Court Opinion

ID: 9546502
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:30:47.128911+00
Date Added: 2024-06-11T15:16:32.288620
License: Public Domain

O’CONNELL, C. J.,
dissenting.
The majority holds that an injured third party may recover on a policy of insurance even though the insured would not be allowed to enforce the policy. In so doing, it introduces much confusion into the law of agency and, although purporting to avoid the question, effectively adopts the reasoning and effect of Barrera v. State Farm Mutual Automobile Insurance Co., 71 Cal2d 659, 79 Cal Rptr 106, 456 P2d 674 1969), which rejects the fundamental principles of the law of contract. The opinion of the majority is not supported either by logic or any of our prior cases on the subject. I dissent.
*301The fundamental fallacy of the majority’s position is found in the following passage:
“The rule that knowledge of an agent is to be imputed to his principal, regardless of actual knowledge by the principal, is a rule based upon considerations of public policy to the effect that one who selects an agent and delegates authority to him should incur the risks of the agent’s infidelity or want of diligence rather than innocent third persons. See 3 Merrill on Notice §§ 1204, 1268 at 132-34, 252 (1952). Cf. Eestatement (Second) of Agency § 282(2) (a). Those reasons of public policy are not present in cases involving litigation between a principal and a third party who has acted in collusion with the agent. When, however, as in this case, the injured party is one who did not act in collusion with the agent, those same reasons of public policy are present.”
The point the majority fails to note is that the rights of one injured through the negligence of the insured are derivative of the rights of the insured.① The third party, however innocent, has no right to recover from the insurer unless there is a duty to pay the losses of the insured growing out of a valid contract of insurance or a duty to the public “at large.” Since the majority does not deem it necessary to follow Barrera in recognizing such a duty to the public, it must explain how the third party may recover on a contract of insurance to which it is not a party or an intended beneficiary and which is rendered voidable as to the insured through his misrepresentations of a material fact. This the majority does not do.
It is clear that plaintiff is entitled to rescind *302the contract as to Sevier, its insured. There can be no question that had Sevier merely answered “no” in response to the question of whether he had been convicted of a traffic violation within the prior five years, plaintiff would be entitled to rescind the contract of insurance as to him. These answers entered on the application were misrepresentations without which plaintiff would not have issued Sevier a policy.② Plaintiff relied upon these misrepresentations.③ Sevier, however, disclosed to plaintiff’s agent Henderson sufficient facts to put plaintiff on notice of the falsity of the representations in the application.④ Defendants contend that Henderson’s knowledge, which was admittedly not transmitted to plaintiff’s underwriters, should be imputed to plaintiff. The general rule of imputation of knowledge or notice is well settled:
“* * * ‘The corporation is affected or charged with knowledge of all material facts of which its officer or agent receives notice or acquires knowledge while acting in the course of his employment and within the scope of his authority, even though the officer or agent does not in fact communicate his knowledge to the corporation through its other officers or agents. * * *.’ ” Woodtek, Inc. v. Musulin, 263 Or 644, 650, 503 P2d 677 (1972).⑤
This general rule is subject to an exception, however, which is applicable to the facts of this case. The knowledge of notice of the agent is not imputed to the principal when the person knows the agent is *303acting adversely to the interests of the principal.⑥ In the present case, Sevier testified that when he told Henderson of his arrest for DTJIL, Henderson stated, “to Hell with it. Maybe they’ll never find out.” Thus, even by his own testimony, there can be no reasonable room for doubt that Sevier knew that Henderson was not going to convey the information to plaintiff. Therefore, Henderson’s knowledge cannot be imputed to plaintiff.
It is also clear that plaintiff has not waived its right to rescind. The notice of cancellation or non-renewal which was sent to Sevier soon after the discovery of his misrepresentations was necessary to prevent the automatic renewal of the policy. At the same time, the question of rescission was submitted to plaintiff’s legal department for determination of its rights. These acts, taken together, indicate nothing more than the decision to sever its relations with its insured as soon as legally possible, not an intent to retain the benefits of the contract while shunning its obligations.
