YANQUELL v. UNITED SERVICES AUTOMOBILE ASSOCIATION (1987)

Charles C. Yanquell, a ninety-year-old retired Navy captain, was killed in an automobile accident in Coronado on August 28, 1983, when Trudy Leigh Stevenson suffered an epileptic seizure, crossed the median strip of Silver Strand Boulevard, and hit the Yanquell vehicle head-on.   The accident also resulted in severe injuries to Captain Yanquell's wife and daughter.   Stevenson's insurance was inadequate to cover the Yanquells' alleged damages.

Plaintiffs Ella S. Yanquell, Elizabeth S. Yanquell, and Julia R. Viera, individually and as executrix of the estate of Charles C. Yanquell, (collectively “the Yanquells”) sued various defendants for personal injuries, medical malpractice and wrongful death.   Plaintiffs' ninth, tenth and eleventh causes of action were against United Services Automobile Association (USAA) arising from the alleged negligent failure of USAA to provide Captain Yanquell with clear information concerning the availability and procedures for obtaining underinsured motorist coverage (UIM).   USAA successfully demurred to each of these causes of action.   The Yanquells appeal from the ensuing judgment of dismissal.

We conclude USAA had a duty to provide Yanquell with information that was sufficiently clear to enable him to implement a decision to purchase UIM coverage.   We also decide the writings were ambiguous as a matter of law and therefore reverse the judgment as to the ninth cause of action for negligence.   We affirm in all other respects.

FACTUAL AND PROCEDURAL BACKGROUND

The following facts are alleged in the Yanquells' ninth cause of action.   USAA is a “direct writing” insurance company which deals directly with its insureds and foregoes the use of agents and brokers in order to diminish costs and increase profits.   For almost 60 years up to the time of his death Captain Yanquell relied on USAA to provide for his automobile insurance needs and to act in his best interests.   Yanquell believed in carrying all available automobile liability insurance in very high limits for the benefit of his family.   When USAA informed Captain Yanquell of the need for increased coverage, he generally followed USAA's recommendations.   After Captain Yanquell suffered a stroke in 1974, Ella Yanquell paid the insurance premiums.   She read and often discussed with her husband the documents sent by USAA.

Beginning in the late 1970's USAA made available UIM coverage in addition to the uninsured motorist coverage (UM) to which Captain Yanquell already subscribed.   UIM coverage pays the insureds and/or beneficiaries under the automobile insurance policy the difference between a third party tortfeasor's existing liability insurance and the reasonable value of the insureds' tort recovery up to the limits of the UIM coverage.   USAA sent the Yanquells various documents concerning underinsured motorist coverage.   The documents received from USAA “were so ambiguous, obtuse, and confusing, and the reference to UIM was so obscure, that neither Captain nor ELLA YANQUELL, nor many other reasonable persons, would have understood” that UIM was a new coverage not previously available in California, that such coverage was distinct from UM and had to be applied for separately, that UIM was potentially beneficial to USAA insureds and their families, and that large amounts of coverage ($300,000 per person/$500,000 per accident) could be obtained at the nominal annual premium of $15.   Had the information sent by USAA not been negligently written, Captain Yanquell's USAA policy would have included UIM coverage in the amount of $300,000/$500,000.   USAA undertook the duty to advise its insureds of UIM coverage and performed this duty in a negligent manner.

The tenth and eleventh causes of action incorporate the facts set forth in the ninth cause of action, seek damages on an estoppel theory and request reformation of the insurance contract to include UIM coverage.   USAA demurred to all three causes of action.

In sustaining the demurrer without leave to amend, the court relied on Gibson v. Government Employees Ins. Co. (1984) 162 Cal.App.3d 441, 208 Cal.Rptr. 511, stating “USAA did not owe a duty to plaintiffs to make available to them a particular type of insurance or to advise them of the inadequacy of their coverage.”

DISCUSSION

I

 In the discussion which follows we first explain why we believe Gibson is not persuasive.   We then briefly touch on the general principles affecting the responsibilities of the insurance agent and the insurer to the client/insured.   We conclude by resolving USAA's duty of care on general principles of general tort liability rather than using the “buzz” words frequently applied in insurance cases to impose liability on the insurer.

Initially we are frank to say we can understand why the trial court relied on Gibson.   That case is similar both factually and legally to the one before us.   Both involve aspects of the new underinsured motorist coverage.   Both plaintiffs were long-time customers of large insurance companies and relied on these insurers to take care of their insurance needs.   Central to each case is the question of legal duty.   As we shall point out, however, notwithstanding the commonality of this question the precise issue in this case is considerably different than the one presented in Gibson.

