RAY NIELSON AVERETT ANGELA MARIE AVERETT
||SUPREME COURT OF ARIZONA
||Supreme Court No. CV-92-0015-PR
||1994.AZ.16034, 869 P.2d 505, 177 Ariz. 531, 160 Ariz. Adv. Rep. 3
||March 3, 1994
||RAY NIELSON AVERETT; ANGELA MARIE AVERETT, AN ADULT INCAPACITATED, AND DANIEL RAY
AVERETT, A MINOR, BY AND THROUGH THEIR LEGAL GUARDIAN AND CONSERVATOR, EUGENE W. AVERETT,
FARMERS INSURANCE COMPANY OF ARIZONA; TRUCK INSURANCE
EXCHANGE CO., DEFENDANTS-APPELLEES.
||Court of Appeals No. 2 CA-CV 91-0077. Pima County No. 267718. Appeal from the Superior
Court of Pima County. The Honorable Robert B. Buchanan, Judge. Memorandum Decision of the
Court of Appeals. Division Two, November 29, 1991. Vacated
||Poore & Riddle, Tucson, by J. Thomas Poore, Attorneys for Plaintiffs/Appellants.
||Chandler, Tuller, Udall & Redhair, Tucson, by D. B. Udall, Attorneys for
||Zlaket, Feldman, Moeller, Corcoran, Martone
||The opinion of the court was delivered by: Zlaket
||We accepted review of this case to examine the relationship between an insured's
"reasonable expectations" of coverage and the "household exclusion"
found in an automobile liability insurance policy. We have jurisdiction pursuant to Ariz.
Const. art. 6, § 5(3) and A.R.S. § 12-120.24.
||Angela and Daniel Averett were seriously injured while riding as passengers in the
family automobile driven by their mother, Carol Averett. Carol died as a result of the
accident, which the parties have stipulated was caused by her negligence.
||Ray Averett, Carol's husband, made a claim for himself and his children against Farmers
Insurance Company, which carried liability insurance on the automobile Carol
was driving. Farmers, relying on its "household exclusion" and Arceneaux v.
State Farm Mut. Auto. Ins. Co., 113 Ariz. 216, 550 P.2d 87 (1976), responded with an offer
of $15,000 per child, even though the policy declarations recited bodily injury limits of
$250,000 per person and $500,000 per occurrence, and the children's injuries admittedly
exceeded those amounts.
||In its insuring agreement, the Averett policy states that Farmers
||will pay damages for which any insured person is legally liable because of bodily
injury to any person . . . arising out of the . . . use of a private passenger car.
||Although Ray Averett was designated as the named insured, it is undisputed that his
wife also qualified as an "insured person" under the policy.
||In a separate section entitled "Exclusions," the policy states:
||This coverage does not apply to:
||11. The liability of any insured person for bodily injury to you or a family member.
||"Family member" is defined to include related persons who live in the named
insured's household. Because Angela and Daniel were clearly family members under this
definition, Farmers denied coverage for all sums over the statutorily required limits of
$15,000 per person and $30,000 per occurrence. See A.R.S. § 28-1170.
||Averett filed suit, seeking a judicial declaration that Farmers was obligated to pay
the full amount of the policy limits notwithstanding the exclusion. The parties filed
cross-motions for summary judgment. In denying Averett's motion and granting Farmers', the
trial court cited Arceneaux for the proposition that "the household exclusion in the
plaintiff's insurance policy is a valid exclusion after payment of the statutory
limits." Although his order did not expressly say so, the judge obviously rejected
the argument that Averett's reasonable expectations could render the exclusion
unenforceable. The court of appeals affirmed by memorandum decision, with one judge
||It is well established that a contracting party's reasonable expectations may affect
the enforceability of non-negotiated terms in a standardized agreement. See Broemmer v.
