Oklahoma Insurance Law : Oklahoma Insurance Lawyer & Attorney : Buckman & Roach Law Firm : Tulsa Bad Faith Insurance & Declaratory Judgment Commentary

Unnecessary damages which could have been avoided by the insured cannot be recovered in a lawsuit for breach of contract as every Oklahoma insurance lawyer well knows.  A party who asserts a claim for breach of contract against an insurance company has a duty to use reasonable efforts to mitigate his damages.  Hidalgo Properties, Inc. v. Wachovia Mortgage Company, 617 F.2d 196, (10th Cir. 1980)  A party, including a policyholder, has a duty under Oklahoma law, to make all reasonable efforts to minimize his damages.  Sabine Corp. v. ONG Western, Inc., 725 F.Supp. 1157, (Okla. W.D. 1989).

The principle of mitigation of damages is summarized in the Restatement (Second) of Contracts Section 350 comments (1979) as follows:

As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts. Once a party has reason to know that performance by the other party will not be forthcoming, he is ordinarily expected to stop his own performance to avoid further expenditure. . . . Furthermore, he is expected to take such affirmative steps as are appropriate in the circumstances to avoid loss by making substitute arrangements or otherwise. 

A promisee is not required to go to extraordinary lengths or expense to avoid loss; only efforts that are reasonable under the circumstances are necessary.

Any Oklahoma insurance law attorney defending a case brought against an insurance company for breach of contract, fraud, bad faith, or any other cause of action will always look to see if the losses could have been reasonably avoided to prevent the insurance company from being forced to pay more than the law requires.  The lawyer representing the insured will attempt to show reasonable efforts were used or it was impossible to lessen the damage.

My favorite example is the hail storm that knocks a hole in the roof.  The insured needs to do something to stop the water from raining inside and soaking the furniture, i.e., mitigate or lessen the damage by tarping the hole in the roof.  He can't just sit back and watch the water run down the walls!

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Coverage decisions tend to be expensive one way or the other.  If an insurance company determines coverage exists, then it has to pay for the underlying claim.  If the claim was not really covered by the terms of the insurance policy, then the company has incurred an expense that was unnecessary and which adversely impacts the year end financial picture.  Decisions to deny coverage, when in fact it exists, is even more expensive.  There is the litigation expense plus the potential bad faith claim. 

Christopher J. Boggs wrote a commentary about what his 19 years of experience in the insurance industry had taught which he was kind enough to share. 

• Only good lawyers realize they don't know everything about the law
• Someone who truly understands insurance can explain its concepts in simple language.  The person with no idea how it works masks his ignorance with $10.00 words and legalese
• There is ALWAYS more than one possible answer to a coverage question.  One is just more correct than the others based upon the particular situation
• Only "newbies" know everything about insurance
• Regardless of how much I know (or think I know) about insurance, there is always MUCH more to learn.  It is NEVER okay to guess at the answer to a coverage question
• It's perfectly acceptable to say, "I don't know", as long as you follow it up with "but I'll find out and get right back to you."

The only other thing I have to add from my 25 years of coverage analysis is the answer is always simple - just ask either side!  They always know the answer!

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Oklahoma insurance law attorneys agree there are a number of reasons why a policy may be voided by an insurance company.  Fraud by the applicant or policy holder is the most common reason an insurance company would rescind or void an insurance policy.  Rescission is defined as:

1. A party's unilateral unmaking of a contract for a legally sufficient reason, such as the other party's material breach, or a judgment rescinding the contract; voidance.  Rescission is generally available as a remedy or defense for a nondefaulting party and is accompanied by restitution of any partial performance, thus restoring the parties to their precontractual positions. -- Also termed avoidance.  Black's Law Dictionary (8th ed. 2004)

According to Oklahoma statute 15 O.S. § 235, a party seeking to rescind or void a contract (which includes an insurance policy) must:

• act promptly upon discovering facts which entitled him to do so
• restore to the other party everything of value

In other words, experienced Oklahoma insurance attorneys advise their insurance company clients wanting to rescind a policy on the grounds of fraud to act quickly and also to return all premiums paid.  Sneed v. State ex rel. Department of Transportation, 1983 OK 69, 683 P.2d 525 and Berlands's Inc., of Tulsa v. Northside Village Shopping Center, 1972 OK 152, 506 P.2d 908.

As a caveat fancy legal wording for caution or warning), accusing a policyholder of fraud needs to be done carefully.  In Oklahoma, an insurer really should consult with competent legal counsel before doing so.