There are significant differences in the facts.   In Gibson there is “no mention whatsoever ․ of any advertising or representation made by defendant with respect to the nature and extent of the coverage offered by it․”  (Gibson v. Government Employees Ins. Co., supra, 162 Cal.App.3d at p. 448, 208 Cal.Rptr. 511.)   Here the claims focus on eleven documents Captain Yanquell received from USAA, including several that can only be described as advertisements for the purpose of soliciting additional insurance coverage.

Because of the foregoing factual differences the question in Gibson was whether GEICO owed a fiduciary duty to advise his insureds of the availability of UIM coverage and the inadequacy of their policy limits.   Here the issue is whether USAA owed Captain Yanquell a duty to provide clear information in the documents mailed to him about the UIM coverage it was offering and how such coverage could be purchased.

Moreover, Gibson does not dwell on the unique relationship a direct insurer has with its insureds.¹  The Gibson court focused on the more general fiduciary responsibility insurance companies owe their policyholders.   We are satisfied there is a meaningful difference between an insurance company which deals with its insureds directly and an insurance company which does not.

The successful insurer is able to achieve and maintain a high level of sales through a variety of techniques.   One common method readily observable to the consumer is the use of the media in every imaginable way to extol the strong points of a particular company.   Some companies offer better claim service;  others offer lower prices or broader coverage.   Apparently USAA decided to obtain its share of the market through a strong campaign of personal solicitation to a select group of active or retired military officers and their dependents by written contact through letters and flyers describing the benefits of dealing directly with USAA.   Presumably USAA decided to eliminate the middleman between it and its insureds in order to reduce costs, avoid problems of communication, increase administrative efficiency and heighten customer satisfaction.   All of the goals sought by USAA were admirable particularly since they would be accompanied by increased profits.   USAA's motto accurately reflects its commercial strategy—“Serving you best because we know you better.”   Undoubtedly USAA's approach had mutual benefits for both itself and its customer.²  We conclude that along with the benefits USAA assumed legal responsibility beyond the contractual and fiduciary responsibilities arising from the insurance contract itself.

Because of the foregoing considerations we reject Gibson as being dispositive on the issue of whether a direct writing insurer owes a duty to its insured to make sure the advertisements it sends are not ambiguous or misleading.

Frequently, if not invariably the problems associated with miscommunications by insurers to their insureds are due to the acts of the insurance agent or broker.   Where the agency relationship exists there is not only a fiduciary duty but also an obligation to exercise due care.  (1 Witkin, Summary of Cal.Law (8th ed. 1973) Agency & Employment, §§ 84–85, pp. 704–705.)  “A professional agent is required to have the particular knowledge and to exercise the particular skill and diligence expected of it.”  (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970) 1 Cal.3d 586, 594, 83 Cal.Rptr. 418, 463 P.2d 770.)   The nature and extent of the duty of care owed by an independent insurance agent to his client depends in part upon the degree of skill which he represents himself to possess.  (Couch on Insurance (2d ed. 1960), § 25:37, p. 338.)   Thus insurance agents or brokers may be held liable for negligence arising outside the insurance contract.  (See, e.g., Reserve Insurance Co. v. Pisciotta (1982) 30 Cal.3d 800, 816–817, 180 Cal.Rptr. 628, 640 P.2d 764 (insurance broker who negligently fails to obtain the correct amount of coverage for an insured can be liable to the insured for the loss caused by the negligence).)

We are also sensitive to the fact that the relationship between the insurer and insured is characterized by elements of public interest, adhesion, and fiduciary responsibility.  (Seaman's Direct Buying Service, Inc. v. Standard Oil Co. (1984) 36 Cal.3d 752, 769, 206 Cal.Rptr. 354, 686 P.2d 1158.)  “ ‘Insurers hold themselves out as fiduciaries, and with the public's trust must go private responsibility consonant with that trust.’ ”  (Egan v. Mutual of Omaha Ins. Co. (1979) 24 Cal.3d 809, 820, 169 Cal.Rptr. 691, 620 P.2d 141, quoting Goodman & Seaton, Foreword:  Ripe for Decision, Internal Workings and Current Concerns of the California Supreme Court (1974) 62 Cal.L.Rev. 309, 346–347.)

