DeJonge v. Mutual of Enumclaw

843 P.2d 914, 315 Or. 237, 1992 Ore. LEXIS 250

• Court: Oregon Supreme Court
• Decided: December 31, 1992
• Docket: CC 86-0829; CA A61480; SC S37708
• Status: Published

Opinions

GRABER, J.

The issue in this declaratory judgment action is whether defendant insurer is estopped to deny liability coverage to plaintiffs based on a policy exclusion.¹ Plaintiffs sought a declaration that their liability insurance policy with defendant covered a wrongful death action, in which it was alleged that plaintiffs had negligently sold alcoholic beverages to a minor who later, and as a result of ingesting the alcoholic beverage, caused the death that was the subject of the wrongful death action. The jury in the present case returned a verdict for plaintiffs. The trial court granted defendant’s motion for judgment notwithstanding the verdict and entered judgment for defendant, ruling that plaintiffs had failed to prove all the elements of an equitable estoppel. The Court of Appeals affirmed on the ground that there was no evidence of a false representation. DeJonge v. Mutual of Enumclaw, 104 Or App 296, 800 P2d 313 (1990). We affirm, but on different grounds. We hold that the insurance policy excluded coverage for liability related to the sale of liquor to a minor and that defendant was not estopped to deny such coverage.

Because plaintiffs prevailed before the jury, we review the evidence in the light most favorable to them. Jacobs v. Tidewater Barge Lines, 277 Or 809, 811, 562 P2d 545 (1977). In 1980, plaintiffs bought a small grocery store. Shortly afterwards they met with an insurance agent, Kees-ecker, to obtain coverage for the store. Plaintiffs testified that they told Keesecker that they wanted “full” or “complete” coverage. Keesecker replied that “he was there to serve [plaintiffs’] purposes.”

Although Keesecker knew that plaintiffs sold alcoholic beverages at the store, he never specifically discussed coverage for liquor liability. Keesecker obtained for plaintiffs an insurance policy issued by defendant. The policy excluded coverage for liquor liability, as follows:

“I. COVERAGE S - STOREKEEPER’S LIABILITY

* * * *

“Exclusions

“This coverage does not apply:

Hs Hs

¹ ‘ (h) to bodily injury or property damage for which the insured or his indemnitee may be held liable

“(1) as a person or organization engaged in the business of * * * selling or serving alcoholic beverages, or

“(2) * * * as an owner or lessor of premises used for such purposes, if such liability is imposed

ft* * * * *

“ (ii) by reason of the selling, serving or giving of any alcoholic beverage to a minor * * *.” (Bold in original.)

Plaintiffs did not read the policy in the three years following its original issuance to them and were not aware of the exclusion until they were named as defendants in the wrongful death action. Plaintiffs tendered the defense of the action to defendant, which rejected the tender. A judgment of $675,000 was entered against plaintiffs in the wrongful death action. They then brought this action for a declaratory judgment.²

Plaintiffs do not dispute that their only remaining claim is under the policy and that the policy itself clearly excludes coverage in this case. At trial, the sole issue submitted to the jury was whether defendant was estopped to rely on the exclusion. The jury returned a verdict for plaintiffs. Defendant moved for a judgment notwithstanding the verdict, having previously moved for a directed verdict. In addition to arguing that plaintiffs had failed to prove all the elements of estoppel, defendant argued in its motion for directed verdict and in its motion for judgment notwithstanding the verdict that, as a matter of law, estoppel was not available in this case.

The rule in Oregon supports defendant’s contention that, in this situation, estoppel cannot be used to negate an express exclusion in a policy of insurance. In ABCD... Vision v. Fireman’s Fund Ins. Companies, 304 Or 301, 307, 744 P2d 998 (1987), this court held that “[e]stoppel cannot be invoked to expand insurance coverage or the scope of an insurance contract.” The ABCD...Vision court distinguished between using estoppel affirmatively, to create a right to coverage not contained in the insuring clauses of the policy, and using it defensively, to preserve a right to coverage already acquired by preventing its forfeiture. The court held that estoppel is not available in the former situation to negate an express exclusion in the written contract but is available in the latter situation to avoid a condition of forfeiture of coverage. 304 Or at 307. In Wyoming Sawmills v. Transportation Ins. Co., 282 Or 401, 410, 578 P2d 1253 (1978), this court had held that “the rule [precluding estoppel or waiver] must be limited to failure to assert an exclusion.”³

