Gap Policy is insurance, despite name and disclaimer
If it looks like an insurance policy and quacks like an insurance policy, its an insurance policy -- according to the Oklahoma Court of Civil Appeals. And if it meets the requirements of an insurance policy, statements in the contract that says its not insurance are going to be ignored. Further, breach of the contract can give rise to a bad faith action. Thus, calling a contract a debt release waiver will not insulate the parties from a bad faith claim.
EMBRY v. INNOVATIVE AFTERMARKET SYSTEMS , 2008 OK CIV APP 92 , ___ P.3d ___ (OSCN 2008)
The Embrys bought a truck and financed the purchase. They also purchased a "Debt Relief Waiver Addendum" (DRWA); which would pay the remaining balance owed to the finance company if the truck were destroyed or stolen and the comprehensive coverage paid was less than the amount owed. In other words, it would cover the gap if the insured value was less than balance owed on the note. A clause in the DRWA specifically said that the parties agreed it was not insurance.
The truck was totaled, and after the insurance paid for the loss, there was still owing some $9,000. When that amount wasn’t paid, the finance company took a default judgment against the Embrys for about $10,000. Eventually, the DRWA paid the finance company the balance on the note. Embry then sued under the DRWA, claiming he was treated unfairly and negligently, that the claim was handled negligently, that he was a beneficiary of the DRWA, and that there was a breach of the duty of good faith and fair dealing.
The trial court granted summary judgment and the Court of Civil Appeals reversed.
First, the court distinguished the case from a classic third party beneficiary contract because here, Embry paid for the contract. In a classic third party beneficiary contract case, the third party has not paid for the benefits he or she seeks to recover.
Then, the court found that despite the language of the contract, the DRWA met the definition of “insurance” under Oklahoma law: “Insurance” is a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies. 36 O.S. § 102. Whether or not a contract is one of insurance is to be determined by its purpose, effect, contents, and import, and not necessarily by the terminology used, and even though it contain declarations to the contrary.
Thus, the court held that Embry is entitled to the benefit of his bargain. Here, his "bargain" is a DRWA program product composed of an issuer, an administrator of claims, and an underwriter. All three components must function and perform, otherwise the DRWA product is of no value. If he is denied the benefit of that bargain and sustains damages through the bad faith or negligence of any entity that is a necessary component of the bargained-for product in order to make it function as intended, then he is entitled to recover his damages from that entity. Further, Embry is entitled to seek damages against the defendants for bad faith and/or negligence.
EMBRY v. INNOVATIVE AFTERMARKET SYSTEMS , 2008 OK CIV APP 92 , ___ P.3d ___ (OSCN 2008)
