of the med-pay coverage. Appellant/cross-respondent United Services Auto Association (USAA) denies the existence of a requirements contract and otherwise contends that Schlang's claim for additional coverage lacks merit. We agree and reverse.

FACTS

On January 19, 1987, Schlang sustained serious injuries as a result of a collision with an underinsured driver. At the time of the accident, Schlang's vehicle was insured by USAA. ¹ After various treatments and surgery, it was determined that Schlang would suffer from a lifetime of sleep apnea, a condition causing intermittent cessation of breathing during sleep. Schlang's condition required the permanent use of a night-time breathing apparatus, or "constant positive air pressure machine" ("CPAP"). USAA paid all medical expenses relating to Schlang's injuries during the three-year period following the accident, as provided in the policy.

As the policy's three-year time limit approached, Schlang's attorney informed USAA of the need for future surgery, and the lifetime availability of CPAP. The attorney also sent USAA a copy of what was termed a contract between Advanced Medical Services ("AMS"), a medical supplier, and Schlang for CPAP supplies. In response, USAA requested documentation from Schlang's doctors verifying the necessity for the CPAP in order to "seriously consider" the claim. Schlang's attorney wrote back, suggesting that all of the specified documentation had been previously supplied. In any event, after January 19, 1990, USAA discontinued further payments on Schlang's claims.

The following month Schlang filed this action against USAA claiming that he had "incurred" his CPAP expenses within the policy limitation period and alleging causes of action for breach of contract, bad faith and declaratory relief. Thereafter, both parties filed motions for summary judgment. The district court granted summary judgment in favor of USAA, disposing of all issues except the claim that Schlang was entitled to CPAP for thirty years.

After a bench trial, the district court ruled that a valid and binding requirements contract had been entered into between Schlang and AMS and that the CPAP expenses had therefore been "incurred" within the policy's three-year term. The court's decision obligated USAA to pay Schlang's future expenses related to the CPAP up to a maximum of $62,396.89 (the remaining balance of Schlang's $100,000.00 policy limit for med-pay coverage). Subsequently, Schlang successfully sought costs and attorney's fees based upon USAA's failure to accept his offer of judgment prior to trial.

On appeal, USAA challenges the district court's judgment awarding Schlang his medical expenses for thirty years of CPAP supplies and his costs and attorney's fees, and denying USAA's motion to alter or amend judgment. Schlang cross appeals from the district court's summary dismissal of his claim for punitive damages and bad faith.

DISCUSSION

Because USAA was required under the terms of its policy with Schlang to pay only those expenses "incurred" within three years of the accident, the threshold issue before us is whether Schlang's claimed expenses were timely incurred. A majority of courts considering the issue have concluded that expenses are "incurred" when one has paid or become legally obligated to pay them. For example, in Virginia Farm Bureau Mut. Ins. Co. v. Hodges, 238 Va. 692, 385 S.E.2d 612 (1989), an insured sued her insurer for plastic surgery that was to be performed after the period permitted by her policy. Two days prior to the one-year limitation, her physician drafted a memo in which he agreed to perform surgery for a specified cost. The insured did not accept the offer within the policy limitation period. Accordingly, the court indicated:

An expense can only be "incurred" ... when one has paid it or become legally obligated to pay it. Moreover, "incur" is defined in Webster's Third New International Dictionary 1146 (1986) as follows: "become liable or subject to...."

During the first year after her accident, [the insured] did not pay [the doctor] nor was she contractually obligated to pay him. She could have decided to go to another doctor or not have the surgery at all. Therefore, she did not "incur" the expense of [the] suggested surgical procedure within the meaning of the policy.

