Top Student Exam Answers, Winter 1989
Note: These were, in my judgment, the best answers received under examination conditions. They should not be taken as model answers, in that they all contain extraneous material as well as omitting useful information. Some even reach incorrect conclusions. However, they all take intelligent approaches to the questions, are well organized and reasoned, and make sensitive use of the facts.
Question 1, Answer 1
As defined by the Uniform Commercial Code (UCC) §2-105, the bottles of Chateau Orleans qualify as "good." Therefore, with the exception of Dumont’s second agreement with Triumphe, the UCC provisions and case interpretations of these provisions will predominate discussion of legal claims. Dumont’s legal relationship with Von Braun will first be analyzed, followed by the agreements with Triumphe.
Dumont may sue Von Braun for breach of the contract signed February 21 to purchase the wine. Likewise, Von Braun may countersue for the price of the wine under the same contract. The agreement includes a bargained-for exchange to satisfy consideration and is in writing to satisfy the statute of frauds under UCC 2-201 for sale of goods over $500.
Dumont should proceed with one of two strategies. If it can be shown that Von Braun bore the risk of loss up to and including the time at which the wine was lost, Dumont should seek to enforce the contract and collect damages. If it can be shown by Von Braun that the risk of loss transferred to Dumont, it is best to pursue having the contract voided by the doctrines of impracticability or mistake.
Section 2-513 of the UCC provides for a right of inspection by the buyer. Under part four of this section, "unless expressly agreed by the parties it (inspection) does not. . . shift the place for delivery or for passing the risk of loss." The contract with Von Braun provides for inspection before the sale became final; however, Dumont was not to take delivery from Von Braun’s cellar until March 15. UCC 2-509(3) provides that in this case the risk of loss would not pass to Dumont until receipt of the goods or on tender of delivery. Economically, this result is sensible since Von Braun is in the best position to insure the bottle while it remains under his control. Thus, Dumont has not assumed the risk of loss and should pursue enforcement of the contract to collect damages.
If Von Braun is convinced he bore risk of loss, he will most likely try to avoid liability through the doctrines of mistake impracticability. The events surrounding the loss of the wine on March 8, which may establish responsibility or fault, will be key to this defense. The bottle may have been cracked prior to March 8, it may have cracked on March 8 due to an inherent flaw in the bottle, it may have been cracked by Butterfield or it may have been cracked by Von Braun.
If the bottle had cracked prior to March 8 or on March 8 due to an inherent flaw, neither party would be to blame and the contract could be avoided under UCC2-613 since the unique bottle was identified to the contract. This would be a failure of a basic assumption under which the contract was made; that the wine would exist at time of delivery, similar to the music hall being in existence at the time of the concert in Taylor v. Caldwell.
However, the facts in this case do not support this claim. Butterfield, with "excruciating care", thoroughly inspected the label, the color of the glass, the residue on the neck, and the humidity of the cork. Any pre-existing crack should have been discovered. The bottle of wine had survived 200 years of handling without cracking.
Von Braun may still avoid the contract under UCC 2-615 by showing he was not at fault, but that Butterfield caused the loss. If this were shown Von Braun might collect the price of the contract under UCC 2-709 if the courts adopts the view that risk of loss passed to Dumont during Butterfield’s inspection. The facts are more indicative that Butterfield did not cause the crack. Butterfield set the bottle down "gently, but quickly and with flair." Further, there is no evidence that wine leaked onto the table where he had set the bottle. The facts do not indicate how Von Braun handled the bottle after retrieving it from the table. However, the large and spreading stain on his jacket indicates a substantial crack which should have left a spot on the table prior to his picking up the bottle. This is further evidenced by only one cup of the wine being saved.
