Max True Plastering Co. v. U.S. Fidelity and Guar. Co., 85860

CourtSupreme Court of Oklahoma
Citation912 P.2d 861,1996 OK 28
Docket NumberNo. 85860,85860
PartiesMAX TRUE PLASTERING COMPANY, Plaintiff, v. UNITED STATES FIDELITY AND GUARANTY COMPANY, Defendant/Third Party Plaintiff, v. BOB H. JOHNSON AGENCY and Jeff R. Johnson, Third Party Defendants.
Decision Date27 February 1996

Joseph R. Farris, Jerry Reed, Judy R. Nathan, Tulsa, for Plaintiff, Max True Plastering Company.

Robert L. Magrini, John B. Hayes, Oklahoma City, for Defendant/Third Party Plaintiff, United States Fidelity & Guaranty Company.

Scott D. Cannon, Tulsa, for Third Party Defendants, Bob H. Johnson Agency and Jeff R. Johnson.

KAUGER, Vice Chief Judge.

Two issues are presented by the questions certified: 1 1) whether the doctrine of reasonable expectations applies to the construction of insurance contracts in Oklahoma; and 2) what circumstances give rise to the doctrine's operation. Under the reasonable expectations doctrine, the objectively reasonable expectations of applicants, insureds and intended beneficiaries concerning the terms of insurance contracts are honored even though painstaking study of the policy provisions might have negated those expectations. 2

2 We find that the reasonable expectations doctrine may apply to the construction of ambiguous insurance contracts or to contracts containing exclusions which are masked by technical or obscure language or which are hidden in policy provisions.


The third-party defendant, Jeff R. Johnson (Johnson/agent), sold a fidelity bond to the plaintiff, Max True Plastering Company (True/insured), insuring True for some losses arising from employee dishonesty. 3 The bond was purchased from the defendant, United States Fidelity and Guaranty Company (USF & G/insurer).

In the summer of 1991, True discovered that employees 4 in his Dallas office had formed a corporation, LCR, Inc. (LCR), and that they were diverting True business to it. True filed suit against LCR and the employees in October of 1991. The following June, True wrote the agent notifying him of losses from employee dishonesty; and he claimed coverage under the USF & G policy. USF & G denied coverage on August 16, 1993, asserting that True had not complied with the policy's notice and proof of loss requirements and that losses of intellectual property, such as the diversion of job opportunities and lost profits, were not covered by the policy.

True filed suit against USF & G to recover under the policy on August 30, 1993. True contended that coverage existed either under the express terms of the policy or that he was insured because of his reasonable expectations that the losses were covered. On July 28, 1994, USF & G filed a third-party petition against Johnson and his agency 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 on December 9th claiming coverage either under the plain reading of the policy or pursuant to his reasonable expectations. Finding no Oklahoma precedent to resolve the questions of law, the trial court certified two questions to this Court pursuant to the Uniform Certification of Questions of Law Act, 20 O.S.1991 § 1601 et seq., on July 14, 1995. We set a briefing cycle which was completed when the final reply brief was filed on October 30, 1995.




True argues that although this Court has not expressly adopted the reasonable expectations doctrine, many of the principles applied in Oklahoma to the construction of insurance contracts conform to the spirit of the doctrine. It urges us to join the majority 5 of jurisdictions which have considered An adhesion contract is a standardized contract prepared entirely by one party to the transaction for the acceptance of the other. These contracts, because of the disparity in bargaining power between the draftsman and the second party, must be accepted or rejected on a "take it or leave it" basis without opportunity for bargaining--the services contracted for cannot be obtained except by acquiescing to the form agreement. 7 Insurance contracts are contracts of adhesion because of the uneven bargaining positions of the parties. 8 The doctrine of reasonable expectations has evolved as an interpretative tool to aid courts in discerning the intention of the parties bound by adhesion contracts. 9 It developed in part because established equitable doctrines were inadequate, 10 and it takes into account the realities of present day commercial practice. 11

the doctrine by recognizing it as part of Oklahoma law. USF & G and Johnson insist that insureds are adequately protected by existing principles applied to the construction of insurance contracts and they contend that those courts which have rejected the doctrine 6 offer the better reasoned opinions.

