Averett v. Farmers Ins. Co. of Arizona

• Decision Date: 03 March 1994
• Docket Number: No. CV-92-0015-PR,CV-92-0015-PR
• Citation: 869 P.2d 505,177 Ariz. 531
• Parties: Ray Nielson AVERETT; Angela Marie Averett, an adult incapacitated, and Daniel Ray Averett, a minor, by and through their legal guardian and conservator, Eugene W. Averett, Plaintiffs/Appellants, v. FARMERS INSURANCE COMPANY OF ARIZONA; Truck Insurance Exchange Co., Defendants/Appellees.
• Court: Arizona Supreme Court

Page 505

869 P.2d 505

177 Ariz. 531

Ray Nielson AVERETT; Angela Marie Averett, an adult incapacitated, and Daniel Ray Averett, a minor, by and through their legal guardian and conservator, Eugene W. Averett, Plaintiffs/Appellants, v. FARMERS INSURANCE COMPANY OF ARIZONA; Truck Insurance Exchange Co., Defendants/Appellees.

No. CV-92-0015-PR.

Supreme Court of Arizona.

March 3, 1994.

[177 Ariz. 532] Poore & Riddle by J. Thomas Poore, Tucson, for plaintiffs/appellants.

Chandler, Tullar, Udall & Redhair by D.B. Udall, Tucson, for defendants/appellees.

OPINION

ZLAKET, Justice.

We accepted review of this case to examine the relationship between an insured's "reasonable expectations" of coverage and the "household exclusion" found in an automobile liability insurance policy. We have jurisdiction pursuant to Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

BACKGROUND

Angela and Daniel Averett were seriously injured while riding as passengers in the family automobile driven by their mother, Carol Averett. Carol died as a result of the accident, which the parties have stipulated was caused by her negligence.

Ray Averett, Carol's husband, made a claim for himself and his children against Farmers Insurance Company, which carried liability insurance on the automobile Carol was driving. Farmers, relying on its "household exclusion" and Arceneaux v. State Farm Mut. Auto. Ins. Co., 113 Ariz. 216, 550 P.2d 87 (1976), responded with an offer of $15,000 per child, even though the policy declarations recited bodily injury limits of $250,000 per person and $500,000 per occurrence, and the children's injuries admittedly exceeded those amounts.

In its insuring agreement, the Averett policy states that Farmers

will pay damages for which any insured person is legally liable because of bodily injury to any person ... arising out of the ... use of a private passenger car.

Although Ray Averett was designated as the named insured, it is undisputed that his wife also qualified as an "insured person" under the policy.

In a separate section entitled "Exclusions," the policy states:

This coverage does not apply to:

. . . . .

11. The liability of any insured person for bodily injury to you or a family member.

"Family member" is defined to include related persons who live in the named insured's household. Because Angela and Daniel were clearly family members under this definition, Farmers denied coverage for all sums over the statutorily required limits of $15,000 per person and $30,000 per occurrence. See A.R.S. § 28-1170.

Averett filed suit, seeking a judicial declaration that Farmers was obligated to pay the full amount of the policy limits notwithstanding the exclusion. The parties filed cross-motions for summary judgment. In denying Averett's motion and granting Farmers', the trial court cited Arceneaux for the proposition that "the household exclusion in the plaintiff's insurance policy is a valid exclusion after payment of the statutory limits." Although his order did not expressly say so, the judge obviously rejected the argument that Averett's reasonable expectations could render the exclusion unenforceable. The court of appeals affirmed by memorandum decision, with one judge dissenting.

DISCUSSION

It is well established that a contracting party's reasonable expectations may affect the enforceability of non-negotiated terms in a standardized agreement. See Broemmer v. Abortion Services of Phoenix, Ltd., 173 Ariz. 148, 151-52, 840 P.2d 1013, 1016-17 (1992); Darner Motor Sales v. Universal Underwriters, 140 Ariz. 383, 389-94, 682 P.2d 388, 394-99 (1984); Restatement (Second) of Contracts § 211 cmt. f (1981). Farmers argues, however, that because there is no evidence here that its agent made misleading statements or promises to induce Mr. Averett to purchase this policy, the law of reasonable expectations does not apply. We disagree. The absence of misrepresentation is not determinative. In State Farm Mut. Auto. Ins. Co. v. Bogart, 149 Ariz. 145, 151, 717 P.2d 449, 455 (1986), we said:

It is true that an oral representation contrary to the words in the written instrument may qualify as either a fraudulent or negligent misrepresentation, but Darner does not by its terms limit itself to misrepresentation actions. We decline the invitation to so limit the decision. The provision in the declaration page reflecting non-owned coverage in the amount of $300,000 certainly is an indication that the "dickered" or negotiated deal was the purchase of $300,000 in non-owned coverage. One of the basic principles which underlies Darner is simply that the language in the portion of the instrument that the customer is not ordinarily expected to read or understand ought not to be allowed to contradict the bargain made by the parties.

Farmers further suggests that our decision in Arceneaux validates its conduct here. Such an assertion misconstrues that case. With respect to coverages in excess of the statutorily required minimums, A.R.S. § 28-1170(G) and Arceneaux permit the adoption of contract terms that do not conform to the strict requirements of the financial responsibility laws. 113 Ariz. at 218, 550 P.2d at 89. This allowance does not necessarily mean, however, that all such terms are automatically valid and enforceable. See Do by Minker v. Farmers Ins. Co. of Arizona, 171 Ariz. 113, 116, 828 P.2d 1254, 1257 (Ct.App.1991). As with any agreement sought to be judicially enforced, the law of contracts must be applied in an attempt to discern and effectuate the parties' intentions. See Taylor v. State Farm Mut. Auto. Ins. Co., 175 Ariz. 148, 854 P.2d 1134 (1993). That body of law includes the rule of reasonable expectations. Thus, while the "household exclusion" may be enforceable in some circumstances, it may not be in others. In Gordinier v. Aetna Cas. & Sur. Co., 154 Ariz. 266, 272-73, 742 P.2d 277, 283-84 (1987), we stated:

As a synthesis of the cases and authorities demonstrates, Arizona courts will not enforce even unambiguous boilerplate terms in standardized insurance contracts in a limited variety of situations:

1. Where the contract terms, although not ambiguous to the court, cannot be understood by the reasonably intelligent consumer who might check on his or her rights, the court will interpret them in light of the objective, reasonable expectations of the average insured [citing State Farm Mutual Auto. Ins. Co. v. Bogart, 149 Ariz. 145, 717 P.2d 449 (1986) and Wainscott v. Ossenkop, 633 P.2d 237 (Alaska 1981) ];

2. Where the insured did not receive full and adequate notice of the term in question, and the provision is either unusual or unexpected, or one that emasculates apparent coverage [citing Zuckerman v. Transamerica Insurance Co., 133 Ariz. 139, 650 P.2d 441 (1982) ];

3. Where some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured [citing Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127 (1982) ];

4. Where some activity reasonably attributable to the insurer has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and unambiguously denied by the policy [citing Darner Motor Sales v. Universal...