Dumont could also pursue damages from Von Braun under a theory of fraud. However, this may be very difficult to prove. The first step would be to utilize the UCC 2-515 to gain access to the remaining wine for sampling and testing purposes. It is uncertain whether tests would indicate whether the wine was authentic. The statements by Von Braun’s two guests that the wine was only 80 years old lack credibility when weighed against Dumont’s own inspection by Butterfield. As chief wine buyer for internationally known Dumont, his approval as authentic would far outweigh the statements of Von Braun’s guests.
under UCC 2-713. The certainty of fixing these damages may be difficult. The most accurate measure is the difference between the expected auction value of $500,00-$525,000 and the contract price of $450,000. However, Dumont has relied on the ownership of the second bottle to bargain with Triumphe. The effect of owning the second bottle on their negotiations is highly speculative.
Beyond the code doctrine used to this point, the court may turn to equitable and fair considerations to relieve Von Braun of liability. First, it is doubtful Von Braun could foresee the extent to which he would be liable if the bottle was cracked. Further, fault may be affixed to Von Braun, but his breach was accidental. Finally, the value of Dumont’s remaining bottle of wine has more than offset the losses with Von Braun.
The first agreement between Dumont and Triumphe should be valid as a bargained-for exchange with consideration and also in writing to avoid the statute of frauds. Triumphe may sue for damages under this contract. Dumont should attempt to avoid the contract by claiming it has become impossible to perform. The contract specifically identifies the Von Braun bottle of wine to be sold to Triumphe. Unless it can be shown that Dumont was at fault for breaking the bottle of wine, §2-613 should allow avoidance of the contract.
If it is proven that Butterfield was at fault for the loss, Dumont may be held liable. However, the damage sustained by Triumphe is highly uncertain. She has offered $550,000 for a bottle of wine appraisers expected to sell at auction for $500,000-$525,000. The current flux in the market and the commercial benefits derived from giving the wine to the government can not be predicted. Furthermore, the loss of the Von Braun bottle has increased the value of Triumphe’s bottle by an estimated $250,000. The court would probably turn to equity and award only nominal damages if Dumont is liable.
Triumphe may argue that the first contract was not intended to identify which bottle of wine was to be sold to him, thus requesting the Dumont bottle. There is some evidence Dumont intended to give their bottle to Triumphe. After agreeing to the contract, Dumont "reasoned it would be in a stronger bargaining position with Von Braun’s bottle actually in hand. " Recognizing the uniqueness of the wine, the court could lean toward specific performance; however, the parol evidence rule may bar proof by the Triumphe of negotiations showing which bottle was actually identified. This is especially possible since this evidence contradicts the express words of the written agreement between parties accustomed to contracting commercially (UCC 2-202).
The second agreement between Dumont and Triumphe does not rise to the level of an enforceable contract. Dumont should attempt to have the contract voided for lack of consideration. The only item bargained for was the promise to negotiate in good faith beginning on March 21. The good faith duty is pre-existing under common law and pervades all elements of the UCC. Further, the express use of two documents is strong evidence that the parties did not intend the second agreement to be incorporated into the first.
The parties may have intended to create a binding agreement, but it is doubtful either intended the court to uphold and fill in a price under UCC 2-305. It is more likely they intended to end the contract if a price was not agreed upon. The court would have difficulty supplying this term considering the uniqueness of the market and its recent volatility.
Dumont’s best course of action would be to first attempt to get the Triumphe contract voided due to impossibility and the second agreement declared invalid for a lack of consideration. If successful, it may be best not to sue Von Braun; his financial situation is questionable, Dumont may want to continue further business with him on less rare wines and the loss due to the cracked bottle has been more than offset by the rise in value of Dumont’s remaining bottle of Chateau Orleans.
Question 1, Answer 2
Dumont’s major claim is against Von Braun (and his insurer) for damages resulting from the destruction of the Chateau Orleans (Orleans). Since the Orleans is a "good" within the meaning of UCC §2-105, Dumont might pursue the typical UCC buyer’s remedies. First, if the sensational report is correct, and the third bottle is still out there somewhere, Dumont might try to cover under §2-712. In this case, the amount of recovery would be the cost of obtaining the third bottle minus the contract price of $450,000 (plus incidental damages under §2-715, such as the cost of locating this bottle). If, however, this bottle really were the third bottle, or if locating the real third bottle would be too difficult, Dumont could seek market damages under §2-713 (market price - contract price). Since the market price is the price at time of breach, the court would have to determine when Dumont actually learned of it. If a court holds that Dumont became constructively aware of the breach through its agent, Butterfield, then the market price at the moment would be used. This price would probably be the $550,000 that Dumont and Triumphe had agreed on, though Von Braun might argue that it is the $500,000 to $525,000 that the bottle would have brought at auction. On the other hand, Dumont can make a good argument that it didn’t learn of the breach until later, by which time the market price had risen to $800,000. In this case the award would be $350,000 ($800,000 - $450,000).
