State Farm Mut. Auto. Ins. Co. v. Farmers Ins. Exchange

• Decision Date: 18 December 1963
• Citation: 238 Or. 285,387 P.2d 825
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and O. A. Sjolund, Respondents, v. FARMERS INSURANCE EXCHANGE, Appellant.
• Court: Oregon Supreme Court

Page 825

387 P.2d 825

238 Or. 285

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY and O. A.

Sjolund, Respondents, v. FARMERS INSURANCE EXCHANGE, Appellant.

Supreme Court of Oregon, In Banc.

Argued and Submitted March 7, 1963.

Reargued Sept. 9, 1963.

Decided Dec. 18, 1963.

Myron L. Enfield and Geo. A. Rhoten, Salem, argued the cause for appellant. With them on the briefs were Rhoten, Rhoten & Speerstra, Salem.

Alfred J. Laue, Salem, argued the cause for respondents. With him on the brief were Williams & Skopil, Salem.

Before McALLISTER, C. J., and ROSSMAN, PERRY, SLOAN, O'CONNELL, GOODWIN and DENECKE, JJ.

DENECKE, Justice.

The question for decision is whether or not the defendant insurer used due diligence to secure the cooperation of its insured to assist in the defense of an action for damages.

The defendant, hereinafter referred to as Farmers, wrote an automobile liability policy for one Ratzlaff. During the policy period Ratzlaff had a collision with one of the plaintiffs, Sjolund. Sjolund carried collision insurance with the plaintiff insurance company, hereinafter called State Farm. After State Farm paid Sjolund for the damages to his automobile, less the deductible, Sjolund and State Farm brought an action against Ratzlaff for the damage done to Sjolund's vehicle. This action was tried and resulted in a judgment for the plaintiffs.

Such judgment was not satisfied and plaintiffs brought this suit against Farmers, as the liability insurance carrier of Ratzlaff. The suit was brought pursuant to ORS 736.320, which authorizes a suit against an insurer if a judgment against an assured is not satisfied within 30 days of the rendering of the judgment. Farmers alleged as an affirmative defense that it had no obligation under its policy because Ratzlaff had breached the terms of the policy by failure to cooperate in the defense of the damage action in that he failed to appear at the trial. The trial court entered a decree for the plaintiffs.

Failure to attend trial is usually deemed noncooperation on the insured's part. See cases collected at 60 A.L.R.2d 1146 (1958). The usual question, and the question here, is whether the insurer used due diligence to secure the attendance of the insured. In Johnson v. Doughty, Or., 385 P.2d 760 (1963), we stated our accord with the general rule that an insurer must use due diligence to secure the cooperation of its insured. We held in that case that the insurer had not used due diligence to secure its insured's cooperation. In the Johnson case there had been no communication between the insurer and the insured about any matter at any time. It was found that the only letter sent by the insurer to the insured had been sent to an address known to be incorrect.

The facts in this case are not as one-sided. On September 11, 1959, a copy of the answer in the damage action was sent to Ratzlaff at his address in Eureka, California, where he had lived for sometime. An acknowledgment was requested, but none was received. The trial of State Farm and Sjolund against Ratzlaff was set for February 2, 1960, at Dallas, Oregon. On November 30, 1959, the attorneys appearing for Ratzlaff wrote Ratzlaff notifying him of the trial date and requesting him to acknowledge receipt of this notice. The letter was addressed to the same address in Eureka. No acknowledgment was received. On January 14, 1960, Farmers sent a letter to Ratzlaff by certified mail again notifying him of the trial date, stating the necessity for him to be present at the trial and offering to reimburse him for any expenses incurred in attending the trial, including loss of wages. An acknowledgment was again requested, but again none was received. Ratzlaff did not appear at the trial or notify Farmers that he was not going to appear. Ratzlaff's attorneys moved for a continuance upon the ground that Ratzlaff was not present. Their motion was denied, and the attorneys continued to represent Ratzlaff at the trial.

The cooperation clause in the policy issued to Ratzlaff was as follows:

'The insured shall cooperate with the Exchange and, upon the Exchange's request, shall attend hearings and trials and shall assist in affecting settlement, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suit.'

