Abstract of First-Party Insurance Law
By Kenneth Elliott

The law interpreting these policies addresses an array of issues and circumstances such as waiver and estoppel, insurable interest, insurance fraud, policy exclusions and the rights of the mortgagee. This article is an overview of some of the legal and factual considerations that arise from such policies.

POLICY CONSTRUCTION

The Statutory Fire Policy

The basic provisions of the fire insurance policy in Oklahoma are statutory. The provisions may be found at 36 O.S. § 4803, which is derived from the New York statutory fire policy. The provisions in the statute, if not specifically included in the policy contract, are included by implication.1 An insurer may, of course, add other perils or coverages to the fire policy. The provisions of the statutory fire policy may be amended or altered by an insurer so as to expand coverage, but not to restrict coverage.

One advantage of the statutory language is that it is similar to the language in statutory fire policies in many other states and the basic terms, conditions and legal tenets arising from the provisions (statute of limitations, waiver, examination under oath, misrepresentation, mortgagee rights) have received significant judicial attention.

Reasonable Expectation Doctrine

The Supreme Court has adopted the “reasonable expectation doctrine” as it relates to policy interpretation. Under this doctrine, if the insurer or the agent creates a reasonable expectation of coverage on the part of the insured, even though not supported by the policy language, the insured’s expectation will prevail over the policy language. In Max True Plastering Co. v. U.S. Fidelity and Guar. Co.2 the court, while recognizing that provisions of the policy that are “clearly and definitely set forth in appropriate language, and upon which calculations of the company are based, should be maintained unimpaired... ,” held that the doctrine of reasonable expectations may be applied to “ambiguous contract language or to exclusions which are masked by technical or obscure language or which are hidden in the policy provisions.”

In Simpson v. Farmers Insurance Co.3 the court observed that it would not apply the doctrine to language that was not ambiguous, hidden or masked by technical or obscure language.

Waiver and Estoppel

An insurer may waive the provisions of an insurance policy. It must be remembered that although an insurer may by its conduct be estopped in denying coverage for a risk which the insured had been led to believe was covered, the doctrine of estoppel cannot be invoked to broaden coverage of the policy so as to bring within its protection risks that are not included under the terms of the policy. Illustrative of this principle is Western Ins. Co. v. Cimarron Pipe Line Const. Inc.,4 where the insured sought coverage for physical injury and property damage for work it had completed. The policy contained a completed operations exclusion. The insured argued estoppel, claiming the policy writing agent had told him he thought the policy provided such coverage. The court refused to apply the doctrine of estoppel to bring within the terms of the policy coverage which was specifically excluded.

In contrast is Pendleton v. Pan American Fire and Casualty Co.,5 where the insurer was estopped from denying coverage after defending the insured for a loss without issuing a reservation of rights.6

There are certain claim activities that are deemed not to be a waiver by statute. Title 36 O.S. § 3630 states that the acknowledgment of receipt of a notice of loss, furnishing a proof of loss for a claim, investigating a loss or claim or engaging in any negotiations toward a possible settlement of a loss or claim is deemed not to constitute a waiver of any provision of a policy or of any defense of the insurer.

POLICY DEFENSES

Insurable Interest

The requirement that the insured have an insurable interest in the subject of the policy is statutory in Oklahoma. See 36 O.S. § 3605.

The Oklahoma Supreme Court has adopted the “factual expectations test” to determine if insurable interest exists. Under this test, insurable interest exists if the insured would gain some economic advantage by the property’s continued existence or if the insured would suffer some economic detriment in case of the loss or destruction of the property.7 Under this test, the lack of legal title does not defeat the requirement of insurable interest. In Conti v. Republic Underwriters Ins. Co.8 the court held that a son having possession and beneficial use of property had an insurable interest even though the property was in his father’s name. The court has also held that a co-tenant who is liable to other co-tenants for damage to or destruction of the common property has an insurable interest to the extent of his potential legal liability.9

The court has held an obligation on a note secured by the insured property creates an insurable interest to the extent of the mortgage debt. In Johnson v. Allstate Ins. Co.10 the insured deeded the insured property to her husband and relinquished possession, but her name remained on the mortgage. The court held that she had an insurable interest to the extent of the balance owed on the note. In Snethen, supra, a good faith purchaser of a stolen vehicle had an insurable interest because possession of the vehicle was “lawful” although not “legal.”