Or, Dumont might consider simple expectation damages, which would be the $100,000 profit it expects from the sale to Triumphe. Of course, Von Braun could raise a simple foreseeability defense on the grounds he could not have known about the secret negotiations with Triumphe. But he should realize that a dealer’s business necessarily means Dumont will turn around to resell the bottle at a profit. Furthermore, the court might be more willing to award market damages, even though they would exceed the lost profit. To award lost profit only might be to give a windfall to Von Braun, who is likely the party at fault. Though the facts do not say, what if Triumphe, independently, had approached Von Braun and had offered him at least $100,000 more than did Dumont? Von Braun and Triumphe might have "engineered" the accident, substituting a fake bottle of Orleans. He could then claim an impossibility excuse or merely pay the lost profit and sell the real bottle to Triumphe. Triumphe would then be in a stronger position to get the last bottle from Dumont. At any rate, whatever measure of damages the court may award, Dumont may have trouble collecting. The insurance will cover only $250,000, and if it doesn’t come through, then Von Braun, already in debt to a Boston law professor , might default.
Von Braun, however, has a number of defenses to this action. First, he might try to avoid the contract for mistake. If both parties mistakenly believed, in good faith, that the bottle really was an Orleans, and if it turns out not to be, then the contract will not be enforced. Of course, there is always the possibility of fraud or non-disclosure, which given Von Braun’s shady reputations and his financial status, is not beyond question. Von Braun, therefore, will likely pass on this defense.
Instead, he might raise an impossibility defense or an excuse under §2-613. But his excuse is weak. First, Dumont can argue that the contingency was not unforeseen, inasmuch as Von Braun had taken care to insure the bottle. But whether Von Braun can use the defense really depends on whose fault was the accident. Maybe Butterfield set down the bottle with too much flair, but more than likely, the bottle broke as a result of Von Braun’s negligence. After all, the bottle was still under his control, and if it were not stored under the proper conditions, then the court might find that Von Braun was responsible. Von Braun might try to prove that risk of loss [§2-509(3)] had passed to Dumont after Butterfield signaled his approval and shook hands, thus indicating he was taking delivery [§2-606(a)]. In that case, Von Braun might actually sue under §2-709 for the price of the Orleans. But since the agreement specified that delivery would not take place until March 15, this claim seems especially weak. On the whole, then, Dumont’s claim looks good – the accident was probably Von Braun’s fault, inasmuch as he had control of the bottle, he bore the risk of loss, and he was the cheapest cost avoider, as proved by his insurance policy.
Dumont may try a second claim against Von Braun if it should turn out that the bottle were not an Orleans. That is, Dumont can claim an implied warranty that the bottle was a true Orleans. This claim, however, could not rise under the UCC because the relevant section on implied warranty, §2-314, would not apply to Von Braun, who is not a "merchant" within the meaning of §2-104. Since this was a private sale, I doubt the claim has merit.
Aside from the Orleans case, Dumont should remember that it still has a contract with Von Braun for the sale of several dozen cases of other wines. Dumont might not want to deal with Von Braun anymore, and it can easily avoid this oral contract under the statute of frauds (UCC § 2-201) if the value of the other wine exceeds $500, which is likely. Also, Butterfield may have been acting on his own when he orally agreed to buy the other wine. But since Dumont did send him down to look at other wines, this possibility is unlikely. At any rate, Dumont might not want to breech this contract because of its reputation as a renowned wine dealer. Furthermore, in light of § 1-103, Dumont should consider its good faith obligation and should stick to its promise.