These statements characterizing the responsibilities of the insurance company and/or the agent cause a Pavlovian-like response by those trained in the law.   It is easy enough to say that in substituting itself to perform those acts usually done by intermediaries USAA necessarily assumed legal responsibilities associated with those duties.   In more familiar terms by assuming the benefits are reduced costs in functioning without the agent or broker, USAA assumed the burdens of potential liability generally imposed on those entities.   We are uncomfortable however basing our conclusion solely on an assignment theory or by using legal terms which are essentially question begging.   Legal jargon is hardly an adequate substitute for thoughtful analysis.   Use of the words “agent” or “fiduciary” is frequently nothing more than shorthand for special relationships in the tort field which will invariably carry legal baggage, i.e., a duty of care.   In fairness to USAA and because its role as a direct insurer does not fit precisely into a specific legal niche, the discussion which follows emphasizes the broad principles which determine when a plaintiff is entitled to protection from a defendant's conduct.

The imposition of a duty to exercise reasonable care in given circumstances depends on the balancing of a number of policy considerations.  (Sun ‘n Sand, Inc. v. United California Bank (1978) 21 Cal.3d 671, 695, 148 Cal.Rptr. 329, 582 P.2d 920.)   The most important of these factors include:  “․ the foreseeability of harm to the plaintiff, the degree of certainty that the plaintiff suffered injury, the closeness of the connection between the defendant's conduct and the injury suffered, the moral blame attached to the defendant's conduct, the policy of preventing future harm, the extent of the burden to the defendant and consequences to the community of imposing a duty to exercise care with resulting liability for breach, and the availability, cost, and prevalence of insurance for the risk involved.”  (Rowland v. Christian (1968) 69 Cal.2d 108, 113, 70 Cal.Rptr. 97, 443 P.2d 561.)   The chief element in determining whether the defendant owes a duty of care is the foreseeability of the risk.  (Dillon v. Legg (1968) 68 Cal.2d 728, 740, 69 Cal.Rptr. 72, 441 P.2d 912.)

Based on the allegations of the Yanquells' complaint, which we must accept as true, we conclude these policy considerations favor imposing a duty of reasonable care on USAA.   It is certainly reasonably foreseeable that where advertising sent to an insured fails to clearly specify that the insured must make separate application for additional insurance coverage, such failure will result in the insured not having insurance to cover the risk at the time the event occurs.   On the allegations presented, there is no question but that the Yanquells were harmed by the lack of underinsured motorist coverage:  Stevenson carried liability insurance in the amount of $50,000/$100,000 and the Yanquells' claims are alleged to have been in excess of $500,000.   Further, USAA's conduct was closely connected with the injury suffered.   Had the language of the advertising not been ambiguous and misleading Captain Yanquell would have purchased UIM coverage in the amount of $300,000/$500,000.

Moral blame is perhaps an inaccurate term to describe USAA's efforts to maximize profits through the elimination of the middleman.   Nonetheless some moral blame must be affixed to USAA in light of its promise to serve the insured better because of the trust relationship.   Imposing a duty on USAA to eliminate the risk of future harm caused by carelessly drafted advertisements not only transfers the risk of loss to the entity which can avoid that risk, but places the moral obligation for doing so on the proper entity.

We do not believe insurers will be unfairly burdened by the necessity of drafting clear advertising for their insureds or that imposition of the duty advocated by the Yanquells “would have a chilling effect on the willingness of insurers to provide their insureds and the public with information pertaining to their coverages and services.”   When some parties are required to bear the financial loss which they have caused others, not only is this thought to be a fair result in moral terms, but presumably beneficial results occur in the marketplace of behavior and commerce.   Faced with the choice of disseminating accurate advertisements or eliminating all advertising, insurers will undoubtedly choose the former preferring to exercise greater care in the preparation of advertising for their policyholders rather than give up the competitive edge which advertising affords.

 In balance we are unaware of any social benefit to be served by allowing direct writing insurers to be relieved from reasonably foreseeable losses caused by their conduct.   Accordingly here we see no reason to excuse an insurer like USAA from the obligation to exercise due care in drafting mail communications to be mailed to its insureds where the insurer assumes the functions of the middleman with respect to the insured and capitalizes on the “closer relationship” achieved by elimination of the agent.   We wish to emphasize that our holding does not reach the question of the direct writing insurer's duty of care where advertising is sent to persons to whom the insurer has not already issued a policy.   In effect, all we have said is that the traditional rule construing ambiguities in an insurance policy against the insurer (Continental Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 437, 296 P.2d 801;  see generally 1 Witkin, Summary of Cal.Law (9th ed. 1987) Contracts, § 699, pp. 632–634) must apply equally to communications sent by the insurer to its insureds which, although not technically a part of the policy, explain the extent of policy coverage.