Plaintiffs do not quarrel with the specific rule, stated in ABCD...Vision v. Fireman’s Fund Ins. Companies, supra, and Wyoming Sawmills v. Transportation Ins. Co., supra, that estoppel cannot be invoked to negate an express exclusion in a written insurance policy. Instead, to avoid that rule, plaintiffs ask us to superimpose a distinction based on the timing of the conduct on which the insured seeks to rely. Plaintiffs contend that the rule precluding the use of estoppel to negate an express written exclusion applies only to an insurer’s conduct after the loss, not to conduct before the loss. The pertinent distinction with respect to timing in a claim of estoppel to negate an express written exclusion, however, is between conduct before and after the issuance of the policy. The legislature has expressed this distinction in a form of the parol evidence rule that applies to written contracts of insurance. ORS 742.016(1) provides:

“Except as provided in ORS 742.043 [concerning binders of insurance], every contract of insurance shall be construed according to the terms and conditions of the policy. When the contract is made pursuant to a written application therefor, if the insurer delivers a copy of such application with the policy to the insured, thereupon such application shall become a part of the insurance policy. Any application that is not so delivered to the insured shall not be a part of the insurance policy and the insurer shall be precluded from introducing such application as evidence in any action based upon or involving the policy. Any oral representations by the insured that are not included in an application shall not be a part of the insurance policy and the insurer shall be precluded from introducing such representations as evidence in any action based upon or involving the policy.” (Emphasis added.)

In 1917, the legislature first enacted the substantial equivalent of ORS 742.016 (formerly ORS 736.305 and then ORS 743.045). 1917 General Laws of Oregon, ch 203, § 12.

Although there are exceptional circumstances in which an insurer can be estopped to deny the existence of coverage notwithstanding the policy’s terms and conditions,⁴ the statute states the rule that written contracts of insurance “shall be construed according to the terms and conditions of the policy.” ORS 742.016(1). In the absence of those exceptional circumstances, none of which is present here — indeed, none of which plaintiffs even claim to be present here — the insured is bound by the provisions of the policy issued. To the extent that timing creates a dividing line in deciding the validity of an express exclusion in a written policy, ORS 742.016(1) suggests that the relevant time is the time when the policy is issued.

Plaintiffs argue — notwithstanding the rule of ABCD...Vision v. Fireman’s Fund Ins. Companies, supra, and this court’s other estoppel cases — that Paulson v. Western Life Insurance Co., 292 Or 38, 636 P2d 935 (1981), limits the usual rule precluding the use of estoppel to negate an express exclusion only to an insurer’s conduct after the loss. Plaintiffs read Paulson too restrictively and without sufficient regard for the context provided by its facts and by ORS 742.016(1).

In Paulson v. Western Life Insurance Co., supra, the employer, holder of a group health insurance plan, told a new employee that he would not have to prove insurability if he applied for insurance within six months of his date of hire. In fact, under the group policy, employees had to enroll within 31 days in order to avoid proving insurability. About two months after beginning work, the employee filled out the application for coverage, which was forwarded to the insurer with the premium. The insurer wrote to the employer that the employee had to furnish satisfactory evidence of insur-ability, but the employer did not inform the employee. Meanwhile, the employee’s dependent daughter had fallen ill and had incurred substantial medical expenses. The insurer denied coverage. This court held that estoppel was available to preclude the insurer from asserting that no coverage existed due to untimely filing of the employee’s application.

