Insurance Contract Law

Brien Roche

Insurance policies are contracts. They are simply agreements. No different than most other contracts.

What follows is an explanation of contract law and some incorporation of insurance contract law.

First, some general definitions. A contract is an agreement between two or more persons which creates an obligation to do a particular thing. The essential elements are an offer, acceptance and consideration.

Insurance Contract Law-Offer

An offer is just that. It is an offer to do something. Sometimes offers are set forth in letters of intent. This is a way to set forth an offer without a binding contract. This way the negotiations can continue.

Sometimes the offer may have conditions. For instance those conditions may be price, manner of acceptance or a deadline.

An offer may be revoked any time before acceptance. Also it may be considered rejected if not accepted by a date specified.

The offer should contain the identity of the person making the offer,  to whom it is made, the subject matter, the price, and the time, manner and place of payment or performance.

Acceptance

The acceptance must meet in every respect the terms of the offer. If it is not identical, then it is considered a rejection or a counter offer. Therefore with acceptance there must be a meeting of the minds. 

A conditional acceptance is a counter offer.

The offer is considered made when it is received. However, an acceptance is governed by the mailbox rule. Acceptance is considered made when it is sent i.e. deposited into the mail.

The offer and acceptance together must show a meeting of the minds on every meaningful detail. In addition the offer and acceptance may be shown by word, act or conduct.

Consideration

Consideration is the meat of the deal. It is the quid pro quo. Any consideration, given in good faith is sufficient. The court will not typically inquire into the adequacy of the consideration. In other words the consideration may be as small as a peppercorn. The consideration may be money. Also it may be forbearance. It may be a very slight advantage to one party. Or it may be a small inconvenience to the other party. What is offered does not have to equal what is received. However, inadequacy or inequality may be an indication of fraud.

Past consideration is not consideration. What that means is that past consideration for another contract does not constitute valid consideration. The performance of a duty based solely on a moral obligation to the other party is not consideration.

Consideration may be proven through promissory estoppel. That is if one party expects that the other party will be induced to act or forebear, and that party in fact does, then the promise may be enforceable. This is sometimes called equitable estoppel or promissory estoppel. It is a substitute for consideration. For instance, an employer promises an applicant to be made a partner in two years. The two years pass and the employee is not made a partner. The employee may have a claim based on equitable estoppel. However in Virginia the estoppel can only be used to prove consideration for a unilateral contract. 

Conditions

There may also be conditions as part of a contract. A condition precedent calls for the performance of some act or the happening of some event after the terms of the contract have been agreed to, but before the contract takes effect. The condition precedent must be performed. Otherwise performance is excused. In State Farm v. Nationwide, 596 F.Supp2d 940 (E.D.Va. 2009) the court held an umbrella policy requirement that the named insured maintain underlying coverage in the amount listed is a condition precedent to the umbrella carrier’s obligation to perform.

Sometimes in construction contracts, there will be language that the sub gets paid when the general gets paid by the owner. Generally, that is not held to be a condition precedent. Galloway v. Ballard 250 Va. 493, 506 (1995)

A condition subsequent is one which defeats a contract right. For instance, the right to bring suit against the insurance company may be defined by a particular time. The failure to bring suit within that time defeats the lawsuit. in Virginia conditions subsequent are not favored and will be strictly construed. State Planters v. First National, 76 F2d 527, 530 (4th Cir. 1935)

Insurance Contract Law-Types of Contracts

Contracts can come in a number of different types. They may be oral or written. They may be a combination of both. Certain types of contracts must be in writing and signed by the party against whom it is being enforced. However those types of contracts may not be modified orally. Lindsay v. McEnearney, 260 Va. 48 (2000)

Contracts may be expressed or implied. An expressed contract is one where all the terms and conditions are stated. An implied contract is not set forth in express terms, but rather is inferred from the parties conduct. Such a contract is implied in fact and takes for granted a mutual agreement and promise that have not been expressed. Such a contract requires the intent to contract.

A contract implied in law is also called a quasi contract. It is not really a contract at all. The law imposes a promise to pay in order to prevent one party from being unjustly enriched at the other’s expense. Such a contract is based on what is called “quantum merit”.  That term means “as much as deserved“. Damages are awarded in an amount equal to the reasonable value of the services rendered. To base a claim on such unjust enrichment the courts infer the existence of a contract and privity between the parties. However the agreement and presumed intent of the parties are disregarded.