Dumont’s major liability will come from its dealings with Triumphe. As to the Von Braun bottle, she has the same buyer’s remedies against Dumont that Dumont had against Von Braun. That is, she will probably seek market damages under §2-713, which would amount to $250,000 ($800,000 - $550,000). Or, she might try a specific performance claim under § 2-716, forcing Dumont to substitute its own bottle. Even though the good is "unique" for purposes of applying this claim, I doubt a court will go for it because the contract did identify the Von Braun bottle specifically, and that was destroyed.
And as this bottle was destroyed, probably at Von Braun’s fault, Dumont has a very strong defense under impossibility doctrine and under § 2-613 to both of Triumphe’s claims. Dumont can also claim mistake, in that while negotiating with Triumphe, it did not realize that Von Braun’s bottle was defective. Since Von Bruan still controlled this bottle and may have been at fault, mistake defense should also work.
There is also the matter of the second document with Triumphe. If Dumont wants to sell its remaining bottle to someone else at the new market price, it might go ahead. Dumont can claim that the second document is merely a memorandum of preliminary negotiations. Though it does state an enforceable promise to negotiate in good faith, that is all it does. No where does this document state that an agreement has been reached and that all was left was the drafting of a more formal document. Thus, the document is just an agreement to agree, probably unenforceable at common law. The document merely cites an offer and a counter-offer, either of which may be withdrawn now, especially with proper notice. In fact, Triumphe’s counter-offer has the effect of terminating her power to accept Dumont’s offer. Triumphe may have, in fact, already rejected this offer by makeing her counter-offer.
Dumont’s attempt to avoid this negotiation, however, might cause Triumphe to speculate that Dumont itself "engineered" the destruction of Von Braun’s bottle. Maybe Butterfield skillfully scratched a crack in the bottle while he was inspecting it. With that bottle gone, Dumont could hope to get an incredibly huge price for its remaining bottle, more than enough to cover its lost profit from the Von Braun bottle. Triumphe might sue to enforce this contract, but that will accomplish little. Maybe she could recover reliance expenses, such as the cost of the previous negotiations. But she could not prove that she would actually reach an agreement with Dumont. And as damages for her stated intentions for the bottle – to present it to France – could only be measured by the most arbitrary and subjective terms. I doubt she could recover anything but nominal damages. In fact, she would be improvident to bring suit at all, as that would surely antagonize Dumont and make the negotiations that much tougher. Thus, I feel that Dumont may safely negotiate the sale of this last bottle with others.
Question 2, Answer 1
Part A
Provisions:
(1) Application:
This form constitutes an application; if approved by Northwest, and accepted by your signature below, the application will become a contract in three weeks.
BUT:
Northwest can reject your application for good cause, which includes but is not limited to:
a.) excessive riskiness in your particular case,
b.) the terms in part (2) below are inappropriate.
If Northwest rejects your application, you will be notified within three weeks. Actions in reliance on the policy before that time will not create a liability for Northwest.
I understand that unless I am notified the Insurance Policy represresented bv this form becomes effective in three weeks:
_____________________________ Applicant
(2) Merger clause:
This document contains all provisions of and exceptions to the insurance policy.
I have read and understand the form, and assent to its terms:
_____________________________ Applicant
OR
I have not read the entire form, but I acknowledge that I am agreeing to all reasonable terms contained in it:
_____________________________ Applicant
All of the representations which I have made to the applicant different from or additional to the terms stated on this form are listed below:
_______________________________________________ _______________________________________________ ____________________________________________________________________________ Agent
Observations:
Clause (1) above operates to give the company a three week grace period in which to allow underwriters to assess the risks involved in a particular situation. This should preclude the acceptance of policies covering unsound and unprofitable risks. Since it is plainly worded, prominent, and separately signed, the provision ought to give adequate notice to potential customers, and be upheld by courts.
