Opinion ID: 1454266
Heading Depth: 1
Heading Rank: 2

Heading: Adhesion Contract Theory

Text: The majority opinion states that the primary issue is whether the household exclusion is valid as to amounts in excess of those which are statutorily mandated and relies on the principle of freedom of contract to permit the extension of the household exclusion to coverage beyond the statutory minimums. This approach fails to address adhesion contract theory, raised by appellants in the trial court and on appeal. Aside from public policy considerations, the adhesion issue is sufficient by itself to reverse and remand the trial court's decision. Appellants relied on the adhesion contract theory in the trial court and specifically requested the court to resolve that issue. The court refused to do so, but instead noted that the insurance contract was valid, implying that the adhesion theory was inapplicable. Before this Court, appellants cite several cases from other states dealing with the household exclusion and argue that appellants' reasonable expectations were not met. This, the issue is properly before this Court and should be treated. As this Court recently noted, Like credit life and disability insurance, automobile insurance is generally sold through adhesion contracts that are not negotiated at arm's length. Purchasers commonly rely on the assumption that they are fully covered by the insurance that they buy. Farmers Insurance Exchange v. Call, 712 P.2d at 236 (Utah 1985). In fact, this Court has examined a number of contracts in light of adhesion theory with varying results. See, e.g., Resource Management Co. v. Weston Ranch and Livestock Co., 706 P.2d 1028, 1040-49 (Utah 1985) (contract terms not unconscionable and contract not one of adhesion); System Concepts, Inc. v. Dixon, 669 P.2d 421, 429 (Utah 1983) (no disparate bargaining status between parties); General Motors Acceptance Corp. v. Martinez, 668 P.2d 498, 501 (Utah 1983) (adhesive nature of insurance policy is basis of duty to notify); White v. Fox, 665 P.2d 1297, 1300 (Utah 1983) (contract not adhesive; parties' bargaining status was equivalent); Bekins Bar V Ranch v. Huth, 664 P.2d 455, 459-64 (Utah 1983) (finance charges in loan agreement not unconscionable). In the leading case of Gray v. Zurich Insurance Co., 65 Cal.2d 263, 419 P.2d 168, 54 Cal. Rptr. 104 (1966), Justice Tobriner of the California Supreme Court set forth the principle of reasonable expectations in adhesion insurance contracts. Although courts have long followed the basic precept that they would look to the words of the contract to find the meaning which the parties expected from them, they have also applied the doctrine of the adhesion contract to insurance policies, holding that in view of the disparate bargaining status of the parties we must ascertain that meaning of the contract which the insured would reasonably expect. 65 Cal.2d at 269-70, 419 P.2d at 171-72, 54 Cal. Rptr. at 107-08. Judicial determination of the insured's reasonable expectations does not necessarily depend upon the presence of an ambiguity in the policy. See, e.g., Powers v. Detroit Automobile Inter-insurance Exchange, 427 Mich. 602, 632 n. 8, 398 N.W. 2d 411, 424 n. 8 (1986); Stordahl v. Government Employees Insurance Co., 564 P.2d 63, 65-66 (Alaska 1977). Indeed, the insured's complete failure to read the policy's provisions, exclusions, or limitations may not be determinative of his reasonable expectations unless the insurer can demonstrate that the failure to read was unreasonable. Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961, 967-68 (1970); see Hawaiian Insurance and Guaranty Co. v. Brooks, 67 Hawaii 285, 686 P.2d 23 (1984); Reserve Insurance Co. v. Pisciotta, 30 Cal.3d 800, 810 n. 3, 640 P.2d 764, 769 n. 3, 180 Cal. Rptr. 628, 633 n. 3 (1982). At least one state has used the adhesion contract theory to invalidate a household exclusion clause in an automobile insurance policy. In Transamerica Insurance Co. v. Royle, 202 Mont. 173, 656 P.2d 820 (1983), the Supreme Court of Montana considered the case of a mother who had negligently caused an automobile accident in which her daughter, a passenger in the mother's car, was seriously injured. The insurance policy covering the automobile contained a household exclusion that denied coverage for injuries incurred by a person living or residing in the insured's household at the time of loss. After determining that parent-child immunity did not present a barrier to the daughter's suit, the Montana Supreme Court concluded: [W]e hold that the household exclusion clause is invalid due to its failure to honor the reasonable expectations of the purchaser of the policy... . The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. Royle, 656 P.2d at 824 (quoting Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961, 967 (1970)). The importance of considering adhesion theory in this case is obvious. The majority opinion's reliance on the principle of freedom of contract between the parties is misplaced if the insurance policy is adhesive in nature because the parties' ability to freely contract is largely illusory where adhesion theory applies. The Supreme Court of New Mexico in Estep v. State Farm Mutual Automobile Insurance Co., 103 N.M. 105, 703 P.2d 882 (1985), noted: With respect to the freedom of contract argument, we suggest, as did the court in the second case of Mutual of Enumclaw Insurance Co. v. Wiscomb, 97 Wash.2d 203, 211, 643 P.2d 441, 445 (1982), that to say there is freedom of contract regarding inclusion or exclusion of coverage for family members in these cases is to ignore reality. The discussion in Wiscomb of the take-it-or-leaveit nature of obtaining automobile liability coverage, and the effect of the policy's exclusion on third parties who are or may be ignorant of the insurance arrangements and unable or incompetent to contract for coverage for themselves, illustrates the fragility of any assertion that the terms of this or similar insurance policies truly are the product of conscious bargaining between the parties. The argument might be more credibly made were there evidence that insureds had been, or traditionally are, offered the choice of including or excluding coverage for family members. There is no such evidence in this record. 103 N.M. at 109-10, 703 P.2d at 886-87. Absent findings of fact regarding the reasonable expectations of the parties, the course of negotiations between them, and the circumstances existing when the contract was made, it is impossible to conclude, as does the majority opinion, that the contract terms were arrived at freely in this case. When reviewing motions for summary judgment, this Court views issues of fact in the light most favorable to the party opposing summary judgment. Call, 712 P.2d at 237; Mountain States Telephone & Telegraph Co. v. Atkin, Wright & Miles, Chartered, 681 P.2d 1258, 1261 (Utah 1984). The parties' failure to include a copy of the insurance policy in the record and the lack of evidence directed to the adhesion claims make it necessary to remand this case to the trial court. Thomas Mastbaum did state in his affidavit that he was unable to read or review the text of the insurance policy before he purchased it, that he was unaware of the household exclusion clause, and that he assumed the insurance policy covered all parties, including his wife, for any injuries sustained in an automobile accident involving his vehicle. However, in the absence of the policy itself and without a more complete description of the nature of the negotiations and circumstances surrounding the contract's formation, there is too much uncertainty and too little evidence from which to draw a conclusion regarding the Mastbaums' reasonable expectations. Hence, apart from questions of public policy, this action should be remanded to the trial court to complete the record regarding appellants' claims of adhesion.