Enforceability

Contracts may be unenforceable in some cases. A contract that is required to be in writing, and is not, is unenforceable. If a contract that is barred by the statute of  limitations it is also unenforceable.

A contract may be void because it violates a statute intended to protect the public. However a contract may be voidable due to fraud, incompetence, mutual mistake, duress, undue influence or the failure to comply with a condition precedent.

Contracts may be executory or executed. An executory contract calls for future performance. An executed contract is one where performance has been completed.

Contracts may be entire or severable. If a contract is entire the court will enforce the entire agreement. A severable contract is one where part of the agreement may be enforced.

Contracts may be unilateral or bilateral. A bilateral contract is one where each party promises some performance. In a unilateral contract one party makes a promise to perform upon the fulfillment of certain conditions by the other party. However if those conditions are not fulfilled there is no obligation to perform.

Parties and Subject Matter

The parties to a contract must be competent. For a third-party to seek some relief pursuant to the contract that party must show that it was clearly and specifically an intended beneficiary by both parties. However potential benefit is not sufficient. In Levine v. Selective, 250 Va. 282 (1995) the plaintiff property owner pled sufficient facts to support a third-party beneficiary claim to a contract between his builder and the insurer where he alleged all parties expressly understood that he was the beneficiary of the insurance contract, the insurer had actual notice of this and when the insurer made partial payment, it issued checks to the builder and the property owner.

In Munson v. Aetna, 35 Va. Cir 216 (1994), Aetna denied coverage to its insured and did not defend. Plaintiff then obtained a judgment against the insured. The plaintiff then sued the insurance carrier for bad faith. The court held that the judgment creditor in this case was a third party beneficiary. 

The subject matter of the contract must be legal. 

Insurance Contract Law-Interpretation

Contracts are interpreted by the plain meaning rule. Where the agreement is complete on its face and its meaning is plain and unambiguous the court only looks at the four corners of the document.

Sometimes there is a mutual mistake of fact that goes to the heart of the deal. Such a deal may be reformed or rescinded on the grounds of mutual mistake. A contract may be reformed not only where there is mutual mistake, but also unilateral mistake, coupled with fraud or other inequitable conduct. Reformation may also be allowed where the parties have an agreement, but in reducing it to writing, they make a mistake of law, so that the contract does not reflect the agreement. Generally, the proof for reformation must be clear and convincing evidence.

The critical guide in interpreting a contract is to look for the intent of the parties expressed in the words i.e. the plain meaning. Frequently the court will look at the dictionary definitions of words. In Hill v. State Farm, 237 Va. 148 (1989) the court looked at the dictionary to determine whether a moped was a motor vehicle. Based on the dictionary definition, the court concluded that the carrier had intended to include mopeds in its uninsured motorist coverage.

In determining whether there is coverage for a claim under a policy, the court will apply the eight corners rule. The court will look at the four corners of the suit papers and the four corners of the policy.

Covenant of Good Faith

Virginia does not recognize a separate cause of action for a breach of implied duty of good faith and fair dealing. Brauer v. Nations Bank, 251 Va. 28, 33 (1996)  Likewise such a covenant cannot be the vehicle for rewriting an unambiguous contract in order to create duties that don’t otherwise exist.

In the context of the UCC, every contract imposes an obligation of good faith. A breach of this obligation however does not amount to an independent tort. Brauer at 33

Ambiguity

Sometimes a contract is ambiguous. Terms may be ambiguous where they may be susceptible to two or more meanings or refer to two or more things at the same time. However a contract is not ambiguous just because the parties disagree about the meaning. A contract is not ambiguous because the parties failed to specify a term. The court will always look at the intent of the parties, the entire contract, and the facts and circumstances surrounding the contract. Ambiguity will be interpreted against the party who drafted the contract.

The parol evidence rule may be relied on to resolve ambiguities. This rule has so many exceptions that you need to know the exceptions to understand the rule.

One of the exceptions is the collateral contract doctrine. A prior or contemporaneous oral agreement that is independent of and not inconsistent with the written contract, and which would not ordinarily be expected to be in writing, is admissible  as an exception to this rule.

The parol evidence rule does not forbid the introduction of evidence of agreements or statements made after the signing of the written agreement.

Another exception to the rule is the partial integration doctrine. That is to say where the entire agreement is not in writing parol evidence may be used to show the additional independent facts contemporaneously agreed on in order to establish the entire contract.