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 Fraud perpetrated in any contract can relieve the other party of the duty to perform.  In other words, fraud or making false statements is legally unacceptable.  Fraud includes any statement or act that is intended to deceive someone into entering into the contract.  Fraud consists of:

• A Suggestion that something is true when in fact it is not
• A positive statement that something is not true when the person making the statement had no reasonable basis for saying it
• A person concealing something known to be the truth
• A promise made without any intention of performing it
• A person remaining silent when he had a duty to speak
• Any other statement or action intended to deceive

Oklahoma has statutes defining actual fraud, 15 O.S. § 58-59 that attorneys rely upon in defending against fraudulent insurance claims. 

In Varn v. Maloney, 1973 OK 133, 516 P.2d 1328, the Oklahoma Supreme Court said the elements needed to prove fraud are:

• A false representation 
• made with the knowledge of its falsity or recklessly without knowledge as to its truth or falsity
• as a positive assertion with the intention that it be acted upon by another 
• actual reliance upon the statement 
• injury or damage resulting therefrom.

Proving fraud in Oklahoma is not always easy to do and legal advice from an experienced attorney practicing in insurance litigation is usually needed.  The most common approach to dealing with fraud in insurance claims in Oklahoma is recission.

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In our last post, we discussed some rules the courts use to interpret insurance policies. If the contract has language that is subject to more than one interpretation, it is considered to be ambiguous. In Oklahoma when an insurance policy has ambiguous language, we explained the courts construe the language in favor of the insured or the policy holder and against the insurance company.

However, this still does not answer the question of how you decide what the language means. It is one thing to say the language should be viewed favorably to the policy holder, but you still have to determine what should happen.

Oklahoma has adopted the “reasonable expectations test”. In simple terms, it is what would a reasonable insured would have expected at the time he was purchasing the coverage. An insured buying disability insurance that has a clause which is ambiguous would not reasonably expect to have collision coverage for his vehicle.

The courts have used the “reasonable expectations test” as a means of protecting insurance companies from having their contract rewritten to the point where it would be unfair and unreasonable. The courts have made it extremely clear that it is not their job to rewrite an ambiguous insurance contract, it is merely their responsibility to interpret the language of the policy when the parties otherwise disagree.

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It is no surprise there is often disagreement over whether an insurance policy provides coverage. There are competing interests to be accommodated and sometimes the language used is clearer to one person than another.

We are often asked, “How do judges decide what the insurance policy really means?” There are volumes of books in law libraries discussing this very topic, but there are some general principles judges often employ.

1. A judge is going to look at the whole contract to determine the intent of the parties. You do not just consider one part of the contract, but use all of the parts to interpret other provisions and try to figure out what was really intended.
2. The courts generally examine the language of the policy to see what the parties meant by the words that were used. For instance, there may be definitions in the policy that tell the meaning of the words.  If not, then the courts usually interpret words in their ordinary and popular sense. Technical words are interpreted in the way that are usually understood by persons in that particular business unless they are clearly used in a different sense.
3. If the terms are ambiguous or otherwise uncertain, those particular phrases are read in the way that is most favorable to the policy holder or the insured.  Lawyers tend to say the contract is construed against the drafter.  Since the insurance company came up with the language used; it will be read in the light most beneficial to the person insured.
4. The courts are going to apply any regulations that the insurance department, statutes, or case law require.  For example, it would be against public policy to write an insurance policy that provided protection for committing criminal actions. In certain categories or classifications of insurance, there are required coverages which are mandated by the legislature.  Oklahoma has a statutory fire policy in which the essential elements of the coverage are set forth in the statute and this coverage is provided even if the policy says something different.  The insurance company can add to the minimum coverage, but cannot provide less than the minimum.

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Some people, including insurance adjusters, forget an insurance policy is a legally binding contract.  Claim representatives who adjust a lot of liability and third-party claims sometimes tend to confuse the issue of coverage under a policy with liability for the accident.  These issues are not related.

One reason insurance policies don't seem like binding contracts is because the insurance policy is signed with a preprinted signature by an officer of the company. The policy holder or insured does not have to sign the agreement so it is not what people typically think of as a contract. 

Another reason maybe that insurance policies are contracts the courts call “contracts of adhesion”. In other words, the terms of the agreement are usually not negotiated like a typical business deal. The insurance company drafts and prepares the policy and the insured either buys the coverage or does not.

Regardless of whether people think of insurance polices as contracts, courts consider them valid and binding to the extent the agreement does not violate regulations of the insurance department, statutes of the jurisdiction where the policy is issued, and controlling case law interpreting insurance policies. As such, the first step in trying to decide whether there is coverage for any given situation is to read the policy.

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