Abortion Services of Phoenix, Ltd., 173 Ariz. 148, 151-52, 840 P.2d 1013, 1016-17 (1992);
Darner Motor Sales v. Universal Underwriters, 140 Ariz. 383, 389-94, 682 P.2d 388, 394-99
(1984); Restatement (Second) of Contracts § 211 cmt. f (1981). Farmers argues, however,
that because there is no evidence here that its agent made misleading statements or
promises to induce Mr. Averett to purchase this policy, the law of reasonable expectations
does not apply. We disagree. The absence of misrepresentation is not determinative. In
State Farm Mut. Auto. Ins. Co. v. Bogart, 149 Ariz. 145, 151, 717 P.2d 449, 455 (1986), we
||It is true that an oral representation contrary to the words in the written instrument
may qualify as either a fraudulent or negligent misrepresentation, but Darner does not by
its terms limit itself to misrepresentation actions. We decline the invitation to so limit
the decision. The provision in the declaration page reflecting non-owned coverage in the
amount of $300,000 certainly is an indication that the "dickered" or negotiated
deal was the purchase of $300,000 in non-owned coverage. One of the basic principles which
underlies Darner is simply that the language in the portion of the instrument that the
customer is not ordinarily expected to read or understand ought not to be allowed to
contradict the bargain made by the parties.
||Farmers further suggests that our decision in Arceneaux validates its conduct here.
Such an assertion misconstrues that case. With respect to coverages in excess of the
statutorily required minimums, A.R.S. § 28-1170(G) and Arceneaux permit the adoption of
contract terms that do not conform to the strict requirements of the financial
responsibility laws. 113 Ariz. at 218, 550 P.2d at 89. This allowance does not necessarily
mean, however, that all such terms are automatically valid and enforceable. See Do v.
Farmers Ins. Co. of Arizona, 171 Ariz. 113, 116, 828 P.2d 1254, 1257 (Ct. App. 1991). As
with any agreement sought to be judicially enforced, the law of contracts must be applied
in an attempt to discern and effectuate the parties' intentions. See Taylor v. State Farm
Mut. Auto. Ins. Co., 175 Ariz. 148, 854 P.2d 1134 (1993). That body of law includes the
rule of reasonable expectations. Thus, while the "household exclusion" may be
enforceable in some circumstances, it may not be in others. In Gordinier v. Aetna Cas.
& Sur. Co., 154 Ariz. 266, 272-73, 742 P.2d 277, 283-84 (1987), we stated:
||As a synthesis of the cases and authorities demonstrates, Arizona courts will not
enforce even unambiguous boilerplate terms in standardized insurance contracts in a
limited variety of situations:
||1. Where the contract terms, although not ambiguous to the court, cannot be understood
by the reasonably intelligent consumer who might check on his or her rights, the court
will interpret them in light of the objective, reasonable expectations of the average
insured [citing State Farm Mutual Auto. Ins. Co. v. Bogart, 149 Ariz. 145, 717 P.2d 449
(1986) and Wainscott v. Ossenkop, 633 P.2d 237 (Alaska 1981)];
||2. Where the insured did not receive full and adequate notice of the term in question,
and the provision is either unusual or unexpected, or one that emasculates apparent
coverage [citing Zuckerman v. Transamerica Insurance Co., 133 Ariz. 139, 650 P.2d 441
||3. Where some activity which can be reasonably attributed to the insurer would create
an objective impression of coverage in the mind of a reasonable insured [citing Sparks v.
Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127 (1982)];
||4. Where some activity reasonably attributable to the insurer has induced a particular
insured reasonably to believe that he has coverage, although such coverage is expressly
and unambiguously denied by the policy [citing Darner Motor Sales v. Universal
Underwriters, 140 Ariz. 383, 682 P.2d 388 (1984)]. . . .
||According to his deposition testimony, Ray Averett told the Farmers agent that he
wanted "full coverage" for his entire family, although the meaning of that
statement is not fully explained in the record. Averett purchased what he believed was
"full coverage," in amounts far greater than those required by law. He chose
Farmers because he thought it offered what he wanted at the lowest available price, and he
paid all of the premiums.