Statute of Limitations

The statutory fire policy includes a one-year period of limitations. With respect to the peril of fire, this limitation has been upheld.11 In Walton v. Colonial Penn. Ins. Co.12 the one-year period survived a constitutional challenge.13

The statute of limitations begins to run from the date of the loss. The statutory period of limitations may be waived by the insurer’s conduct of continued negotiations which lulls the insured into believing the claim may be paid. See, e.g., Insurance Co. of North America v. Board of Education14 (where the denial of the claim is not made in sufficient time so as to allow the insured to file suit within the one year period of limitations, the period is deemed waived).15

The one-year statute of limitations does not apply to all risks afforded by the multi-peril policy. In Wagnon v. State Farm Fire and Casualty16 the court held that theft coverage in a homeowner’s policy fell within the definition of casualty coverage under 36 O.S. §707 and was not subject to the one-year period of limitations. The court did not define the statute of limitations for theft coverage.

Fraud/False Swearing After the Loss

The statutory policy language provides that the policy shall be void if an insured conceals or misrepresents any material fact or circumstance. See 36 O.S. § 4803.

The public policy of Oklahoma with respect to the insured’s obligation to be truthful in connection with the submission of a claim is demonstrated by the fact that the state requires the following statement to appear on policies and claim forms:

“WARNING: Any person who knowingly, and with intent to injure, defraud or deceive any insurer, makes a claim for the proceeds of an insurance policy containing any false, incomplete or misleading information is guilty of a felony.”17

Misrepresentation will void the policy if it is 1) material, 2) willful and 3) made with the intent to deceive the insurer.18 It is not necessary for the insurer to actually be deceived by the misrepresentation. See, e.g., Long v. Insurance Co. of North America19 and Goodwin v. Maryland Casualty Co.20 A mere mistake, inadvertence or good faith belief as to the matter being represented will not sustain a charge of fraud and false swearing. However, the intent to deceive is implied where the misrepresentations were knowingly and deliberately made.21 The misrepresentation is material if it would influence the judgment of a reasonable insurer in determining its course of action.22

In Oklahoma, there are decisions that recognize misrepresentations that inflate the value of the subject matter of the claim as being material.23 It has also been recognized that a misrepresentation concerning the place where property is stored is material. See Long v. Insurance Co. of North America.24 It is well settled in other jurisdictions that misrepresentations concerning financial condition and status, prior losses and ownership may be material.

Misrepresentations in the Application of Insurance

The effect of misrepresentations made by an insured in an insurance application is governed by 36 O.S. § 3609 which states that misrepresentations on the application of insurance may prevent recovery if they are 1) fraudulent, 2) material to the risk or hazard or 3) the insurer would not have accepted the risk if the true facts had been made known.            

With regard to objective misrepresentations made in property insurance applications, the courts have construed the three alternatives listed in 36 O.S. § 3609 to be inclusively disjunctive. In other words, if any of the three alternatives are satisfied, the policy is void. If a misrepresentation is material, it need not also be fraudulent, i.e. “[t]he untruth of any material representation relied on by the insurance company in making the contract will avoid the contract, wholly irrespective of the intent, whether innocent or fraudulent, with which such misrepresentation was made.”25

Where the insured misrepresents the fact of previous claims in an application for insurance (i.e., previous theft losses in application for personal property insurance) the Oklahoma court has held such misrepresentations are material as a matter of law and are sufficient to void the policy. See Hobbs v. Prudential Property and Casualty Co.26

