Title: McMULLAN v. ENTERPRISE FINANCIAL GROUP, INC.

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

McMULLAN v. ENTERPRISE FINANCIAL GROUP, INC.  McMULLAN v. ENTERPRISE FINANCIAL GROUP, INC. 2011 OK 7 Case Number: 108241 Decided: 01/31/2011 THE SUPREME COURT OF THE STATE OF OKLAHOMA NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR WITHDRAWAL. HARRY McMULLAN, III, Plaintiff/Petitioner, v. ENTERPRISE FINANCIAL GROUP, INC., Defendant/Respondent. CERTIORARI REVIEW OF A CERTIFIED INTERLOCUTORY ORDER FROM THE DISTRICT COURT OF OKLAHOMA COUNTY Honorable 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, REVERSED AND REMANDED FOR FURTHER PROCEEDINGS Murray E. Abowitz, Daniel C. Hays, Licensed Legal Intern, Oklahoma City, Oklahoma, for Plaintiff/Petitioner McMullan Joe M. Hampton, Cara S. Nicklas, Oklahoma City, Oklahoma, 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. 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. ¶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 ¶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, ¶7 The Oklahoma Insurance Code (the Code), ¶8 "Indemnity" is not defined in the general provisions of the Code, but the Service Warranty Insurance Act, ¶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.; ¶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. ¶11 The United States Supreme Court in Group Life & Health Ins. Co. v. Royal Drug Co., . . .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. 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. ¶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 insurable interest; 2. A risk of loss; 3. An assumption of the risk by the insurer; 4. A general scheme to distribute the loss among the larger group of persons bearing similar risks; and 5. The payment of a premium for the assumption of risk. ¶16 In its analysis of those five elements, the Ford court concluded that: 1) the purchasers of vehicle service contracts had an insurable interest in the automobiles which the contracts covered; 2) they had a risk of loss if one of the listed parts malfunctioned; 3) the vehicle service provider assumed the risk and replaced the parts involved; and 4) the loss was distributed among a larger group with similar risks, because it is obvious that some of the purchasers will require a large number of replacement parts and services during the contract term, while there are others who may not require any and some who may require only a few; and 5) a premium (the purchase price of the contract) was paid in exchange for vehicle service provider's assumption of the risk of loss. Clearly, the five elements of an insurance contract were present in the vehicle service contracts. ¶17 In Pugh v. North American Warranty Services, 2000 UT APP 121, ¶16, ¶18 Oklahoma's statutory scheme, like Ohio's in Griffin, supra, may not regulate vehicle service providers with the same regulations as it does insurance companies.. However, we find the rationale of both Ford, supra, and Pugh, supra, persuasive. The purpose of the contract is to provide indemnity and shift risk -- it just does so on a smaller scale and with less financial responsibility than an insurance contract might provide. The contract meets the statutory definition of insurance as "a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies. CONCLUSION ¶19 Although vehicle service providers may not be subject to the exact same requirements and regulations as insurance providers, vehicle service contracts meet the definition of and are designed to function and perform as "insurance." The consumer pays for indemnity and pays to shift the risk of paying for high repair costs to the vehicle service provider in exchange for a pre-paid premium. Because these contracts function like insurance, their providers should be subject to the same covenants of good faith that insurers must meet. However, we express no opinion on the merits of the bad faith claim as applied to the facts of this case, that question is for the fact finder to resolve. REVERSED AND REMANDED FOR FURTHER PROCEEDINGS COLBERT, V.C.J., KAUGER, WATT, EDMONDSON, REIF, COMBS, JJ., concur. TAYLOR, C.J., WINCHESTER, J., dissent. FOOT