||Averett further testified that he thought this insurance would cover his children if
they were injured while riding with their mother. He said that his wife had health
problems, which made him particularly concerned about her ability to drive. His testimony
implies that had he been advised of the household exclusion, he might have opted to shop
elsewhere, or taken other measures. The Farmers agent allegedly knew of Carol's health
problems, but it is unclear to what extent they were discussed, if at all, in connection
with Averett's purchase of the coverage.
||Rather typically, the parties did not discuss the contract terms, nor was there any
opportunity to negotiate them. Moreover, Averett testified that he never received a copy
of the actual insurance policy, though Farmers asserted during argument before this court
that it sent one to him. Averett acknowledged receipt of the declarations page which
recited coverage in the limits he had purchased. This allegedly reinforced his belief in
the amount of protection he thought he had. Averett further stated that at no time prior
to this claim was he advised of the existence or substance of the "household
exclusion." When the exclusion was finally called to his attention, he said that he
read but was unable to understand it.
||In Bogart, we stated:
||We believe it quite clear that the clause in question also significantly modifies the
"dickered deal" and could even be found unconscionable. The "dickered
deal" was to buy $100,000/$300,000 in owned and non-owned auto coverage. Most
informed policyholders would be shocked to discover that the substantial protection which
they had purchased was reduced to the $15,000 minimum statutory coverage whenever they
drove a rented car. Such an eventuality is certainly one that should be clearly called to
the attention of the insured.
||149 Ariz. at 153, 717 P.2d at 457. The same analysis lends itself to this case.
According to Averett's testimony, neither the agent nor anyone else from Farmers ever
explained the coverage or told him that the policy might provide fewer benefits for his
children than it would for a stranger.
||We believe that reasonable persons could differ on the factual issues presented here.
Whether the average, reasonably informed policyholder would expect his or her family to be
excluded from liability coverage under these circumstances is certainly a debatable
question. We strongly suspect that most consumers who purchase insurance in amounts
greater than the statutory minimums would be surprised to learn that members of their
household were covered only to the extent of $15,000 per person and $30,000 per
occurrence, regardless of the limits stated on the face of the policy. Other questions
here include whether Farmers ever provided Averett with a copy of the policy that it now
attempts to enforce, and if so, whether that document's language was sufficiently clear to
place a reasonable insured on notice of the household exclusion. Thus, we are of the view
that the trial court should have permitted a fact finder to decide if, based on all
available evidence, the household exclusion in Averett's policy was "beyond the range
of reasonable expectations." Restatement (Second) of Contracts § 211 cmt. f (1981).
||Our decision should not be read to mean that a household exclusion is unenforceable
under all circumstances. As Arceneaux makes clear, the insurance company and its insured
may agree to this exclusion with respect to losses above the statutorily required minimum
amounts of coverage. But such a limitation must be intended and agreed to, not merely
imposed upon an unwitting customer. When an exclusion, limitation or escape clause runs
contrary to what a reasonable insured would expect, or when it significantly diminishes
coverage that the policy purports on its face to provide, the surrounding facts and
circumstances must be considered to determine whether, and to what extent, there was a
meeting of the minds between the contracting parties.
||Nor is it our intention here to extend or expand upon the doctrine of reasonable
expectations as previously described in cases such as Darner, Broemmer and Gordiner. We
hold only that under these facts, the trial court should not have granted summary judgment
on Averett's reasonable expectations theory but should have instead allowed the matter to
be considered by the finder of fact.
||We vacate the court of appeals' memorandum decision. We reverse the summary judgment
in favor of Farmers, and remand the case for further proceedings consistent with this
||THOMAS A. ZLAKET, Justice
||STANLEY G. FELDMAN, Chief Justice
||JAMES MOELLER, Vice Chief Justice
||ROBERT J. CORCORAN, Justice
||FREDERICK J. MARTONE, Justice