Delk v. Markel American Ins. Co., 99,117.

• Decision Date: 21 October 2003
• Docket Number: No. 99,117.,99,117.
• Parties: Debra DELK, Plaintiff, v. MARKEL AMERICAN INSURANCE COMPANY, a Virginia Corporation, Defendant.
• Court: Oklahoma Supreme Court

81 P.3d 629

2003 OK 88

Debra DELK, Plaintiff, v. MARKEL AMERICAN INSURANCE COMPANY, a Virginia Corporation, Defendant.

No. 99,117.

Supreme Court of Oklahoma.

October 21, 2003.

Rehearing Denied December 15, 2003.

Peter J. Ram and James A. Belote, Stipe Law Firm, Oklahoma City, OK, for plaintiff.

Bruce V. Winston, Walker, Ferguson & Ferguson, Oklahoma City, OK, for defendant.¹

OPALA, V.C.J.

¶ 1 The United States District Court for the Western District of Oklahoma (certifying court) certified a question of law pursuant to the Revised Uniform Certification of Questions of Law Act, 20 O.S.2001 § 1601 et seq.² We have reformulated the question as authorized by § 1602.1of the Act.³ We answer the following reformulated question:

May an insured cotenant who occupies the insured property as her home and who has insured the property for its full value recover (within the policy limits) more than the value of her fractional legal interest in the property?⁴

We answer this reformulated question in the affirmative.

I THE ANATOMY OF FEDERAL LITIGATION⁵

¶ 2 In April 1998 James Delk executed a warranty deed conveying equal fractional interests in his residence to six of his relatives, including his daughter, Debra Delk (plaintiff or Delk). The other five cotenants named in the deed are plaintiff's adult son, John, his minor children, Julian and Cheyenne Delk, plaintiff's minor son, Tanner Mabry, and plaintiff's adult nephew, Cody Delk. Plaintiff lived in the home with John and his family until it was destroyed by fire in September 2001.

¶ 3 Markel American Insurance Company (defendant) in May 1999 issued to plaintiff as the sole named insured a homeowner's policy covering the residence. The application did not ask plaintiff about the nature or extent of her legal title. Plaintiff contends that she informed defendant she was taking over as policyholder from her father and that she would be making the premium payments. Plaintiff renewed the policy on a yearly basis at an annual premium of $786.00. The policy was in force and effect when the house was destroyed by fire. The policy limits for dwelling coverage stand at $104,000.00.⁶ The policy at issue is the only property insurance covering the home. Plaintiff alone paid the annual premiums. She and her adult son, John, contend they had an understanding that plaintiff would obtain insurance on the home and that she alone would be entitled to any proceeds recovered in the event of an insured loss.

¶ 4 When the home was destroyed by fire in September 2001, plaintiff made a claim under the policy for the amount of the policy's dwelling coverage limits. Defendant learned while investigating the claim that plaintiff owned only a one-sixth interest in the insured property. Defendant then denied plaintiff's claim as to all but one-sixth of the policy limits on the grounds that her insurable interest—and hence the insurer's indemnification duty—was limited to plaintiff's fractional share of the property's ownership.

¶ 5 Plaintiff then brought this action against defendant in the United States District Court for the Western District of Oklahoma for breach of contract and breach of the insurer's implied duty of good faith and fair dealing. Both parties moved for summary judgment.⁷ Unable to determine how Oklahoma law would quantify plaintiff's insurable interest in the home, the federal district court judge submitted to this court the certified question of law which we answer today as reformulated.

II THE NATURE OF THE COURT'S FUNCTION WHEN ANSWERING QUESTIONS FROM A FEDERAL COURT

¶ 6 In answering questions posed by a federal court, the parameters of state-law claims or defenses identified by the submitted questions may be tested, but it is not this court's office to intrude (by its responses) upon the certifying court's decision-making process.⁸ The latter must be left entirely free to assess the impact of our answers and then make its own appraisal of the proof in the case before it.⁹

¶ 7 Because this case is not before us for decision, we refrain (as we must) from applying the declared state-law responses to the facts in the federal-court litigation, which have been tendered for review by the certifying court either in the form of evidence adduced at trial or by acceptable probative substitutes (so-called "evidentiary materials").¹⁰ The task of analyzing today's answer for its application to this case is deferred in its entirety to the certifying court.