The Paulson court noted that two previous cases⁵ holding that estoppel could not be invoked to “creat[e] an original grant of coverage” concerned post-loss conduct by the insurer or its agent. 292 Or at 51 (quoting Wyoming Sawmills v. Transportation Ins. Co., supra, 282 Or at 410). The court distinguished Wyoming Sawmills and Schaeffer v. Mill Owners Ins. Co., 242 Or 150, 407 P2d 614 (1965), reasoning that, in those cases, the insured could not show a detriment arising from the conduct. Because detriment is an element of estoppel, a successful claim of estoppel could not be made in those cases. Paulson v. Western Life Insurance Co., supra, 292 Or at 51-52. However, the pre-loss/post-loss distinction was not the basis for the court’s holding.

Paulson v. Western Life Insurance Co., supra, concerned when an individual had to apply for existing group insurance of a conceded scope, not what the scope of the available coverage would be. The court emphasized that there was “no question that [the employee] would have received [the coverage] had he enrolled within 31 days.” 292 Or at 52. “[T]he plaintiff was entitled to virtually automatic coverage without proof of insurability if application was made within 31 days and * * * but for [the employer’s] statement such coverage would have been in effect at the time the loss occurred.” Ibid. The court acknowledged that the defendant was “correct in the assertion that there are limitations as to the extent to which insurance coverage can be created by estoppel,” id. at 51 (emphasis in original), but went on to explain that this was not such a case. Id. ¿t 52. In other words, the court’s discussion-indicated a belief that estoppel was not being used to create coverage in the sense of enlarging the insuring clauses of the group policy or denying effect to an exclusion. Neither the scope of coverage nor any express exclusion from coverage was at issue.

Paulson also may be read as an example of a situation, mentioned in the parol evidence cases cited above, in which the insured was dissuaded from reading or understanding the policy. However one reads Paulson, it is entirely consistent with a distinction between pre-policy and post-poZ-icy losses. In Paulson, the representation was made and the loss occurred before the individual employee was brought under the group policy. See id. at 40-43, 52-53 (discussing facts). Thus, the facts of the case did not require the court to consider what result would occur if the representation were made before the written policy issued but the loss occurred afterwards. In contrast, the two prior cases discussed by the court in Paulson, 292 Or at 51-52, involved losses that had occurred after the issuance of the contracts of insurance, whose coverage terms were held to be binding. “In both of those cases the agreement was struck and the policy was issued.” Id. at 52.

ABCD...Vision v. Fireman’s Fund Ins. Companies, supra, decided six years after Paulson, likewise did not draw a legal distinction between pre-loss and post-loss conduct, although factually the case concerned post-loss conduct. Rather, the case concerned only the topic of the representations on which the insured relied. The court restated the across-the-board rule that estoppel cannot be used to expand coverage and then distinguished between using estoppel to negate an express exclusion in the written contract of insurance (hot permitted) and using estoppel to avoid a condition of forfeiture of coverage (permitted). 304 Or at 307.

As discussed above, Paulson v. Western Life Insurance Co., supra, does not suggest that this court has drawn a legal distinction between pre-loss and post-loss conduct. The mere fact that our other estoppel cases happened to involve post-loss conduct, e.g., ABCD... Vision v. Fireman’s Fund Ins. Companies, supra; Wyoming Sawmills v. Transportation Ins. Co., supra; Schaeffer v. Mill Owners Ins. Co., supra, does hot create a legal rule that the principles discussed in them can apply only to post-loss conduct. We decline to adopt the legal distinction with respect to timing that plaintiffs suggest. The often-expressed principle that estoppel cannot be invoked to negate an express exclusion in a written insurance policy applies even when the alleged representation occurred before the loss, at least where, as here, the exclusion on which the insurer relies is unambiguous⁶ and the insurer did not dissuade the insured from reading or understanding the exclusion.⁷ The parties’ insurance policy excluded coverage for liability related to the sale of liquor to a minor, and defendant was not estopped to deny such coverage.⁸

The decision of the Court of Appeals is affirmed on different grounds. The judgment of the circuit court is affirmed.

1 The dissent asserts “that the sole question to be decided by this court in this case [is] whether there was sufficient evidence to support [the] jury verdict” on plaintiffs’ estoppel claim. 315 Or at 246. The dissent notes that one member of the court expressed that view during oral argument as well.