Nor is the payment of the property damage claim to the holder of a lien upon Sevier’s automobile a basis for concluding that plaintiff waived its right to rescind the contract of liability insurance. First, this payment was clearly a detriment to plaintiff, not the retention of a benefit inconsistent with rescission. Secondly, a rider on the policy requires plaintiff to give the lienholder notice of cancellation ten days before cancellation can be effective. Thus, plaintiff was bound to satisfy the lienholder’s property damage claim, notwithstanding the misrepresentations of the insured. The fact, alluded to by the. majority, that no separate consideration was paid for this provision of *304the contract is not relevant since the lienholder was a third party beneficiary who had relied to its detriment on the promise not to rescind in loaning Sevier money secured by a lien on the automobile covered by the policy. Since plaintiff was bound to satisfy the lien-holder’s claim, no intent to waive its election to rescind can be based upon the payment.
Because the policy was validly rescinded as to Sevier, the fact that the innocent third party played no part in Sevier’s misrepresentations and knew nothing of the collusion with Henderson, plaintiff’s agent, is irrelevant. The holding of the majority is supportable, then, only if plaintiff is obligated to compensate defendant Sutton for her losses because of a duty not directly referable to the legally unenforceable contract with Sevier. The majority does not enlighten us as to the source or scope of this duty.
It is, perhaps, the majority’s position that the policy that “one who selects an agent and delegates authority to him should incur the risks of the agent’s infidelity or want of diligence rather than innocent third persons,” should be extended to protect one in the position of defendant Sutton. The problems with such approach, if intended by the majority, are insurmountable. Defendant Sutton’s damages were not caused, in any reasonable sense, by the misfeasance of plaintiff’s agent. She cannot have relied upon the presence of insurance in sharing the road with Sevier, since insurance is not a pre-condition for driving in Oregon. Moreover, even if a theory of causation could be constructed, there is no finding that plaintiff was negligent in hiring or retaining the services of Henderson, nor is there any basis apparent in the record for such a finding. Nor does the majority purport to make a principal strictly liable for the breaches of fiduciary duty of an agent.
I am forced to conclude, therefore, that the ma*305jority’s position is supportable only on tbe basis of the imposition of a newly created duty on insurers to investigate the representations of applicants for automobile liability insurance based upon some theory of strict liability, even though the majority purports to avoid consideration of this question. The trial court recognized that liability could be imposed only upon a theory of strict liability, which it embraced by adopting the reasoning in Barrera. I do not think that the reasoning in Barrera provides a sound basis for imposing strict liability upon plaintiff insurer in this case.
The basic premise of the Barrera decision which defendants urge us to adopt is that the duty of insurance carriers is no longer to be analyzed solely with reference to the contract of insurance and the rules of contract law, but is to rest also upon a non-contractual policy in favor of compensating the innocent victim of the insured’s negligence. This expansion of the insurer’s duty to provide protection to non-contracting parties is, in effect, the extension of the principle of strict liability, not unlike that which characterizes the liability of the seller of products. The California court makes this extension by pointing to various factors which, it is argued, justify the imposition of strict liability upon insurers.
First, it is said that the sale of insurance is a “quasi-public” business and that therefore the rights and obligations of the insurer and insured “cannot be determined solely on the basis of rules pertaining to private contracts negotiated by individual parties of relatively equal bargaining strength.” Barrera, supra 456 P2d at 681-682. This seems to combine and confuse two ideas: (1) the idea that a business affected with the public interest owes duties to the public at large, and (2) the principle that adhesion contracts are to be treated differently than other contractual relations where the parties have equal bargaining posi*306tions. As to the latter consideration, we are unable to see how the adhesion character of the contract has any relevance except in defining the rights and duties of the contracting parties. And as to the contracting parties, the adhesive character of the contract is not involved in a case such as the one before us because there is no indication that an ordinary insured would read his policy as providing coverage notwithstanding misrepresentations affecting the nature of the risk. The “quasi-public” character of the insurance business may be conceded. As such, the business is subject to more extensive state regulation than most other businesses. But this tells us nothing about the scope of the regulation, specifically as to whether the insurer is required to investigate applicants for insurance. It is clear that no statute or regulation requires such investigation.⑦