 In Scottsdale Ins. Co. v. Tolliver27 the Supreme Court was asked to answer a certified question from the federal court as to whether “Oklahoma law requires a finding that the insured intended to deceive the insurer before a misrepresentation, omission or incorrect statement on an insurance application can serve as a ground to prevent recovery… .” The Supreme Court refused to answer the question stating that the settled law required proof of intent. However, the authority relied upon by the court deals exclusively with life insurance contracts and not with property insurance contracts. The issue of misrepresentation on the application of a life insurance contract is distinguishable from a property insurance contract.28

Innocent Joint Insured Doctrine

The “innocent joint insured” doctrine holds that the action of one insured that voids the policy (such as willful destruction of the property or misrepresentation) will void the policy with respect to an innocent joint insured. Oklahoma courts, in contrast to the general trend across the country, have adhered to this doctrine. It was first established in Short v. Oklahoma Farmers Union.29 Here, a husband and wife were co-insureds of a residence they jointly owned. The husband burned the residence without the involvement or knowledge of the wife. The court held that, “[w]here, as here, the title to the property is held jointly and that property is insured under a single policy and is destroyed by a joint insured’s act of arson, the entire policy is void...”30 Included in the dicta is a strongly worded statement concerning the public policy against arson.

In United Services Automobile Association v. McCants31 the court upheld Short. In McCants, the husband and wife were joint insureds but the wife was not a title owner of the residence. The wife burned the residence. The court of appeals, relying on Short, held the husband could recover because the wife was not a joint owner. The Supreme Court held this was a misapplication of Short, that the only requirement for coverage to be voided as to the innocent co-insured was for the innocent party to be a joint insured with the offending insured. Joint ownership of the property was not material to the contractual consequence of an insured deliberately destroying the insured property.

In an unpublished opinion32 the court held that the false statement of a daughter who was an insured at the time of the fire but was not a member of the household at the time of the false statement was binding on the named insureds.

POLICY LIMITATIONS/EXCLUSIONS

Business Pursuits

The Oklahoma court has upheld limitation of coverage for “business pursuits” found in homeowners policies, declaring such limitations as unambiguous. In Shadoan v. Liberty Mutual Fire Insurance Co.33 the court had before it a clause that limited its exposure for business property that was “[u]sed at any time or in any manner for any business purpose.” The insured submitted a claim for tools which he stated he sometimes used in connection with his employment. The court found that the extent to which the property was used in connection with the business was immaterial the court concluded that, “[t]he issue is not whether the [property] was used ‘primarily’ for a business purpose, but whether it was used at all for any business purpose.”34

In Wiley v. Travelers Insurance Co.35 the court held that a hobby pursuit can be considered a business for purposes of a property insurance contract if the hobby included a profit motive. In this regard there may be many factual issues to consider rendering the question for the jury.36

Wear and Tear

The policy exclusion for wear and tear has received attention from the court. In Bank of Oklahoma, N.A. v. Continental Casualty Co.37 the court held excessive deterioration caused by the occupant’s failure to maintain the property may be classified as a fortuitous event. In this case, a mortgagee was a named insured under a special hazard insurance policy. The owner of the property had failed to maintain the property for eight years. The court stated that while some wear and tear could be anticipated, the gross failure of the owner to maintain the property could not have been expected or anticipated and was, therefore, a fortuitous and covered event.

Cancellation

With respect to notice of cancellation for non-payment of premium, the court has held that proof of mailing is sufficient. In State Farm Fire & Cas. Co. v. Van Horn38 the insurance company sent a cancellation notice because of non-payment of the premium. The insured and mortgagee denied receiving the notice. The court held that it was not necessary to prove that the notice was received but was sufficient to prove the notice was mailed by the insurer. Although the opinion is not published, it cites numerous Oklahoma Supreme Court cases that reflect the same holding.39 However, evidence that the insured and/or loss payee did not receive the notice of cancellation can, under certain circumstances, rebut the presumption of mailing, thereby creating a question of fact.40