After argument, however, the court asked the parties for supplemental briefs on the question whether the issue that we decide here is properly before us. The parties, and we, agree that the issue here decided was preserved (both orally and in writing) at the trial court and was argued in defendant’s brief to the Court of Appeals as an alternative basis for affirmance.

2 Plaintiffs also brought an action against Keesecker, alleging negligent failure to procure adequate insurance. The trial court granted Keesecker’s motion for summary judgment, and the Court of Appeals affirmed on the ground that the action was barred by the applicable statute of limitations. Plaintiffs do not challenge that holding before this court.

3 Most jurisdictions have ruled that estoppel is not available to expand the coverage of a written policy so as to protect the insured against risks expressly excluded. See Annot, 1 ALR3d 1139, 1143 (1965 & Supp 1991) (collecting cases from over 30 states, including Oregon, that follow that rule). Courts have stated various reasons for that rule. The most prevalent is that courts cannot create a new contract for the parties. See, e.g., Inland Mutual Insurance Company v. Hightower, 274 Ala 52, 145 So 2d 422 (1962) (reasoning that to permit expansion of coverage by estoppel would be to create a new contract for which no consideration had been paid). A related rationale is that an insurer should not be required by estoppel to pay a loss for which it charged no premium. Annot, supra, 1 ALR3d at 1144. (Plaintiffs acknowledged in this case, and the record discloses, that a policy with the desired coverage would have cost them an additional $85.30 to $170.60 per year.) In addition to those policy considerations, in Oregon there is a third rationale for the rule, expressed in our cases, that estoppel is not available to expand the coverage afforded by a written insurance policy: the legislative rule established in ORS 742.016(1). That version of the parol evidence rule will be discussed in the text, below.

4 See Knappenberger v. Cascade Ins. Co., 259 Or 392, 398, 487 P2d 80 (1971) (stating general rule); Bunn v. Monarch Life Insurance, 257 Or 409, 478 P2d 363 (1970) (in case involving an insurance policy that had an application attached, insured was not bound by false representation inserted in the application by insurer’s agent); Simmons v. Washington Fidelity National Insurance Co., 136 Or 400, 299 P 294 (1931) (insured was allowed to recover under theory of equitable estoppel despite rule of parol evidence statute, because insured could neither read nor write); Dolan v. Continental Casualty Co., 131 Or 327, 279 P 855, 281 P 182, 283 P 15 (1929) (recovery in estoppel was permitted despite parol evidence statute, because a reading of the insurance application by the insured would not have revealed the false statement).

5 Wyoming Sawmills v. Transportation Ins. Co., 282 Or 401, 578 P2d 1253 (1978); Schaeffer v. Mill Owners Ins. Co., 242 Or 150, 407 P2d 614 (1965).

6 This case is not like Farley v. United Pacific Ins. Co., 269 Or 549, 525 P2d 1003 (1974). There, the insurance agent read over the telephone to the insured the provision that was going to be included in the policy. The agent told the insured that he was covered under that wording. As it turned out, that wording excluded the risk for which the insured wanted coverage. It was the agent’s construction of the policy provision that this court found pivotal: “It seems entirely reasonable to us that [the insured] should not appreciate the fact that the language of the policy would not cover him when considered in the face of the agent’s assurance that he was covered. ” 269 Or at 558. “[T]he insurance company is estopped to assert the actual meaning of the provisions of its policy because the insured is entitled to rely upon a contrary interpretation of those provisions by the company’s general agent.” Id. at 559. The issue here is not interpretation of an ambiguous provision, but the validity of a clear provision.

7 Plaintiffs do not argue that the exclusion is ambiguous or that the insurer dissuaded them from reading or understanding the exclusion. They claim only that the pre-issuance representation as to the extent of coverage that would be provided by the later-issued written policy survived the issuance of the written policy — notwithstanding the policy’s express, unambiguous exclusion of the desired coverage — solely because the representation occurred before the loss occurred.

8 In a situation such as the one at bar, the insured may have a remedy in the form of a claim against the agent for negligent failure to procure insurance. See note 2, ante. That claim does not translate ipso facto to a claim against the insurer under the policy that was procured.