The Barrera opinion attempts to find in the California financial responsibility law the policy to compensate the innocent victims of traffic accidents.⑧ Conceding that financial responsibility statutes are designed to protect such innocent victims, the question is to what extent. Such statutes do not, in most jurisdictions, require all drivers to have insurance.⑨
*307The fundamental inadequacy of the reasoning underlying the Barrera decision is its failure to recognize the relationship of the parties to the typical contract of automobile liability insurance and the limited extent to which financial responsibility laws alter this relationship. In the first instance, at least, the insurance carrier agrees to accept a predictable risk of loss to the insured through the insured’s liability to another. This contractual duty runs to the insured and is historically and fundamentally a duty to indemnify. The rights of a third person are derivative of those of the insured.⑩
It is my opinion that the Barrera decision *308cannot be supported by reasoned analysis of the legal principles embodied in the statutory and case law which governs the rights and duties of liability insurers in “financial responsibility” states such as Oregon and California and results in the judicial imposition of absolute or enterprise liability contrary to both our case law and Oregon’s financial responsibility law. Therefore, I would hold that in the absence of contract provision or statute establishing one, there is no duty on an insurer to investigate the veracity of its insureds.
To my knowledge, none of the statutes impose upon the insurer the duty to investigate applicants. In those limited situations in which the insurer is not permitted to rescind, the defense is explicitly abolished (OES 486.551) rather than being conditioned upon due care of the insurer. There is nothing in the framework of financial responsibility legislation which justifies the conclusion that pre-existing insurance law, including the right to rescind the contract for misrepresentation, was to be abandoned in order to compensate the victims of traffic accidents.
Defendants contend that a duty to investigate might also be predicated upon what is described as the “analogous” duty of insurers to prove that they have acted diligently and with good faith before they may invoke their insured’s non-cooperation as a defense to liability under a policy of insurance. The case of Bailey v. Universal Underwriters, 258 Or 201, 474 P2d 746, 482 P2d 158 (1971) is relied upon to support this argument. The duty to exercise diligence and good faith to secure the cooperation of the insured extending to determine coverage under an omnibus clause is not, however, analogous to the duty imposed upon insurers in Barrera. Eather, it is a duty arising from the contract and running directly to the insured. We recognized in Bailey, that “[t]he obligations under a *309cooperation clause are reciprocal,” quoting Imperiali v. Pica, 338 Mass 494, 497, 156 NE2d 44 (1959) (258 Or at 221) and “a conflict of interest arose between the insurer, as agent, and the insured, as principal; and the insurance company’s conduct in such a case is subject to closer scrutiny than that of the ordinary agent, because of its adverse interests,” quoting Tennessee Farmers Mutual Insurance Co. v. Wood, 277 F2d 21 (6th Cir 1960) (258 Or at 224). There was no intimation in Bailey that the insurer’s neglect of this duty would place a judgment holder of the insured in a position superior to that of the insured.⑪ To the extent that Bailey gives the impression that there is a duty to the world at large, it must be disapproved.
I conclude, therefore, that there is in general no common law duty on insurers to investigate the representations of their insureds. Nor can I find grounds for the creation of such a duty in Oregon’s financial responsibility laws.⑫ ORS 486.551 states:
“The liability of an insurance carrier with respect to the insurance policy required by this chapter to prove future responsibility shall become absolute whenever injury or damage covered by the vehicle liability policy occurs. The policy may not be canceled or annulled as to such liability by any agreement between the insurance carrier and the in*310sured after the occurrence of the injury or damage. No statement made by the insured or on his behalf and in violation of the policy shall defeat or void the policy. The provisions of this section are not applicable to policies of vehicle liability insurance other than those required in connection with proof of future responsibility.” (Emphasis added.)⑬
Thus, to follow the Barrera decision would be to modify the structure of insurance regulation and the relationship of the parties beyond that intended by the legislature. Therefore, I would hold that plaintiff was entitled to rescind the policy and is not liable to either defendant.
Denecke and Holman, JJ. join in this dissent.

