Mcmullan v. Enter. Financial Group Inc.

• Decision Date: 31 January 2011
• Docket Number: No. 108,241.,108,241.
• Parties: Harry McMULLAN, III, Plaintiff/Petitioner,v.ENTERPRISE FINANCIAL GROUP, INC., Defendant/Respondent.
• Court: Oklahoma Supreme Court

247 P.3d 1173
2011 OK 7

Harry McMULLAN, III, Plaintiff/Petitioner,
v.
ENTERPRISE FINANCIAL GROUP, INC., Defendant/Respondent.

No. 108,241.

Supreme Court of Oklahoma.

Jan. 31, 2011.

[247 P.3d 1174]

CERTIORARI REVIEW OF A CERTIFIED INTERLOCUTORY ORDER FROM THE DISTRICT COURT OF OKLAHOMA COUNTY; Daniel L. Owens, Trial Judge¶ 0 The petitioner, Harry McMullan III (buyer), bought a used car and a vehicle service contract. Six months later, his car suffered a mechanical breakdown and he submitted a claim. After it was denied, he filed a lawsuit alleging that the provider, Enterprise Financial Group (provider), the respondent: 1) breached the service contract; 2) committed unfair and deceptive practices under the Oklahoma Service Warranty Insurance Act, 36 O.S.2001 § 6633; and 3) acted in bad faith. The respondent filed a motion for partial summary judgment, arguing that because the vehicle service contract was not an “insurance” contract, the petitioner could not assert a bad faith claim. The trial court granted partial summary judgment, and certified the interlocutory order for immediate appeal. We granted certiorari to address the first impression question of whether a vehicle service contract is an insurance contract subject to bad faith claims. We hold that a vehicle service contract meets the definition of an insurance contract.REVERSED AND REMANDED FOR FURTHER PROCEEDINGS.Murray E. Abowitz, Daniel C. Hays, Licensed Legal Intern, Oklahoma City, OK, for Plaintiff/Petitioner McMullan.Joe M. Hampton, Cara S. Nicklas, Oklahoma City, OK, for Defendant/Respondent Enterprise.KAUGER, J.:

¶ 1 We granted certiorari to address the first impression question of whether a vehicle service contract meets the definition of an insurance contract.¹ We hold that it does.

FACTS

¶ 2 On April 25, 2007, the plaintiff/petitioner, Henry McMullan, III (petitioner/buyer) purchased a 2004 Ford Mustang Cobra from a Hyundai dealership in Norman, Oklahoma. At the same time, he also purchased a vehicle service contract for $1800.00 from Enterprise Financial Group, Inc. (respondent/provider), a separate company. The service contract indemnified the buyer for certain repair costs if mechanical breakdowns occurred before 48 months or 50,000 miles, whichever happened first.

¶ 3 About six months after the service contract was purchased, the Mustang suffered a mechanical breakdown. The buyer submitted a claim to Enterprise, alleging that the breakdown was covered under the service contract, but it refused to pay the claim. On March 31, 2009, the buyer filed a lawsuit against Enterprise for breach of contract and bad faith breach of contract.² On February 19, 2010 Enterprise filed a motion for partial summary judgment arguing that the buyer was precluded from asserting a bad faith breach of contract claim because the service contract was not an insurance contract.

¶ 4 In an order filed April 5, 2010, the trial court granted the provider's motion for partial summary judgment finding that because the vehicle service contract was not an insurance contract, the provider was not subject to a bad faith breach of contract claim. This question of first impression was certified for immediate appeal to pursuant to 12 O.S.2001 § 952(b)(3). ³ We granted certiorari on June 7, 2010.

[247 P.3d 1175]

¶ 5 A VEHICLE SERVICE CONTRACT MEETS THE DEFINITION OF AN INSURANCE CONTRACT.

¶ 6 The petitioner relies on the public policy considerations of the Oklahoma Service Warranty Insurance Act, 36 O.S.2001 §§ 6601–6639, and the Oklahoma Insurance Code, 36 O.S.2001 § 1 et seq. to impose the duty of good faith. He argues that these statutes and the fact other jurisdictions have determined similar service contracts to be contracts of insurance support his argument that regardless of what these contracts are labeled, they are insurance contracts which may support a claim for bad faith breach. The provider counters that because vehicle service providers and insurance companies are regulated differently, and because the function and design of the service contracts resembles a warranty, a vehicle service contract does not resemble an insurance contract.