This provision also attempts to prevent acceptance by reliance through explicit warning that the applicant is not covered before a certain date, and that he may not ever be illustrates how reliance on covered. Hetchler v. American Life illustrates how reliance on the part of the insured could create a liability upon the insurer despite terms to the contrary in the policy. The definite date provisions provide for a reasonable period preceding coverage. During this period, applicants may still seek alternative insurers, fostered by a liberal policy of excusing them from contractual obligations before the period has elapsed. In this way reliance during the grace period is discouraged, without compelling the applicant to shoulder his own risk. Moreover, the three week period provides sufficient time for underwriters to assess policy proposals.
The provision is likely to be upheld not only for its obtrusiveness, requiring a separate signature, but also because of its substance. The good cause requirement, properly applied, makes the contract neither unconscionable nor void for lack of mutuality of consideration. Good cause would be used to guard against adverse selection, not to account for subsequent events. Thus Northwest is bound unless the contract is deemed unprofitable upon inspection. Considerations in proving the validity of a rejection would include availability of similar insurance on the market and the potential for moral hazard in the particular case.
Clause (2) represents a merger clause, integrating all provisions within one document. The clause is designed to discourage reliance upon the agent's assertions, estoppel in pais. It should preclude an insured from even arguing that anything not reached by the language of the policy is covered, pursuant to the Parole evidence rule (although claims based upon lack of assent to the contract can skirt that issue). Not only is the applicant apprised of the fact that the Agent's representations are inapplicable, but the agent, herself, is reminded of this fact. The disjunctive alternative of assenting to only the reasonable terms provides an easily enforceable standard. The policy, of course, is designed to contain only reasonable terms, but this condition comports with the U.C.C. treatment of form contracts.
The true focus of this clause is on the agent, since only she can control what is said. It may well be that, despite the separately signed disclaimer, a court will recognize the insured's reliance on an Agent's representation under Restatement §90. Johnson v. United Investors Life reveals courts' distaste for permitting insurance companies to deny coverage retrospectively. Therefore, controlling what the agent says is paramount. Requiring her to sign is an attempt to do so. Further subjecting agents to liability for any conditions not listed in the appropriate area, upon which the company becomes liable and mandating training programs would supplement this system. A change in Agents' incentives might be achieved through a non-commission compensation system.
The money saved on liability alone through these two limitations should enable Northwest to lower rates and increase its client-base. As long as this approach is upheld by he courts and appropriate agencies, its only limitations in achieving the goals of liability reduction are the brevity of the grace period and the limitation of good cause. However, these considerations are necessary to garner approval, and do not constrain Northwest's ability to weed out unnecessarily risky policies.
Part B:
Regulations:
(1) In order to either (i) provide itself with an opportunity to review the particular details of a proposed policy before accepting it, or (ii) limit its liability for either the representations of its agents, an Insurer must provide conspicuous and plainly worded notice to the insured or potentially insured the applicable policy limitations.
2) Notwithstanding the provisions of subsection (1) above, any policy provision purporting to create a grace period in which the Insurer can either accept or decline a potential policy subjects the Insurer to the following duties:(i) a duty of good faith in assessing, and passing upon the potential policy, including, but not limited to a duty not to act opportunistically in light of subsequent events:
(ii) a duty to give seasonable notice in a reasonable manner of its acceptance or rejection of the policy;
(iii) a duty to allow reasonable alternatives to reliance upon the contingency of acceptance, including but not limited to the availability of a rider for immediate coverage, or leaving the potential insured free to pursue other alternatives pending the determination.
(3) Notwithstanding the provisions of subsection (1) above, no limit shall be placed upon the Insurer's liability with respect to the representations of its agents, where the insured, acting in good faith, has materially relied to his detriment upon those representations.
(4) This provision is not exempted from the limitations of procedural or substantive unconscionability.
Practical Application:
The above provision serves public policy by ensuring both procedural and substantive equity, without binding insurance companies to price themselves out of existence. The need for insurance in today's market is manifest; without it industries will expire as risk-adverse proprietors shun them. The remedy to the current crisis situation is to permit insurers to select the most insurable, most viable, and least risky ventures. An unconstrained market mechanism might accomplish this task, but at the cost of allowing consumers to suffer at the hands of a collusive 'big business' industry, thus some constraints are in order.