If this were an ordinary commercial bilateral contract between two parties for whom a continous relationship during the term of thier agreement was mutually advantageous, Ratzlaff probably would be held to have breached his contractual duty. If a party to an ordinary contract is notified by mail that, under the terms of the contract, he is now required to perform an obligation assumed by him in the contract, such notifcation is usually sufficient. A failure to perform after such notification would amount to a breach of the contract unless some legal excuse for nonperformance is shown. The party whose performance was not forthcoming would have the burden of explaining his default. The presumption would arise that a letter duly directed and mailed to the adcressee at his last known address was received by him. ORS 41.360(24).

Notification by mail to the insured in an automobile liability insurance contract that he must now perform a duty he undertook by contract may not be sufficient.

The motivation of an insurer and an insured may be very different from the motivation of the parties to the usual contract. In the usual contract it is to the promisee's benefit and advantage to have the promisor perform his contractual duties. If there is any indication that the promisor is not going to perform, the promisee will exert great effort to secure performance. If performance is not secured, the benefit the promisee hoped to gain from entering into the contract is lost. There is no need to impose a legal duty on the promisee to use diligence to secure the promisor's performance; the economics of the bargain provide ample incentive. The only legal duty that must be inferred, if it is not expressed in the contract, is the duty to notify the promisor that the contractual prerequisites upon which his performance was conditioned have now occurred.

In an insurance contract the benefit to the promisee, the insurer, may be gained in exactly the opposite manner from that existent in the usual contract, i. e., the insurer benefits if the promisor fails to perform. If the promisor, the insured, fails to perform his duty to cooperate, the promisee gains the ultimate benefit; it does not have to pay a loss. There is no economic incentive for the insurer to expend any effort to secure the insured's performance.

The promisor-insured's motivation may also be very different from that of the usual contractual promisor. The usual promisor hopes to gain a benefit or avoid a detriment by performing. Again, the economics of the bargain usually provide enough incentive to guarantee performance and, if this is insufficient, the financial consequences of a breach of contract supply an additional goad.

This motivation is usually wholly lacking when difficulty is encountered in securing the cooperation of an insured. Insureds, when uncooperative, usually become so because they cannot see how their cooperation would benefit either themselves or their insurance company. If the insured was a witness to the accident and believes that on trial he will be found to be at fault, he may see no reason why he should be at the trial. If he was not a witness to the accident, he likewise may see no reason why he should be at the trial. Regardless of his attitude about the above matters, if the insured is judgment proof, he may see no pecuniary benefit accruing to him from attending the trial. The type of person most likely to be indifferent to his duties under the insurance contract is frequently the type of person least likely to be concerned about a judgment being obtained against him.

This situation presents the temptation and the opportunity to the insurer to create a defense to what otherwise would be an indefensible claim, particularly when the insured is believed to reside some distance away from the place of trial. The disinterested attitude of the insured becomes known to the claims man handling the claim. (This was obvious here as the insured on two occasions failed to notify the insurer of the service of summons on him in this action until long after service.) The claims man forms the opinion that this particular defendant may not respond to impersonal, routine communications such as by letter. The insured may not respond to a personal urging by a representative of the insurer either, but if the law does not require some degree of diligence, the insurer has no incentive to do more than 'go through the motions.' If the insurer sends a letter to the insured notifying him of the trial date, and the insured does not appear, what initially may have appeared to be a case involving a certain loss to the insurer in some amount conveniently turns into a case with an air-tight defense.

We are not inferring that the insurance industry makes this a trade practice. The fact that this appeal and Johnson v. Doughty, supra, are the first two cases in this court involving this problem is proof it does not. However, the temptation and opportunity inherent in this situation is a factor to be considered in determining the scope of the duty to use due diligence.

If a situation of the kind described only involved the loss by an insured of the indemnity he purchased under his insurance contract, the possibility envisioned above would not concern us. As noted, the typical uncooperative insured is judgment proof. Indemnity is only of academic concern in such cases. However, while such an insured is nominally the important party, he has no real interest in the outcome; the injured party has the real interest. The injured party is at law only a subrogee of the insured, but in the usual noncooperation case the injured party has the...