Assignment, Survival and Joint and Several

Most contracts can be assigned unless the contract says otherwise. A contract may be joint and several if it says so. The obligations to perform may pass to the survivor if there is joint and several liability

Insurance Contract Law-Breach of Contract

The purpose of a breach of contract action is to put the non-breaching party in as good as position as if the contract has been fully performed.

For the breach to be a basis for a lawsuit, it must be material. That means that the breach must go to the heart of the deal. A non-breaching party is then excused from performing. The party who commits the first material breach is not entitled to enforce the contract. Countryside Orthopedics v. Peyton, 261 Va, 142, 154 (2001) A partial failure of performance may excuse performance by the other party. 

If a contract is severable such as an installment contract, then that separate part may be enforced. If  there has been substantial performance of the contract, then there may not be, any material breach. Neely v.  White, 177 Va 358 (1941)  An anticipatory breach occurs where one party through words or actions indicates it will not perform. In that instance, a breach of contract action may be filed. That repudiation comes in the form of statements, a transfer to a third-party of an interest in the contract or action that renders substantial performance impossible. To constitute a breach of contract, it must cover the entire performance of the contract and go to the very essence of the contract.

Insurance Contract Law-Enforcement

Enforcement may be through an action in equity or law. An equitable action would be for specific performance. However that typically is not allowed where damages are recoverable and adequate.

Specific performance is allowed in regards to the purchase of real estate and in regards to items that are otherwise unique. In pursuing a specific performance action care must be exercised. If that action is dismissed, that could be a bar to re-filing, under Rule 1:6. It must also be kept in mind that specific performance is considered an extraordinary remedy. If there is a liquidated damage clause in the contract, that may be a bar to specific performance. Brown v. Friedberg, 127 Va. 1(1920)

Damages

There are two types of contract damages: direct and indirect, or sometimes called consequential. Direct damages are those that may be discerned from the wording of the contract. Consequential damages arise from the intervention of special circumstances, not ordinarily predictable, but they are compensable if that special circumstance was in the contemplation of all parties when the contract was made. Contemplation includes what was actually foreseen and what was reasonably foreseeable. Roanoke Hospital v. Doyle, 215 Va. 796 (1975)

There actually is a third type of damage called liquidated damages which are damages the parties have agreed to in advance in the event of a breach since damages may be difficult to determine.

To prove damages the plaintiff must show a causal connection between the breach and the damages, and then must prove the damages by using a proper method.

Date Of Breach

The damages are to be determined at the time of the breach. Therefore fluctuations in value after the breach are irrelevant. United Virginia Bank v. Dick Herriman, 215 Va. 373, 375 (1974)

Direct damages may be such things as additional cost of labor and materials due to delays or cost of repairing damaged property. It may be either the value method or the cost method that determines these damages.

An example of consequential damages is lost profits. These damages must be requested in the complaint. Lost profits are recoverable where the claim is an established business, the lost profits can be shown with reasonable certainty, loss was caused by the breach, and the loss was foreseeable as a result of the breach. Virginia Code § 8.01-221.1 addresses damages of a new or unestablished business. The proper measure is lost profits not lost revenue. Profit is the gross amount minus the cost associated with performance Bettius v. National Union, 839 F.2d 1009 (1988).

Also the plaintiff always has a duty to try to minimize the damages.

Statute of Frauds

The statute of frauds requires that certain types of contract be in writing. The purpose of this requirement is to prevent fraud. That is to say, these types of contracts have so often been the subject of fraud that it was felt necessary that the basic terms be put in writing and signed by the party against whom it is being enforced. This Code section is found in section 11–2 of the Virginia Code. The writing may come in any form. It must contain the essential terms of the deal. If there has been part performance of the contract then the statute of frauds may not apply.

Insurance Contract Law-Drafting

In drafting a contract it’s a good idea to use the active voice. Each sentence should state who will do something, what they will do and to whom or for whom  something will be done. That is the active voice.

Your contract should state that if one party has a complaint then notice must be given. In addition it probably is worthwhile to allow for a cure period to allow the purported breaching party to cure the problem. The contract should also contain the choice of laws and a choice of forum selection. To the extent that any amendments are allowed, it must be stated that they have to be in writing and signed by all parties. This raises the bar, if one party wishes to prove an oral amendment.

See the blogpost on this site dealing with contract unconscionability. 

Consult a Skilled Contract Lawyer in the DMV Area About Your Insurance Policy

Call, or contact us for a free consult. Also for more info on contract law see the Wikipedia pages. Also see the post on this site dealing with contract issues.