II

 Having concluded USAA owed Captain Yanquell a duty to provide clear information about the means of obtaining the UIM coverage, we now consider whether the writings Captain Yanquell received from USAA were ambiguous, that is, “ ‘fairly susceptible of either one of the two interpretations contended for․’ ”  (Pacific Gas & E. Co. v. G.W. Thomas Drayage, etc. Co. (1968) 69 Cal.2d 33, 40, 69 Cal.Rptr. 561, 442 P.2d 641, quoting Balfour v. Fresno C. & I. Co. (1895) 109 Cal. 221, 225, 41 P. 876.)   Whether language in a contract is ambiguous is a question of law.  (Producers Dairy Delivery Co. v. Sentry Ins. Co. (1986) 41 Cal.3d 903, 912, 226 Cal.Rptr. 558, 718 P.2d 920.)

 The Yanquell's complaint incorporates eleven documents, exhibits 1A–11, received by Captain Yanquell over several years.   We focus on two sets of documents, exhibits 6A, 6B, 8A and 8B.³

Exhibit 6A, the front page of a notice revised and presumably mailed in March 1982, describes a change in California law which requires insurers to provide uninsured motorist (UM) coverage in limits equal to bodily injury (BI) coverage.   USAA states it will automatically renew all expiring policies to show UM equal to bodily injury (BI) limits.   The insured is given the option of reducing or waiving UM coverage altogether.   The notice also states that existing UIM limits will be changed to equal BI on renewal because “USAA offers UIM only in the same limits as UM in California.”   As with UM coverage, the insured may opt to reduce or waive UIM coverage.   However, there is no explanation in the notice of the procedure to follow to obtain UIM coverage or that policyholders covered by UM and not yet covered by UIM must apply for UIM separately.   The insured is told to complete the form on the reverse side “only if you want to make changes.”   Wording on exhibit 6B, the reverse side of the notice, reiterates that the insured should complete the UIM form “only if changes are desired.”   The UIM form itself allows the insured to order or waive coverage.   Captain Yanquell did nothing and his UM coverage was increased to equal the existing $300,000/$500,000 BI limits.

Exhibits 8A and 8B, two sides of a notice dated August 1983, read in part:

“When you have the minimum UM coverage, UIM is included.   At limits higher than the minimum, UIM becomes a separate coverage and is optional.   It's available at higher limits only when higher limits of UM are purchased.   UIM limits must equal your UM limits.”  (Emphasis in original.)

We think this paragraph is readily susceptible to two equally plausible interpretations.   One insured could read the notice to imply that a separate application is required in order to obtain UIM coverage in limits in excess of $25,000/$50,000.   Another insured could as easily imply that separate application is unnecessary even though UIM is a “separate coverage”.   Under this interpretation an insured like Captain Yanquell, who has UM coverage in excess of the $25,000/$50,000 minimum, would be automatically provided with UIM coverage at the level of UM coverage, because UIM must equal the UM limits.   UIM simply “piggy-backs” UM coverage at the higher limits.   As with the UM and UIM coverage described in exhibits 6A and 6B, the insured could conclude he need only take action to reduce or waive the higher limits of coverage.⁴

We conclude these writings are ambiguous as a matter of law and therefore further trial court proceedings are necessary.

III

The court properly sustained USAA's demurrer to the tenth cause of action for equitable estoppel because UIM coverage was not part of Captain Yanquell's insurance contract before the accident.   The court was also correct in sustaining the demurrer to the cause of action for declaratory relief.   This cause of action seeks reformation of the insurance contract, an improper remedy absent allegations that the parties agreed to UIM coverage in the terms of the contract or that there was a mutual mistake of fact regarding UIM coverage.   The Yanquells' remedy, if any, is limited to that afforded under the negligence cause of action.

DISPOSITION

Judgment reversed with instructions to vacate the order sustaining USAA's demurrer to the ninth cause of action.   Judgment affirmed in all other respects.   The parties to bear their respective costs.

APPENDIX

Exhibit 6A includes the following wording:

“CALIFORNIA UNINSURED MOTORISTS COVERAGE “CALIFORNIA LAW HAS CHANGED—IT AFFECTS YOU

“Effective January 1, 1982 California law requires all auto liability policies issued must provide Uninsured Motorists Coverage (UM) in limits equal to the Bodily Injury (BI) on the policy.   You still have the right to change to lower limits or waive the coverage entirely.

“Renewal policies ․ effective 1–1–82 and later

“To comply with the new law, expiring policies where UM is not equal to your BI limit are being renewed with UM in limits equal to the BI.  (You have the right to reduce or delete the coverage.)

“If you have elected to carry

“Underinsured Motorists Coverage (UIM) it is affected since USAA offers UIM only in the same limits as UM in California.   If UIM was previously provided in a limit not equal to the BI, it is also changed to equal the BI on the renewal.

“YOU HAVE OPTIONS ․ You may choose to

“1) do nothing.  (Do not return the Form.)