The procedural constraints upon Insurers work in two ways. First, they ensure that potential customers are notified of either of the above types of limitation on the insurer's liability. Next, the procedural safeguards serve to curb abuses of market power in attempting to induce adhesion contracts. This restraint is embodied in many of the provisions of the regulation, most notably §§(2)(i) and (3). The former inhibits abuses of market power such as described in the drought insurance hypothetical, where a delay in acceptance decisions provided a safety hatch for the insurer in the face of dry weather. §(3) covers cases such as Johnson v. United Investors Life, where a reasonable person might rely on an insurance agent's representations despite a contract provision which the agent himself neglected to bring to his attention.
These procedural precautions are augmented with substantive provisions. If it could be assumed that all parties were of equal sophistication, the need for any substantive checks upon insurers' ability to limit their liability might disappear. Yet, even Llewellyn's presumption that signing a form contract represents assent to the reasonable terms therein, involves some guard against adhesion contracts. Although no abusive tactics are apparent, substantively unconscionable provisions often arise from defects in the bargain. §(2)(iii) disavows denial of alternatives to submitting to the insurer's conditions, a hallmark of adhesion contracts. Clauses such as the liability disclaimer in Weaver v. Oil, moreover, fly in the face of public policy whether or not any inequity in bargaining power is implicated. Even U.C.C. §2-719 forbids disclaimer of liability for personal injury.
Public policy is served by these provisions through providing a solution, to a market failure. The regulation enhances the availability of liability insurance without unduly impinging upon the insured's rights, ensuring that only those who truly represent an uninsurable risk will be unable to afford insurance. Proceeding on the assumption that rules can influence individual behavior, these provisions attempt to affect a system of incentives whereby both insurers and potential clients are encouraged to exercise care before plunging headlong into a relationship that does not meet their needs.
Question 2, Answer 2
PART A
Northwest should print at the top of the first page of the document, "APPLICATION ONLY — this policy will take effect only after the insured had received a written notice of approval from Northwest's main office. " It should also include on the front page a provision which should be separately signed and which states , " WARNING — THE AGENT HAS NO AUTHORITY TO VARY THE TERMS OF THE CONTRACT. The agent may neither extend the terms of this contract nor change terms which are expressly included. The main terms of this contract are listed below in the section headed ‘summary.' " These sections should be in type size which is larger than the regular terms of the contract, and the headings should be in bold type. In addition to adding these provision, Northwest should also list the areas covered by the policy in clear and plain language on the front page of the document. Below these, also clearly marked, it should list those areas or actions which it will not cover. ( These might include, for example, coverage of children's daycare, and any payment where the harm is the result of the parties own negligence.)
By characterizing the document as an offer on the part of the insured, Northwest should be able to retain the right not to accept it. This should work in all but a couple of situations. The first situation concerns cases where Northwest waits an unreasonably long time before signalling its rejection. In this case, the court might hold that Northwest's silence should be construed as assent. Because the Court's comfort with doing this depends on their characterization of the situation as one in which Northwest has a duty to the insured, there are some things that Northwest may do to to make the court less likely to decide in this way. First, Northwest should neither require a premium payment until after acceptance nor backdate the time of coverage to the time of the application. These were two of the factors which seemed to influence the Kukuksa Court to find a duty on the part of the insurance company. Although the Court did not specify, its decision was probably influenced by the feeling that by keeping the money and backdating the insurance, Northwest was receiving unjust compensation during the period in which it was deciding whether to accept the application.
The second situation in which Northwest may run into problems would be if the court found that the consumer reasonably relied on the coverage as starting within a certain period of time. This can be partially gotten around by alerting the consumer that the policy does not start until he receives notification. This should defeat the requirement of Restatement §90 that the reliance be reasonable. However, if Northwest delays too long, the fact that the insured is prevented from getting insurance with another company while waiting on Northwest may influence the court to hold Northwest for damage that occurs within this period of time. In short, as long as Northwest can manage to check the policies within a couple of weeks, they should be able to reject the application for insurance.
