American Service Mutual Insurance Company v. Bottum

• Citation: 371 F.2d 6
• Decision Date: 17 January 1967
• Docket Number: No. 18439.,18439.
• Parties: AMERICAN SERVICE MUTUAL INSURANCE COMPANY, a Corporation, Appellant, v. Joe BOTTUM, III, Special Administrator of the Estate of Walter William Schwantes, Deceased, Matthew Spirit Track, Marilyn Black Bonnett Roubideaux and Lumbermens Mutual Casualty Company, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

371 F.2d 6 (1967)

AMERICAN SERVICE MUTUAL INSURANCE COMPANY, a Corporation, Appellant, v. Joe BOTTUM, III, Special Administrator of the Estate of Walter William Schwantes, Deceased, Matthew Spirit Track, Marilyn Black Bonnett Roubideaux and Lumbermens Mutual Casualty Company, Appellees.

No. 18439.

United States Court of Appeals Eighth Circuit.

January 17, 1967.

COPYRIGHT MATERIAL OMITTED

Carleton R. Hoy, of Davenport, Evans, Hurwitz & Smith, Sioux Falls, S. D., for appellant.

Merle Johnson, of Woods, Fuller, Shultz & Smith, Sioux Falls, S. D., for Lumbermens Mut. Cas. Co.

Charles Poches, Jr., of Roubideaux, Poches & Reade, Fort Pierre, S. D., for Joe Bottum, III, and others.

Before MATTHES and LAY, Circuit Judges and HARPER, District Judge.

LAY, Circuit Judge.

This constitutes another of the multitude of declaratory actions under Tit. 28, U.S.C. § 2201, where an insurance company, after premium is paid, attempts to abort its policy when a loss occurs. The trial court found against the carrier and we must affirm.

One Serge Alvarez was issued an automobile liability policy by appellant, American Service, on November 18, 1963, while stationed in Memphis, Tennessee, with the military service. In March, 1964, Alvarez was transferred to El Toro, Santa Ana, California. When he arrived at El Toro, he notified his insurance company of the change of address. On March 18, 1964, an endorsement was added to the policy changing the address. On March 20, 1964, an identical endorsement was added reciting an additional premium and changing the principal place of garaging to read El Toro, Santa Ana, California.¹ Alvarez paid the added premium for continued coverage in California.

The original policy provided "this policy shall not be valid unless countersigned by a duly authorized representative of the company." Both endorsements merely recite that they have been countersigned by an authorized representative in Montgomery, Alabama. The policy covered a 1958 Oldsmobile which was loaned by Alvarez, the named assured, to a Robert Schwantes for the purpose of taking Schwantes' children from Santa Ana, California, to St. Paul, Minnesota. On June 2, 1964, during the return trip, the vehicle was involved in a collision in South Dakota. At the time of the accident, Robert Schwantes had given permission to his brother, Walter Schwantes, to drive the car. Walter Schwantes was killed. The personal injury claimants, appellees herein, brought personal injury suits against his estate.

American Service had the usual restricted clause in its policy which insured only those persons operating the Alvarez automobile with the "express permission" of the assured. American Service denied that Walter Schwantes was an insured under the policy since he did not have the "express permission" of Alvarez to drive the car.

The lower court made the following findings: (1) the law governing the construction of said contract and the obligations thereunder were to be determined by the law of the state of the forum, to-wit, South Dakota, citing Klaxon v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477; (2) under South Dakota law of conflict of laws a contract is to be construed in accordance with the law of the place where made; (3) the test of the place of the contract is where the last act is done necessary to give the contract validity, citing Briggs v. United Services Life Insurance Co., 80 S.D. 26, 117 N.W.2d 804 (1962); (4) California was the place where the last act was done, to-wit, adding of the endorsement; (5) in addition, California has the most significant contacts in relationship with the contract;² (6) Walter Schwantes did not have the "express permission" of the assured to drive the car; (7) however, Walter Schwantes had the "implied permission" of the assured under the California omnibus statute, which controlled the policy.

The lower court properly denied American Service any relief from its obligations under the contract.

American Service on appeal asserts (1) Alabama law applies under South Dakota's conflict of laws since the last act necessary to give the contract validity was countersignature by the company's agent in Alabama; (2) there was not a new contract to change the place of contract from the original issuance in Tennessee, therefore, alternatively, Tennessee law applies; (3) the California omnibus statute does not have extra territorial effect in South Dakota; and (4) California law requires policy certification before the omnibus clause is applicable.