Under the doctrine, if the insurer or its agent creates a reasonable expectation of coverage in the insured which is not supported by policy language, the expectation will prevail over the language of the policy. 12 Of the thirty-six jurisdictions which have addressed the reasonable expectations doctrine, our research reveals only four courts which have rejected the rule. Although the Utah court recognized its duty to invalidate insurance provisions contrary to public policy, it refused to adopt the doctrine on the basis that its operation is not well-defined, and its deference to the occupation of the insurance field by the legislative and the executive branches. 27 The three other courts rejected the doctrine in favor of traditional construction guidelines relating to insurance contracts. 28

The doctrine does not negate the importance of policy language. Rather, it is justified by the underlying principle that generally the language of the policy will provide the best indication of the parties' reasonable expectations. 13 The standard under the doctrine is a "reasonable expectation"; 14 and courts must examine the policy language objectively to determine whether an insured could reasonably have expected coverage. 15 Courts adopting the reasonable expectations doctrine have found its rationale for interpretation of the usual insurance contract to be sensible. 16 They also recognize that insurance law is the basis of the doctrine. 17 These courts acknowledge that different rules of construction have traditionally been applied to insurance contracts because of their adhesive nature. 18 Tribunals embracing the doctrine recognize that it is consistent with numerous other interpretive rules pertaining to adhesion contracts. 19 Many of these rules are a part of Oklahoma law. For instance: 1) ambiguities are construed most strongly against the insurer; 20 2) in cases of doubt, words of inclusion are liberally applied in favor of the insured and words of exclusion are strictly construed against the insurer; 21 3) an interpretation which makes a contract fair and reasonable is selected over that which yields a harsh or unreasonable result; 22 4) insurance contracts are construed to give effect to the parties' intentions; 23 5) the scope of an agreement is not determined in a vacuum, but instead with reference to extrinsic circumstances; 24 and 6) words are given effect according to their ordinary or popular meaning. 25 Nevertheless, these rules of construction are often inadequate because they may fail to recognize the realities of the insurance business and the methods used in modern insurance practice. 26

Although the reasonable expectations doctrine has not been adopted per se in Oklahoma, several cases indicate that the reasonable expectations of an insured will be considered in the construction of insurance contracts. In Homestead Fire Ins. Co. v. De Witt, 206 Okla. 570, 245 P.2d 92, 94 (1952), this Court quoted from Bird v. St. Paul Fire & Marine Ins. Co., 224 N.Y. 47, 120 N.E. 86-87, 13 A.L.R. 875 (1918) referring to the construction of an insurance policy:

"Our guide is the reasonable expectation and purpose of the ordinary business man making an ordinary business contract. It is his intention, expressed or fairly to be inferred, that counts." (Emphasis supplied.)

In Conner v. Transamerica Ins. Co., 496 P.2d 770, 774 (Okla.1972), we held that the insurer was obligated to defend its insureds in actions involving dishonest, fraudulent, criminal and malicious conduct or omissions. The Court's holding in Conner was buttressed by a quotation from Gray v. Zurich Ins. Co., 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168 (1966) providing in pertinent part:

"... This language, in its broad sweep, would lead the insured reasonably to expect defense of any suit regardless of merit or cause.... The basic promise would support the insured's reasonable expectation that he had bought the rendition of legal services to defend against a suit for bodily injury which alleged he had caused it, negligently, nonintentionally, intentionally or in any other manner ..." (Emphasis supplied.)

The Conner Court acknowledged that the views expressed in Gray comported with the rules established in Oklahoma for interpretation of insurance contracts.

The reasonable expectation doctrine is a double-edged sword--both parties to the insurance contract may rely upon their reasonable expectations. We refused to extend a homeowner's policy to provide coverage for negligent supervision or failure to control in Phillips v. Estate of Greenfield, 859 P.2d 1101, 1106 (Okla.1993). The rationale for denying coverage was based upon our belief that to do so would "negate the reasonable expectations of the parties as expressed in their contract."

In a series of cases involving the stacking of uninsured motorist coverage, we have relied on the reasonable expectations of the...

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