MEASURE OF RECOVERY UNDER THE POLICY

Actual Cash Value

Oklahoma follows the “broad evidence rule” in establishing the actual cash value in the context of a fire insurance policy. This rule was established in Rochester American Ins. Co. v. Short.41 The rule stands for the proposition that any relevant evidence may be considered in determining the value of the property for which payment is owed under a property insurance contract, including the market value, cost to rebuild or replace and depreciation. The court in Rochester identified several factors in determining actual cash value, such as the purchase price, location and condition of the building, and purpose for which the building was being used. This definition of actual cash value recently received positive reinforcement in Tyler v. Shelter Mutual Insurance Co.42

The court has reviewed the meaning of actual cash value in the context of assessing depreciation to a roof,43 holding that a roof is a single product consisting of both materials and labor which are subject to depreciation in determining its actual cash value.

Replacement Cost Provision and Depreciation

The general “replacement cost” provision of the contract, whereby the actual cash value is initially owed and the balance of the actual cash value and the replacement cost is not owed until the property is actually replaced, has been upheld as valid and enforceable. See Pope v. Farmers Ins. Co.44 and Bratcher v. State Farm Fire and Cas. Ins. Co.45

CLAIMS ADMINISTRATION

Unfair Claims Settlement Practices Act

The Oklahoma Unfair Claims Settlement Practices Act is found at 36 O.S. § 1250.1 et seq. This is an administrative act. One specific section has important implications in the administration of claims. Sections 1250.6 and 1250.7 impose time limitations on the property insurance carrier. Within 45 days after the receipt of a proof of loss, the insurer must advise the insured of the acceptance or denial of the claim or if further investigation is necessary. If the investigation is not completed within 60 days of receipt of the proof of loss, the insurer must notify the insured in writing stating the reasons why additional time is needed. Any investigation must be completed within 120 days of the receipt of the proof of loss. The statute states the time restrictions do not apply to investigations of possible fraud or arson “...which is supported by specific information giving a reasonable basis for the investigation...” (§ 1250.7)

Because the Unfair Claims Settlement Practices Act is regulatory in nature, a violation of the terms of the act cannot form the basis of a private cause of action or an action for bad faith.46

Examinate Under Oath

The examination under oath is an important tool available to the property insurer in the investigation of possible fraud, value of a claim or issues of coverage. There are no cases in Oklahoma limiting the right to take the examination under oath or to seek relevant information and material from the insured. There is some question regarding the effect of an insured refusing to submit to the examination under oath. In Winters v. State Farm Fire and Casualty Ins. Co.47 the insured refused to submit to an examination under oath until after a related criminal matter was resolved, resulting in a two-year delay. State Farm denied the claim. The court, relying heavily on a Kansas case that dealt with the failure to submit a proof of loss, held that the requirement for an examination under oath was merely a condition contained in a unilateral contract and the insurer must show prejudice resulting from the non-compliance before denying coverage.

Appraisal

The statutory policy provides for an appraisal process to resolve a claim. It is best utilized where the dispute is over the valuation of the claim as opposed to disputes concerning coverage.

In Oklahoma, the appraisal is binding only on the party requesting the procedure.48 Denial of liability for the claim by the insurer waives the insurer’s right to invoke appraisal.49

Rights of the Mortgagee under the Standard Mortgage Clause

It is well established that the standard mortgage clause creates a separate contract between the insurer and the mortgagee that cannot be defeated by the misconduct or negligence of the insured.50 This principle applies not only to situations where the insured voids the policy by some misdeed, but also where coverage is void as to the insured because of a lack of insurable interest.51

A mortgagee is not bound by a settlement between the mortgagor and the insurer. In Conner v. Northwestern National Cas. Co.52 the insured and insurer agreed to a settlement of a fire insurance claim. The settlement check was issued to the insured and mortgagee. The insured forged the mortgagee’s endorsement. The court held that the mortgagee was entitled to maintain an action to recover the proceeds because it was not aware of, nor did it consent to the settlement. The court found that as between the insured, insurer and the mortgagee, it would not hold the mortgagee responsible for the forged endorsement.

