Arizona Court of Appeals Holds UM/UIM Selection/Rejection Form Must Include Premium Prices

more+
less-

In Melendez v. Hallmark Insurance Company, 232 Ariz. 327, 305 P.3d 392 (June 11, 2013), the Arizona Court of Appeals held a UM/UIM selection/rejection form is not a valid “offer” under Arizona’s Uninsured Motorist Act, which requires Insurers to offer UM/UIM coverage in an amount equal to liability limits, unless the form includes premiums for the offered coverage. 

The Form

In Melendez, an Insurer denied a UIM claim because the Insured executed a form rejecting UM/UIM coverage.  The subject form generally described UM/UIM coverage, did not state coverage limits, did not state premiums, expressly stated “no coverage is provided by this document,” directed the Insured to contact the Insurer or an agent with questions regarding UM/UIM coverage or limits available, and stated the Insurer would provide UM/UIM coverage in the same amount as bodily injury limits unless the Insured rejected coverage or selected a lower amount of coverage.[1]

The Arguments

The Insured filed suit and made two primary arguments that the form did not constitute an offer.  First, the Insured argued she was not “offered” UM/UIM under A.R.S. §20-259.01 because the form did not state definite terms enabling the insured to accept or reject the offer.[2]  Specifically, the Insured argued the form failed to state premium prices.  Thus, the lack of a premium price on the form precluded the form from constituting a valid offer under A.R.S. §20-259.01.[3]  Second, the Insured also relied on actions taken by the Arizona Department of Insurance.  In 2010, the ADOI sent the Insurer a letter which stated the form did not conform to the ADOI’s sample forms; the Insurer had an opportunity to cure the deficiencies or withdraw the form; and if the Insurer did not comply, then the ADOI would disapprove of the form as ambiguous, misleading, deceptive or otherwise failing to comply with Arizona law.[4]

The Insurer argued A.R.S. §20-259.01 merely requires a “written offer,” the statute does not define a valid offer, common-law contract principles do not determine a valid offer under the statute, and it was not required to offer UM/UIM coverage on an ADOI approved form.

The Holding & Rationale

The Court of Appeals held the form was not a valid offer of UM/UIM coverage under A.R.S. §20-259.01 because an offer “must include premium prices for the amount of coverage requested, and [an offer] is not binding until the premium is communicated and agreed upon.”[5]  Melendez reasoned as follows. 

First, A.R.S. § 20-259.01 is a remedial statute intended to encourage drivers to explore and obtain UM/UIM insurance and consequently liberally construed to “guarantee that responsible drivers will have an opportunity to protect themselves and their loved ones as they would others.”[6] Thus, Arizona requires “strict compliance” with A.R.S. §20-259.01.

Second, contract principles apply to the construction of a statute regarding valid offers of insurance because an insurance policy is a contract.[7] Indeed, the Arizona Supreme Court has previously applied, in Tallent v. National General Insurance Company,[8] general contract principles to construction of the term “offer” in A.R.S. §20-259.01.[9]

Third, Arizona requires an offer to objectively indicate acceptance will conclude negotiations and bind the offeror to the offered coverage.  The Supreme Court also recently approved, in Ballesteros v. American Standard Insurance Company of Wisconsin,[10] the Second Restatement of Contract § 24 definition of an offer as “the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.[11]  Ballasteros held the test for whether an offer under A.R.S. § 20–259.01 has been made is an objective one:  “whether a reasonable person would understand that an offer has been made and that, upon acceptance, the offeror would be bound.[12]  “The offeree need not understand the content of an offer in order to bind the offeror, A.R.S. § 20–259.01 requires only that the insurer make an offer that, if accepted, would bind the insurer to provide the offered coverage.[13]

Applying the above principles, the Court of Appeals held the UM/UIM selection/rejection form did not “objectively communicate a proposal of terms and would not lead a reasonable person to understand that an offer is being made that, if accepted, would bind the offeror” because the form lacked premium prices, lacked optional coverage amounts, and stated it did not provide coverage.[14]  Such a form does not manifest a willingness to enter into a bargain such that an insured would be justified “in understanding that...assent to the bargain is invited and will conclude it.”[15]  Indeed, Melendez held the form did “not sufficiently offer UM/UIM coverage because it d[id] not convey an expression by one party of assent to certain definite terms, provided that the other party involved in the bargaining transaction will likewise expressed assent to the same terms.[16]

Melendez then defended its decision on three additional grounds.  First, the decision is consistent with the ADOI’s interpretation of § 20-259.01 and the 2010 letter of non-compliance the ADOI sent the Insurer.[17]  Second, the decision is consistent with the purpose of A.R.S. § 20-259.01, encouraging “potential Insureds to obtain UM/UIM coverage to protect their loved ones.”[18]  Third, the decision is consistent with the Supreme Court’s holding in Ballasteros, which held a valid offer is based on an objective rather than subjective understanding of an offer.[19]

Finally, the Court of Appeals also distinguished and disagreed with Garcia v. Farmers Insurance Company of Arizona,[20] which upheld an election/rejection form that did not include premium prices and quoted pre-selected limits lower than the insured’s liability limits.[21]  The Court of Appeals reasoned that Garcia did not have the benefit of Ballasteros, did not have the guidance of subsequent ADOI bulletins and actions, and Garcia cannot be considered a liberal reading of a remedial statute designed to encourage potential insureds to purchase UM/UIM coverage.[22]

Analysis

After Melendez, an insurer should confirm it’s UM/UIM selection/rejection form complies with the ADOI’s sample form here (http://www.azinsurance.gov/bulletin/2003-03.pdf) and note the judicial deference Arizona courts grant the ADOI’s interpretation of Arizona’s Uninsured Motorist Act. 


[1] See Melendez, 305 P.3d at 394 (pin cites not yet available for the Arizona Reporter).

[2] “Every insurer ... shall also make available ... and shall by written notice offer the insured and at the request of the insured shall include within the policy underinsured motorist coverage which extends to and covers all persons insured under the policy, in limits not less than the liability limits for bodily injury or death contained within the policy. The selection of limits or rejection of coverage by a named insured or applicant on a form approved by the director shall be valid for all insureds under the policy.” A.R.S. 20-259.01(B) (emphasis added).

[3] See Melendez, 305 P.3d at 394. 

[4] Id.

[5] Id at 396. 

[6] Id. at 395. 

[7] Id. 

[8] 185 Ariz. 266, 267-68, 915 P.2d 665, 666-67 (1996).

[9] Melendez, 305 P.3d at 396.

[10] 226 Ariz. 345, 348, 248 P.3d 193, 196 (2011).

[11] Melendez, 305 P.3d at 396 (emphasis in original). 

[12] Melendez, 305 P.3d at 396-97 (emphasis in original) (citing Ballasteros, 226 Ariz. at 348, 248 P.3d at 196).

[13] Melendez, 305 P.3d at 397 (emphasis in original) (citing Ballasteros, 226 Ariz. at 349, 248 P.3d at 197.

[14] Id.

[15] Id.   

[16] Id. (emphasis in original). 

[17] The Court of Appeals noted “[j]udicial deference should be given to agencies charged with the responsibility of carrying out specific legislation” and it “therefore afford great deference to ADOI's interpretation of this statute as it has been charged with enforcing it.” Id. at 398. 

[18] Id. 

[19] Melendez, 305 P.3d at 399 (citing Ballasteros, 226 Ariz. at 348- 49, 248 P.3d at 196-97).

[20] 191 Ariz. 410, 411–12, 956 P.2d 537, 538–39 (App. 1998).

[21] Id.

[22] Melendez, 305 P.3d at 399.