¶ 7 The Oklahoma Insurance Code (the Code), 36 O.S.2001 § 101 et seq. ⁴ defines insurance as “a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies.” ⁵ Insurers are defined as “every person engaged in the business of making contracts of insurance or indemnity.⁶” (Nonprofit hospital service and medical indemnity corporations are expressly included within the definition of insurer.⁷ Burial associations are expressly excluded from the definition of insurer.⁸ Service warranty providers, such as Enterprise, are not mentioned at all.) ⁹

¶ 8 “Indemnity” is not defined in the general provisions of the Code, but the Service Warranty Insurance Act,¹⁰ which is located therein, defines indemnity as undertaking repair or replacement of a consumer product. ¹¹ A consumer product is tangible personal property primarily used for personal purposes.¹² This portion of the Code also re-

[247 P.3d 1176]

defines insurers as any property or casualty insurer duly authorized to transact business in this state and service warranty associations as any person, other than an insurer, who issues service warranties.¹³ Service warranties are contracts between a consumer and a service warranty association in which agreements to indemnify against the cost of repair or a replacement of a consumer product is undertaken.¹⁴ Maintenance service

[247 P.3d 1177]

contracts which do not provide indemnification are expressly excluded from the definition of “service warranty.” ¹⁵

¶ 9 Neither the Act nor the Code expressly refers to service warranty agreements as insurance contracts, but the Act requires: 1) the state Insurance Commissioner to regulate both service warranty associations and insurance companies in a similar manner through licensing, collecting fees, etc.; ¹⁶ 2) the treatment of service warranty associations as insurers for service of process purposes; ¹⁷ and 3) to indemnity themselves of losses ¹⁸ by either maintaining a funded reserve account or obtaining liability insurance.¹⁹

[247 P.3d 1178]

¶ 10 Public policy reasons exist for legislatures to require a more extensive regulation of insurance companies than service warranty companies. For instance, although service warranty associations involve a risk of loss, they are not subject to risks as large as or at the same monetary level as insurance companies. Consequently, they are frequently subjected to much less stringent regulation than insurance companies.²⁰ Nevertheless, the extent of regulation is not what makes a service provider an “insurance company” nor is it what makes a service agreement an “insurance” contract.

¶ 11 The United States Supreme Court in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 210, 228, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), ²¹ in discussing whether a contract was merely an arrangement for the purchase of goods and services or whether it constituted “insurance,” said:

... The primary elements of an insurance contract are the spreading and underwriting of a policyholder's risk. “It is characteristic of insurance that a number of risks are accepted, some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it.... (Citations omitted.)

¶ 12 The Court, quoting Jordan v. Group Health Assn., 71 App. D.C. 38, 107 F.2d 239 (1939), also stated:

... Whether the contract is one of insurance or of indemnity there must be a risk of loss to which one party may be subjected by contingent or future events and an assumption of it by legally binding arrangement by another. Even the most loosely stated conceptions of insurance ... require these elements. Hazard is essential and equally so a shifting of its incidence ...

¶ 13 Vehicle service contracts are written like insurance policies. The obvious purpose of a vehicle service contract is to protect the purchaser from the expenses associated with an unexpected mechanical breakdown, or an expensive but necessary repair. The purchaser pays a premium and buys an agreement to shift any potential hazard they may face to the vehicle service provider. The vehicle service provider agrees to indemnify the consumer for mechanical repair costs. In other words, the consumer has purchased insurance—regardless of whether the vehicle service company is labeled as an insurance company and regardless of whether it labels its agreements insurance.

¶ 14 While many states have statutorily regulated service contract providers, relatively few courts have decided the issue of whether a vehicle service contract is insurance—and the courts that have are split on the issue. ²² One court has held that such

[247 P.3d 1179]

contracts did not “substantially amount to insurance” so that the provider would be subject to the same regulations as insurance. In Griffin Systems, Inc. v. Ohio Department of Insurance, 61 Ohio St.3d 552, 575 N.E.2d 803 (1991), the Ohio Supreme Court determined that such plans are warranties because:

1) A contract for insurance promises to cover losses or damages over and above, or unrelated to, defects with the product itself; and

2)The vehicle protection plan expressly excluded losses or damages sustained by the purchaser of the product which are unrelated to the product itself. ²³

¶ 15 However, the contrary view that vehicle service contracts should be treated as insurance is set forth in Jim Click Ford, Inc. v. City of Tucson, 154 Ariz. 48, 739 P.2d 1365, 1367 (1987). The question in Ford was whether service vehicle contracts were insurance and thus exempt from taxation under state tax statutes. In determining whether the service contracts were insurance, the court recognized five determinative elements of an insurance contract, including:

1. An...