The protection afforded the mortgagee was expanded in First State Bank of Idabel, Oklahoma v. State Farm Fire and Cas. Co.53 The insured’s restaurant was damaged by fire. The claim was settled, but the mortgagee was not included on the check. The insured used the proceeds of the settlement to repair the fire damage, which actually increased the value of the restaurant. The insured then defaulted on the note and the mortgagee foreclosed and sued the insurance company for the proceeds of the policy. The court awarded the policy proceeds to the mortgagee although the collateral had been increased in value by reason of the repairs financed by the settlement with the insured. The court reasoned that to do otherwise would give the insured the “unilateral right to determine whether the policy proceeds are to be used to restore the mortgaged premises.” The court stated the mortgagee must consent to the settlement and be given the opportunity to agree to use the proceeds to make repairs.

The Supreme Court in Shebester v. Triple Crown Insurers54 held an insurer has an obligation to honor claims of mortgagees who were not named on the policy, but of which the insurer had notice. The insured purchased a horse under an agreement whereby the seller financed the purchase. The insured promised to name the seller on a policy of insurance, which he did not do. The horse died. The seller submitted a claim to the insurer, submitting the installment contract as proof of his interest. Payment was made to the insured only. The court found that the insurer had an “implied in law obligation to pay the rightful claimant.”55 It further held the “agent for an undisclosed insurer is itself bound by a quasi-contractual duty, not only toward the beneficiary of the policy, but also to those outsiders of whose claimed interest in the proceeds the agent has timely notice.”56

CONCLUSION

Property insurance contracts are pervasive in our society and are essential to provide protection against the accidental damage or destruction of property. In a state where severe weather is common, issues concerning the duties and rights of both the insurer and insured have received significant judicial attention. In order for the practitioner to address the issues that arise from the claims made under property insurance policies, he or she must be aware of the statutes and the body of judicial interpretation of specific contract language that relates specifically to property insurance policies.