Of course checking policies can never be a full solution where the problem is with an oral representation by the agent to the consumer. Here the agreement will not appear on the face of the contract and thus cannot be checked. Because the court's primary concern will be with the reasonableness of the consumers' actions, the company should concentrate both on making it less reasonable for them to rely on the agent and on making it more reasonable to read the document themselves. The first step of this is an explicit warning about representations by the agent. But it is clear that this will do little good where the consumers' only reasonable method of access to the provisions is through the assurances of the agent. Thus by making it more reasonable for the customer to read parts of the document, the power of the agent may be leaned. There is a tradeoff involved here for the company, for in order to be able to reduce the amount of information communicated to a size and style which it is reasonable to expect the consumer to read, the company must pick only those provisions which it considers the most crucial. But being able to be secure about the large decisions may be worth not being able to be sure about all provisions.
Because all of the courts concerns seem to be greater where dealing with an individual consumer rather than a relatively more sophisticated business, Northwest's position in the above arguments may actually be stronger than portrayed. However, because it does cover some individual consumers and because all the individual consumer arguments cover, a fortiori, business concerns, the drawbacks of the provisions were discussed in terms of the general consumer.
PART B
Part I — Good Faith Requirements of Acceptance
An insurance company may reject an application for insurance within three weeks of submission where(1) the document is clearly and conspicuously designated as an application only; and
(2) the company does not
(i) require an advance premium; or
(ii) backdate the coverage to the time of acceptance; or
(iii) in any other way profit from the insured until the time his offer is accepted; and
(3)where the insured is an individual consumer rather than a business, there are no other circumstances which make such rejection clearly unjust.
Part II — Insurance Company's liability for the representations of its agmts.
An insurance company may avoid liability for the oral representations of its agents only where(1) A disclaimer for the representations of the agent is clearly and conspicuously marked on the face of the document; and
(2) the representation is specifically contradicted by a provision of the contract which is
(i) expressed in clear and understandable language
(ii) printed in at least 10 pt. type
(ii) headed in a non-misleading fashion
(iv) contained within the first two pages of the document.
Proof of a party's knowledge of a disclaimer that does not meet these requirements is not sufficient to overcome liability.
COMMENTS:
(1) The problems of allowing insurance companies to reject policies after the fact seem to lie primarily in possibility of mistake as to when the policy takes effect and in the unequal position of the parties during the time before acceptance. This regulation minimizes the first of these problems by regulating the amount of time during which a company can consider an application before accepting or rejecting it. Where a consumer is aware in advance that the policy will have a lead time, he may plan to apply for insurance before he expects to need it. There will thus be less chance of his being hurt through reliance on the insurance company. Although, it will always be the case that the consumer may be in an unequal position in that he may not wish to seek other insurance during the time that he is waiting, this provision insures that the company is not enriched at his expense during this period. Moreover, because he has not submitted a premium he may be more free to withdraw his offer during this period.
(2) The problem of misrepresentations by agents may be considered as a subset of the general problems of form contracts. The advantages of using a written contract, e.g. that both parties are bound by what they sign, has become increasingly thwarted by the good faith (and bad faith) use of small print and technical legal terms. Where consumers cannot themselves be expected to read the document, their only alternative is to rely on the actions of the agent. However, as Professor Llewellyn pointed out, not all provisions of a contract are of equal importance. The company may decide which terms it will not allow its agent to vary. Moreover, because the major issues of coverage are those which the deal is most likely to rest, these are the ones most likely to be misrepresented by the agent. In order to get around this problem, this regulation allows companies who wish to do so to make these main terms clear and understandable. Once the terms are in such form that it is reasonable to expect consumers to read them, then court's may feel comfortable imposing a duty for the consumers to do so. And once the consumer no longer need rely on the agent, it becomes just for the company to avoid liability for his statements, as long as it clearly indicates its intention to do so. It is no longer reasonable for the consumer to rely on the representations of the agent, where the consumer is both warned and able to act on this warning.