 Specific statutes such as ORS 743.733, which requires the inclusion of a clause requiring the insurer to pay a final judgment of its insured up to the limits of the policy notwithstanding the insolvency or bankruptcy of the insured, create specific exceptions to the indemnity nature of the contract, but do not purport to change entirely the basic nature of the contract.

 ORS 743.042 (1) (b).

 Cf., Mayflower Insurance Exchange v. Gilmont, 280 F2d 13, 17 (9th Cir 1960).

 Plaintiff admitted as much through the testimony of its Arkansas underwriter that had they known that Sevier had been subjected to a breath test the investigation would have been extended, probably to the point of ordering a Motor Vehicles Department report.

 See also, Fleishhacker v. Portland News Pub. Co., 158 Or 476, 487, 77 P2d 141 (1938); Restatement (Second) of Agency §§ 268, 272 (1958).

 Mutual Life Insurance Co. v. Hilton-Green, 241 US 613, 36 S Ct 676, 680, 60 L Ed 1202, 1211 (1916); Restatement (Second) of Agency §§ 268(1), 282 (1958).

 See Kimball, The Purpose of Insurance Regulation: A Preliminary Inquiry into the Theory of Insurance Law, 45 Minn L Rev 471 (1961).

 456 P2d at 683.

 Financial responsibility laws may be regarded as representing a legislative compromise between the interest of the innocent victims of negligence (not all innocent victims) and the interest in freedom of individuals not to buy insurance. The compromise, however, is built on the foundation of pre-existing insurance law, including the right of rescission. (See, e.g., ORS 743.042, ORS 486.551; Comment, 40 Or L Rev 351, 352 (1961). The most that can be said of limited financial responsibility laws, under which insurance is required as a pre-condition for driving only of those who have demonstrated their financial irresponsibility and their accident proneness, is that the legislature has a general policy in favor of compensation of the inno*307cent victim of negligence, which policy is not sufficiently strong to extend to requiring all drivers to be insured or to support compensation regardless of fault. (See, Recent Developments in Automobile Accident Compensation, 50 Colum L Rev 301 (1950), for discussion of the various policies underlying financial responsibility laws.) The fact that some losses will not be recompensed because of the financial irresponsibility of negligent motorists has been recognized not by abolishing the defense of insurers to fraud and misrepresentation, but instead, of requiring those who insure themselves against the consequences of their own negligence to purchase protection against the negligence of uninsured motorists as well. (ORS 743.789). Thus, it is not accurate to say that the admitted public policy of concern for the innocent accident victim has been extended so far as to require imposition of a duty upon insurers to investigate the veracity of applicants.
We express no opinion on whether the public interest might not be better served by requiring a reasonable investigation by insurers or requiring them to take notice of motor vehicle records. This is a question best left to the legislature, which is better suited to modify the complex of automobile insurance regulation which necessarily involves compromise of conflicting public policies.

 Bonney v. Jones, 249 Or 578, 439 P2d 881 (1968); Allegretto v. Oregon Automobile Insurance Co., 140 Or 538, 544, 13 P2d 647 (1932) (overruled on other grounds); Bailey v. Universal Underwriters, 258 Or 201, 219, 474 P2d 746, 482 P2d 158 (1971); Mayflower Ins. Exchange v. Gilmont, 280 F2d 13 (9th Cir 1960) (construing Oregon Law). See Jarvis v. Indemnity Ins. Co., 227 Or 508, 516, 363 P2d 740 (1960).

 Defendants’ reliance upon Bailey may be based upon a misreading of its somewhat ambiguous holding: “We hold that the defendant insurance company owed a duty to make a diligent investigation of the accident involved in this case, and one in good faith, including the question whether the vehicle involved was covered by the policy issued by defendant.” (258 Or at 226). In fact, we did not require that the insurer investigate the physical facts of the accident but held that it had satisfied its duty simply by making reasonable inquiry of its insured and of the tortfeasor of whether the latter came within the omnibus clause of the insured’s policy. This duty arose out of the contract and does not depend upon the court’s willingness to give pre-eminence to one of the many public policies involved in regulation of automobile insurance.

 ORS ch 486.

 See, Comment, 40 Or LRev 351 (1961).