1. De Noya v. Fidelity Phoenix Ins. Co., 1925 OK 465, 237 P. 125.
2. 1996 OK 28, 912 P.2d 861.
3. 1999 OK 51, 981 P.2d 1262.
4. 748 F.2d 1397 (10th Cir. 1984).
5. 317 F.2d 96 (10th Cir. 1963).
6. See also Braun v. Annesley, 936 F.2d 1105 (10th Cir. 1991).
7. Snethen v. Oklahoma State Union of Farmers Educational and Co-op Union of America, 1983 OK 17, 664 P.2d 377.
8. 1989 OK 128, 782 P.2d 1357.
9. See also Delk v. Markel American Ins. Co., 2003 OK 88, 81 P.3d 629.
10. 1993 OK CIV APP 198, 870 P.2d 792.
11. Insurance Co. of North America v. Board of Ed. Of Independent School Dist. No. 12, Texas County, Okl., 196 F.2d 901 (10th Cir. 1952).
12. 1993 OK 115, 860 P.2d 222.
13. See also Burwell v Mid-Century Insurance Co., 2006 OK CIV APP 97, 142 P.3d 1005.
14. 196 F.2d 901 (10th Cir. 1952).
15. See also Prudential Fire Ins. Co. v. Trave-Taylor Co., 1944 OK 272, 152 P.2d 273.
16. 1997 OK 160, 951 P.2d 641.
17. 36 O. S. § 3613.1.
18. Orient Insurance Co. v. Van Zant-Bruce Drug Co., 1915 OK 573, 151 P. 323.
19. 670 F.2d 930 (10th Cir. 1982).
20. 233 F.Supp. 81 (E.D. Okl., 1964).
21. Wagnon v. State Farm Fire and Cas. Co., 146 F.3d 764 (10th Cir. 1998).
22. Id. at ¶ 13.
23. See, e.g. Wagnon, supra.; Transportation Ins. Co. v. Hamilton, 316 F.2d 294 (10th Cir. 1963).
24. 670 F.2d 930 (10th Cir. 1982).
25. Firstier Mortg. Co. v. Investors Mortg. Ins. Co., 930 F.2d 1508, 1511 (10th Cir. 1991).
26. 1993 OK CIV APP 76, 853 P.2d 252
27. 2005 OK 93, 127 P.3d 611.
28. United Ben. Life Ins. Co. v. Knapp 1935 OK 1177, 41 P.2d 963, Firstier Mortgage Co. v. Investors Mortgage Ins. Co., supra.
29. 1980 OK 155, 619 P.2d 588.
30. Short at ¶ 7.
31. 1997 OK 73, 944 P.2d 298.
32. Lawrence v. State Farm Fire & Cas. Ins. Co., 166 F.3d 1221 (Table) 1999 WL 26880 (10th Cir. (Okla.).
33. 1994 OK CIV APP 182, 894 P.2d 1140.
34. Id., at ¶ 7.
35. 1974 OK 147, 534 P.2d 1293.
36. See also Bailey v. Farmers Insurance Co., 2006 OK CIV APP 85, 137 P. 3d 1260
37. 1992 OK CIV APP 128, 849 P.2d 1091.
38. 139 F. 3d 912 (Table, Text in WESTLAW), 1998 WL 58187 (10th Cir. Okla.).
39. See e.g., Midwestern Ins. Co. v. Cathey, 1953 OK 169, 262 P.2d 434; Gilmore v. Grand Prix of Tulsa Corp., 1963 OK 138, 383 P.2d 231.
40. See Oaks v. Motors Ins. Corp., 1979 OK 77, 595 P.2d 789.
41. 1953 OK 4, 252 P.2d 490.
42. 2008 OK 9, _P.3d_.
43.See Redcorn v. State Farm Fire & Cas. Co., 2002 OK 15, 55 P.3d 1017 and Branch v. Farmers Ins. Co., 2002 OK 16, 55 P.3d 1023.
44. 1998 OK 77, 962 P.2d 1284.
45. 1998 OK 63, 961 P.2d 828.
46. Lewis v. Aetna U.S. Healthcare Inc., 78 F. Supp.2d 1202 (N.D. Okl. 1999); Walker v. Chouteau, 1993 OK 35, 849 P.2d 1085; McWhirter v. Fire Ins. Exchange Inc., 1994 OK 93, 878 P.2d 1056.
47. 35 F.Supp.2d 842 (E.D. Okla. 1999).
48. Massey v. Farmers Insurance Group, 1992 OK 80, 837 P.2d 880.
49. Concordia Fire Ins. Co. v. Barkett, 1925 OK 433, 236 P. 890.
50. See e.g., Oklahoma State Union of Farmers Educational and Co-op. Union of America v. Folsom, 1958 OK 104, 325 P.2d 1053, and Western Assur. Co. v. Hughes, 1936 OK 621, 66 P.2d 1056.
51. See e.g., National Fire Ins. Co. of Hartford v. Dallas Joint Stock Land Bank, 1935 OK 865, 50 P.2d 326; Western Assur. Co. v. Hughes, supra.
52. 1989 OK 85, 774 P.2d 1005.
53. 1992 OK CIV APP 33, 840 P.2d 1267.
54. 1992 OK 20, 826 P.2d 603.
55. Id., at ¶ 21.
56. Id., at ¶ 21.

About The Author

Ken Elliott graduated with honors from the OU College of Law in 1979. He is involved in the International Association of Defense Counsel, Oklahoma Association of Defense Counsel, the Defense Research Institute and served as a  commissioner on the National Conference of Commissioners on Uniform State Laws. He also serves on the Board of Directors for the Variety Health Center and served 10 years as commissioner on the Oklahoma Ethics Commission.

Abstract of First-Party Insurance Law
Published 79 OBJ 1749 (August 9, 2008)