III THE PURPOSE OF THE INSURABLE INTEREST REQUIREMENT AND THE GUIDING PRINCIPLE BEHIND ITS IMPLEMENTATION IN OKLAHOMA

¶ 8 An insurance contract is valid and enforceable only to the extent that the insured has an insurable interest in the subject matter of the policy.¹¹ This requirement has long been a part of Oklahoma's common law¹² and also stands today as a statutory prerequisite for the validity of an insurance contract.¹³ The pertinent subsection of 36 O.S.2001 § 3605 states: "No insurance contract on property or of any interest therein or arising therefrom shall be enforceable as to the insurance except for the benefit of persons having an insurable interest in the things insured."¹⁴ The insurance policy at issue in this case also contains a provision limiting defendant's liability to the insurable interest an insured person has in property covered by the policy.¹⁵

¶ 9 An insurable interest is the relationship or connection a person must have with the subject matter of an insurance policy in order to insure it. The insurable interest doctrine developed over the course of several centuries in response to certain public policy concerns related to insurance. The foremost historical justification for the insurable interest requirement¹⁶ was to prohibit wagering contracts in the guise of insurance.¹⁷ Odd as it may strike us today, insurance as an instrument of wagering was a common and accepted practice in mid-eighteenth century England.¹⁸ Parliament, responding to the pernicious effects of this practice,¹⁹ passed a series of statutes beginning in the middle of the eighteenth century requiring as a prerequisite for the validity and enforceability of an insurance contract that the insured have an interest in the contract's subject matter.²⁰ While the historical anti-wagering foundation of the insurable interest doctrine remains valid, other public policy objectives have greater resonance today.²¹ The distinction between wagering and insurance is now so firmly established in public perception,²² that the justification for the insurable interest doctrine is more readily apprehended today as the prevention of unproductive and wasteful commercial transactions,²³ the limitation of insurance to true indemnity,²⁴ and the deterrence of the fraudulent destruction of insured property.²⁵

¶ 10 The doctrine of insurable interest initially entered American jurisprudence by way of decisional law, but many jurisdictions have over the years enacted insurable interest statutes. While American jurisdictions generally agree on the necessity of an insurable interest, they are divided on what constitutes such an interest. The nature of the interest that qualifies as insurable has changed over time and is gradually broadening.²⁶ Two competing theories have evolved for measuring the nexus which must be present between the property and its insured for an insurable interest to attach. The literature refers to one of these as the "legal interest" theory²⁷ and to the other as the "factual expectation" theory.²⁸

¶ 11 In Snethen v. Oklahoma State Union of the Farmers Educational and Cooperative Union of America,²⁹ we adopted the factual expectation theory of insurable interest.³⁰ Under this theory there is an insurable interest in property if the insured would gain some economic advantage by its continued existence or would suffer some economic detriment in case of its loss or destruction.³¹ This is also the theory espoused by the provisions of 36 O.S.2001 § 3605.B., which define insurable interest as: "any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment."³²Snethen held that the word "lawful" as used in § 3605.B. is not synonymous with the word "legal" and does not require the application of the legal interest theory, but is merely used in the sense that the interest was not acquired in violation of the law.³³

¶ 12 The purpose of the insurable interest requirement must stand at the center of any analysis of the doctrine's application. This is so whether the inquiry concerns the complete presence or absence of an insurable interest or whether, as here, it concerns the extent or measure of an insurable interest. Judicial consideration must be given to whether the contract suggests an element of wager on the part of the insured, i.e. whether it appears that the insured was betting on the loss of property with which he (or she) had little or no connection. The court must also consider whether recovery by the insured would exceed the loss actually suffered, thereby providing motivation for destroying the property. The insurable interest requirement should not be extended beyond the reasons for its existence by an overly technical construction that frustrates the legitimate expectations of the insured or that permits an insurer to avoid the very risk it intended to insure. With these considerations in mind, we address the extent of this plaintiff's insurable interest under Oklahoma law.

IV THE INSURABLE INTEREST OF A COTENANT IN POSSESSION MAY EXCEED THE QUANTUM OF HIS (OR HER) FRACTIONAL LEGAL ESTATE IN THE COTENANCY PROPERTY WHERE THE INSURING COTENANT ACTS AS THE MANAGING AGENT FOR THE JOINT OWNERS³⁴

¶ 13 Defendant invokes the oft-repeated statement that a cotenant's insurable interest is limited to his (or her) interest in the property.³⁵ While we agree with this as a general proposition, we note that it is...