Id., 385 S.E.2d at 614 (footnote omitted); accord Reliance Mut. Life Ins. Co. v. Booher, 166 So.2d 222, 224 (Fla.Dist.Ct.App.1964) (insured must have paid or become liable for the payment within the limitation period); Atkins v. The Great Am. Ins. Co., 15 N.C.App. 79, 189 S.E.2d 501, 504 (1972) (expenses incurred when "one has paid, or become legally obligated to pay" within the policy's time provision); Lefebvre v. Government Employees Ins. Co., 110 N.H. 23, 259 A.2d 133, 135 (1969) (expenses incurred when one becomes obligated to pay); Riverside Ins. Co. of Am. v. Cargill, 570 S.W.2d 455, 456 (Tex.Ct.App.1978) (the prevailing view is that medical expenses are incurred when "expenses are charged, paid, obligated to be paid, prepaid or the services are rendered or performed" within the policy's time provision).

Mindful of the foregoing authorities, our task is to determine whether the district court erred in ruling that Schlang timely incurred a contractual obligation with AMS to purchase his CPAP requirements from AMS over a period of thirty years. In support of the proposition that he is bound by the obligations of a valid contract, Schlang relies on a May 1, 1989, letter from AMS, "accepted and approved" by Schlang in writing on January 11, 1990. In the letter, AMS agreed to provide "CPAP units and supplies, as needed, for the remainder of [Schlang's] lifetime" at an estimated price, and contingent upon certain conditions. ² However USAA contends that the alleged agreement between AMS and Schlang does not satisfy the prerequisites for a requirements contract as a matter of law. We agree.

A requirements contract exists where one party promises to supply the needs of the other party during a certain period of time at an agreed price, and the other party expressly or implicitly promises that he will obtain his goods or services exclusively from the first party. See Bank of America Nat'l Trust & Sav. Ass'n v. Smith, 336 F.2d 528, 528-29 n. 1 (9th Cir.1964).

The court in Harvey v. Fearless Farris Wholesale, Inc., 589 F.2d 451 (9th Cir.1979), interpreted an alleged requirements contract. The facts indicated that the defendant was obligated to sell to plaintiffs while plaintiffs were at liberty to purchase from any supplier. The Harvey court concluded that the contract failed under relevant Idaho law:

Mutuality of obligation as pertains to an executory contract requires that each party to the agreement be bound to perform; if it appears that one party was never bound on his part to do the acts which form the consideration for the promise of the other, there is a lack of mutuality of obligation, and the other party is not bound.

Id. at 460 n. 12 (quoting McCandless v. Schick, 85 Idaho 509, 380 P.2d 893, 898 (1963)). Similarly, this court has stated that "[m]utuality of obligation requires that unless both parties to a contract are bound, neither is bound." Sala & Ruthe Realty, Inc. v. Campbell, 89 Nev. 483, 487, 515 P.2d 394, 396 (1973). Other courts have reached similar results. See Embedded Moments, Inc. v. International Silver Co., 648 F.Supp. 187, 192 (E.D.N.Y.1986) (contract unenforceable where one party is bound to sell but other party is only entitled, not bound, to buy, or to buy exclusively); Baber v. Lay, 305 S.W.2d 912, 914 (Ky.1957) (mutuality of obligation is essential element of an executory contract); and Streich v. General Motors Corp., 5 Ill.App.2d 485, 126 N.E.2d 389, 394 (1955) (mutuality lacking where buyer is not obligated to purchase from seller).

Schlang contends that a requirements contract "is simply an agreement by the buyer to purchase his good-faith requirements of goods exclusively from the seller." Stacks v. F & S Petroleum Co. Inc., 6 Ark.App. 327, 641 S.W.2d 726, 727 (1982); Wilsonville Concrete Products v. Todd Bldg. Co., 281 Or. 345, 574 P.2d 1112, 1114-15 (1978). Of course, at no place in the letter "agreement" relied upon by Schlang does he agree, exclusively or otherwise, to purchase CPAP supplies from AMS.

It is true that NRS 104.2306(1) speaks in terms of "good faith" and reasonableness rather than requiring specified quantities in determining whether a valid requirements contract exists. It is also true that Official Comment 1 to UCC Section 2-306(1), the counterpart to NRS 104.2306(1), explains the section as follows:

1. Subsection (1) of this section, in regard to output and requirements, applies to this specific problem the general approach of this Act which requires the reading of commercial background and intent into the language of any agreement and demands good faith in the performance of that agreement....

Schlang suggests, based upon this statute and...