§ 1.1 Basic Requirements of an Insurance Contract

• Library: Insurance Law in Oregon (OSBar) (2020 Ed.)

§ 1.1 BASIC REQUIREMENTS OF AN INSURANCE CONTRACT

A valid insurance contract requires both an offer and an acceptance. A blank application provided to the potential insured is typically not considered an offer, but once the application is completed and returned to the insurer, it becomes an offer for an insurance contract. Steven Plitt et al., Couch on Insurance § 11:1, Westlaw (database updated June 2019) [hereinafter Couch].

Insurance is, essentially, a contract by which one party gives a consideration, typically paid in money, in exchange for a promise from another party to make a return payment if a certain type of loss has occurred. The word insurance means "a contract whereby one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon determinable risk contingencies." ORS 731.102(1). For more on the contents typically contained in an insurance policy, see § 2.2-3 to § 2.2-3(f).

The insurance contract includes not only the policy itself, which is the written form embodying the agreement of the parties, but also, depending on varying circumstances, the declarations, application riders, endorsements, statutes, charters, bylaws, and whatever else the parties agree will be part of the contract. See, e.g., Collins v. Farmers Ins. Co. of Oregon, 312 Or 337, 341, 822 P2d 1146 (1991) (because statute listing mandatory contents of motor-vehicle liability policy refers to statute stating minimum-coverage requirements, every such policy must contain that coverage at a minimum); Rhone v. Louis, 282 Or 693, 695-96, 580 P2d 549 (1978) (requirements of statutes and ordinances will be deemed covered by insurance policies, adding to or displacing provisions of policy itself); Wright v. State Farm Mut. Auto. Ins. Co., 332 Or 1, 5, 22 P3d 744, 746 (2001) (identifying declarations page as the part of policy that identifies policy limits); Laird v. Allstate Ins. Co., 232 Or App 162, 171, 221 P3d 780, 785 (2009), rev den, 348 Or 414 (2010) (in attempting to determine the meaning of an ambiguous term, the term must be viewed in the context of the whole policy, including the declarations); Brock v. State Farm Mut. Auto. Ins. Co., 195 Or App 519, 531-32, 98 P3d 759 (2004) (if application contains language indicating policy will not issue until acceptance, then it typically does not contain an enforceable binder); Baylor v. Cont'l Cas. Co., 190 Or App 25, 78 P3d 108 (2003) (ruling that certificate of insurance did not provide temporary provision of coverage, but acknowledging the possibility that certificate could be construed as an enforceable binder); Waller v. Auto-Owners Ins. Co., 174 Or App 471, 476, 26 P3d 845, 848 (2001) (endorsement becomes part of insurance contract and, to the extent of any conflict between endorsement and policy, endorsement controls); First Far W. Transp., Inc. v. Carolina Cas. Ins. Co., 47 Or App 339, 344, 614 P2d 1187 (1980) (same); Safeco Ins. Co. of Am. v. Am. Hardware Mut. Ins. Co., 169 Or App 405, 9 P3d 749 (2000) (policy's definition of "Who Is An Insured" held invalid in light of statutory provision). Furthermore, the basic contents of certain insurance policies are dictated by statute (see ORS 742.450 (auto policies); ORS 742.370 (surety bonds); ORS 742.202 (fire insurance)), and the forms of most applications and policies must be preapproved by the Oregon Department of Consumer and Business Services (DCBS) (see § 1.1-2) (statutes regulating content). Even employer rules relating to an employer's group life policy may be part of the contract of insurance. Rhodes v. Equitable Life Assur. Soc. of the U.S., 109 Or 586, 592-93, 220 P 736 (1923).

Except for binders and contracts for temporary insurance covered by ORS 742.043 (discussed in § 1.3 to § 1.3-3), every contract of insurance is to be construed in accordance with the terms and conditions of the policy. The written application is considered part of the policy if the insurer delivers a copy of the application with the policy to the insured. ORS 742.016(1). If a copy of the application is not delivered to the insured, it is not part of the contract and the insurer is precluded from introducing the application as evidence in any action involving the policy. ORS 742.016(1). See also § 4.2-2 to 4.2-2(i) (rescission) and chapter 3 (reformation). The term copy includes a typewritten transcription of a signed, handwritten application. Ives v. INA Life Ins. Co., 101 Or App 429, 433, 790 P2d 1206, rev den, 310 Or 393 (1990).

When an endorsement adequately states the coverage provided by the policy, it may constitute a contract. In Wright v. State Farm Mut. Auto. Ins. Co. , 332 Or 1, 22 P3d 744 (2001), the court held that an endorsement satisfied the statutory requirement to state the coverage afforded by the policy (ORS 742.450(1)), even though neither the declarations page nor the endorsement itself explicitly set forth the limits of liability. The declarations page stated that other limits and exclusions could apply and that the policy consisted of the declarations page, endorsements, and the policy form. The court stated that the statute does not require that all rules related to a particular kind of claim must appear together in one place in the policy. Wright, 332 Or at 15-16; see also Waller v. Auto-Owners Ins. Co., 174 Or App 471, 476, 26 P3d 845 (2001) (both an endorsement and uninsured motorist (UM) coverage define the term named insured); First Far W. Transp., Inc. v. Carolina Cas. Ins. Co., 47 Or App 339, 344, 614 P2d 1187 (1980) (endorsement becomes part of insurance contract and, to the extent of any conflict between endorsement and policy, endorsement controls).

When the agreement is represented in a written policy, strict parol evidence rules apply, and an unattached application is inadmissible. Progressive Ins. v. Nat'l Am. Ins. Co. of California, 201 Or App 301, 307, 118 P3d 836 (2005) (court would not admit evidence of unattached application even if evidence would prove that insured had duplicative coverage); Progressive Specialty Ins. Co. v. Carter, 126 Or App 236, 241, 868 P2d 32 (1994) (affirming trial court decision precluding recession because of alleged misrepresentations in application that was not attached to policy pursuant to ORS 742.013). See § 1.2 regarding oral contracts.

Policy provisions making any portion of the insurer's charters, bylaws, or other constituent documents a part of the insurance contract are invalid unless that portion is set out in full in the policy. ORS 742.033.

§ 1.1-1 Steps in Formation

§ 1.1-1(a) Offer

A completed application for an insurance policy is an offer to make a contract and is subject to the prospective insurer's acceptance or rejection. Morford v. California W. States Life Ins. Co., 166 Or 575, 589-93, 113 P2d 629 (1941) (when insurer issued policy that contained terms at variance with completed application, it was actually a counteroffer and no contract could be made until applicant accepted policy).

Basic policy or application forms for insurance must be preapproved by the director of the DCBS. ORS 742.003 (also listing four exceptions, ORS 742.003(1)(a)-(d)).

Absent a statute to the contrary, an application need not be completed and signed before the parties can enter into a binding contract of insurance. Couch §§ 11:1, 11:3. In Oregon, a single life or health insurance policy may not be made on an individual without a written application or written consent by the individual insured at the time of making the insurance contract. ORS 743.038. This statute does not apply to group life or to group or blanket health insurance. The following situations are other exceptions to the requirement of written application or consent:

(1) A spouse may effectuate such insurance upon the other spouse.

(2) Any person having an insurable interest in the life of a minor, or any person upon whom a minor is dependent for support and maintenance, may effectuate insurance upon the life of or pertaining to such minor.

(3) Family policies may be issued insuring any two or more members of a family on an application signed by either parent, a stepparent or a spouse in a marriage.

(4) A person may effectuate insurance

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