An obvious novation occurred at the time the endorsement was issued showing the assured had changed his principal place of garaging the vehicle to California.³ The circumstances necessitating the increased premium involved, although extending the same financial limits of coverage to the named insured, reflected an additional risk to the insurer. The policy did not provide for any rate adjustment⁴ or any subsequent adjustment in performance on the part of both parties. Appellant could not compel the insured under the terms of the contract to respond to an increase in premium. Yet, an additional risk was being created by the assured moving into a new rate area and undoubtedly, if the additional premium had not been paid, cancellation would have resulted. Under the law of novation, a party who gains additional consideration in exchange for a new risk or obligation cannot effectively assert the contract as being simply extended.⁵ Inherent in such rate increase is the underwriting experience of not only the larger traffic volume, the greater probability of accident or risk, but indirectly the broader insurance coverage required of automobile insurers issuing policies within the State of California.⁶ California had a general omnibus statute in effect⁷ at the time the policy endorsements were issued to Alvarez in California.

The trial court relied on the rule in Briggs v. United Services Life Ins. Co., supra, where the court said:

"A contract must be construed in accordance with the law of the place where made unless it is shown that it was the intention of the parties to be bound by the law in some other place.⁸ * * * The test of the place of a contract is the place where the last act is done by either of the parties which is necessary to complete the contract and give it validity." (Emphasis supplied) 117 N.W.2d at 807.

Appellant argues the last necessary act to give validity to the endorsement was the countersignature by the company in Alabama. The lower court found the last act was "the endorsement dated March 20, 1964" added in California. We submit, however, under this rule the determinative factor is the last act to give "validity" to the endorsement, not the endorsement itself.

However, in the application of the "last act" test neglected is the basic law of South Dakota under either the Briggs case or the statute. The conflict of law rule only becomes operable when the law of the state intended by the parties is not otherwise expressed or implied in the contract. Judge Donovan in Travelers Ins. Co. v. American Fidelity & Cas. Co., D.C. Minn., D.C., 164 F.Supp. 393, faced with a similar question under Minnesota law, stated:

"The intention of the parties as to which law shall govern their contract is, ordinarily, decisive, the conflict of laws rules in this regard being, for the most part, presumptions employed where a clear expression of intention is lacking."⁹ 164 F.Supp. at 398.

In the present instance, the intention to apply California law is clear. The increased premium reflecting California rates, the total circumstances surrounding the issuing of the endorsement in California, the parties agreeing upon California being the new place of garaging the vehicle, and implicit therein, the principal use of the car to be in California, are all clear manifestations of intent.¹⁰ This is the only natural and logical consequence of such action. There can be no ambiguity or doubt as to what was intended under the circumstances.

The instant case readily demonstrates perfunctory reliance on the place of countersignature can be misleading as an aid in determining which law applies. This record is silent as to the mechanics of the countersignature appearing on the policy. Most "countersignatures" originate in gross at the companies' printing presses before an individual policyholder has even considered purchasing a contract. Whether we view the effect of this signature from a legal or a factual point of view such a rule gives strength to a conceptualistic formal requirement, allowing little consideration of the parties true intent or other logical bases to apply the law of a place which has a substantial relationship to the contract. Insurance contracts are prime examples of "contracts of adhesion" where the customer is required to "adhere" to the standard contract form. Insurers, due to their greater bargaining position, should not be allowed to use this as a wholesale method for controlling applicable law. Consideration should be given all circumstances involved before placing much emphasis on formalistic ritual. See Standard Oil Company of California v. Perkins, 9 Cir., 347 F.2d 379; Osborn v. Boeing Airplane Company, 9 Cir., 309 F.2d 99; Steven v. Fidelity and Casualty Co. of New York, 58 Cal.2d 862, 27 Cal.Rptr. 172, 377 P.2d 284; Neal v. State Farm Ins. Companies, 188 Cal.App.2d 690, 10 Cal.Rptr. 781; Bekken v. Equitable Life Assurance Society, 70 N.D. 122, 293 N.W. 200; Kessler, Contracts of Adhesion — Some Thoughts About Freedom of Contract, 43 Col.L.Rev. 629; Ehrenzweig, Adhesion Contracts in the Conflict of Laws, 53 Col.L.Rev. 1072.

California passed a general omnibus statute in 1963. Prior to the passage of this act, California courts applied a similar law, still included in their Financial Responsibility Act, as a matter of public policy, to every automobile policy written in the State, whether certified or not. See, e. g., Wildman...