“2) reduce your UM or waive the coverage.

“3) reduce your UIM limits (Must be in limits equal to the UM) or waive the coverage entirely.

“4) waive UM while designated individuals operate any of your vehicles.

“YOUR CHOICE OF OPTIONS 2, 3 or 4 MUST BE IN WRITING ON THE FORM PRESCRIBED BY LAW!  (SEE REVERSE)

“․

“NOTE:  UM, when carried, is written in the same limit for all cars on the policy, with a separate premium charge for each car.   The difference in premiums for the higher limits is usually small.   For example, if the increase in your UM/UIM is from $15,000/$30,000 to $100,000/$200,000, the additional semi-annual UM premium should be only $4 or $5 more per car, and the UIM premium should be no more than $5 per car.”  (Complaint, Exh. 6A;  emphasis supplied.)

Exhibit 6B, the reverse side of exhibit 6A, provides the following form:

“UNDERINSURED MOTORISTS COVERAGE

“(Complete only if changes are desired)

“If you want to order Underinsured Motorists coverage, or delete the coverage, please complete this portion of this form and return to us.   UIM is written only in the same limits as the UM.   UIM (or UM) cannot exceed the BI.

“[ ] I want Underinsured Motorists Coverage

“[ ] I do not want Underinsured Motorists Coverage

   _

   “Signature of Named Insured

   _

   “USAA Number

   _

   “Date

“The limits of UIM, if carried, will be adjusted to correspond with any change in UM limits.”  (Complaint, Exh. 6B.)

Exhibits 8A and 8B read in part:

“Some insurance coverages are unique to California.   Please read the information below, then send us the attached order form to make sure you receive the protections you need․”  (Complaint, Exh. 8A.)

“․

“UNDERINSURED MOTORISTS (UIM) COVERAGE

“UIM protects you when the other driver is at fault but his liability limits are less than your UIM limits.   If you selected a limit of UIM higher than the other person's Bodily Injury Liability limits, we will pay for any damages up to your UIM limits.

“When you have the minimum UM coverage, UIM is included.   At limits higher than the minimum, UIM becomes a separate coverage and is optional.   It's available at higher limits only when higher limits of UM are purchased. UIM limits must equal your UM limits.

“Some UM and UIM limits that are available include:

“$15,000/$30,000

“$20,000/$40,000

“$25,000/$50,000

“$50,000/$100,000

“$100,000/$200,000

“$100,000/$300,000

“Remember, your UM and UIM cannot exceed your BI limit.   If you want to change these coverages, please use the attached order form.”  (Complaint, Exh. 8B;  emphasis supplied.)

FOOTNOTES

1.   Although there are no allegations in Gibson that GEICO served as an insurance agent or broker, the discussion at page 450 of the opinion suggests that GEICO, like USAA, is a direct writing insurer.

2.   Our statements on USAA's success are more than musings from the isolated perspective of an appellate court.   Perusing the literature on this subject electronically retrieved with remarkable ease, we note USAA was featured in the September 22, 1986, issue of the American Banker as being a “phenomenal success.”   The article further explained that because of market segmentation, service and state of the art automation, USAA continues to maintain an “exceptionally close relationship with its core membership.”   USAA's Director of Marketing for all USAA financial services acknowledges “ ‘people who buy through the mail in general are self-thinkers.   These are the kind of people a salesman doesn't like, because he can't close with them—they take the time to make up their own minds.’ ”   Unlike Geico, which directly solicits from an open market, USAA restricts itself to a selective group of which more than 90 percent are college graduates and 50 percent have graduate degrees.  (1986 American Banker, Sept. 22, 1986;  Fishman, March 1987 Direct Marketing, pp. 84–85.)   Obviously this form of marketing is viewed critically by insurance agents, some of whom have described direct solicitation as “ ‘a flagrant departure from basic principles of the American agency system.’ ”   (National Underwriter—Property and Casualty Edition, July 30, 1982, p. 6.)

3.   Portions of these exhibits are found in the appendix to this opinion.

4.   The uncertainty can perhaps best be illustrated by redrafting the Exhibit 8B paragraph quoted above to clearly express what USAA was trying to convey:“When you have the minimum UM coverage, UIM is included.   If you choose UM coverage at higher than the minimum, you have no UIM coverage unless you apply for and purchase it separately.   If UIM coverage is purchased, the limits must equal your UM limits.   Thus, if you have UM coverage at higher than the minimum limits, your only choices are to separately purchase UIM coverage in an amount equal to your UM coverage or to waive it entirely.”

WIENER, Associate Justice.

KREMER, P.J., and TODD, J., concur.