policy and contract law


As mentioned in my previous entry, the Maine SJC issued two important decisions last week, one relating to insurance and the other government employee benefits.  And while these appear to be two very different areas of the law, the decisions prompt musing on their common themes.

1.  State Farm Mutual Automobile Insurance Co. v. Estate of Carey, 2012 ME 121.


This is the insurance case.   It goes to the test applied to determine when consent has been given by an insured to use a vehicle, so that the accident ensuing from the use is deemed covered, even though that use deviates from the scope of the consent given by the insured.

A few prefacing points.  First, this is an appeal in which the court asked for amici briefs.  It got them from both sides of the question – insurers wanting to limit when they must pay, and MTLA, wanting a liberal view of coverage.  The appeal was first argued in September 2011, then reargued in April 2012, with the decision coming out last week.  Justice Levy wrote for the majority, with Justices Silver and Jabar concurring. 

Second, as the Court noted, it has always made a distinction between "use" and "operation."  The language in insurance policies talk about consent for "use."  No one (presumably) consents that their buddy take their car and drive it while drunk.  That condition, however, goes to "operation," the SJC says, not "use," and so doesn't come into play when determining this consent for use issue.  Rather, use relates to when you tell your friend he can take your car to the local grocery store, and the next thing you know, whatever his consumption of alcohol, he's in New Jersey watching the high surf.  

The specific issue the Court focused on is whether the enactment of a statute requiring you to keep your car insured affects the "minor deviation" rule, which says little, but not big, frolics and detours from the consented use still keep the use in coverage.  In this decision, the Court broadens coverage by shifting the burden of proof, but doesn't make coverage as broad as the concurring Justices would like.    They would like adoption of the "initial permission" rule, which basically says if the insured gives consent to X to use his car, then that's it; he can drive it wherever, however — the consent provision in the policy is deemed to cover whatever happens after.

The SJC adopted the minor deviation rule in 1962, pre-enactment of the financial responsibility statute in 1987.  The majority declined to view the statute a basis to require adoption of the initial permission rule, because the Maine statute doesn't require "omnibus" coverage – "As a result, there is no certainty in Maine that omnibus insurance coverage will be available to provide indemnity insurance for an uninsured motorist who operates a vehicle with the permission of the registered owner."

So the rule now is "if the party seeking coverage establishes initial permission to use the vehicle, the minor deviation rule then shifts the burden to the insurance carrier to establish that there were explicit limitations placed on the borrower’s use of the insured’s vehicle to preclude coverage."

Because this was announcing a new rule, the court vacated the decision denying coverage below for application of the rule. 

2.  Norman E. Budge et al. v. Town of Millinocket,  2012 ME 122


This appeal goes to when town personnel policies become binding.  Three issues were addressed: (1) whether a 1991 personnel policy adopted as a town ordinance created an enforceable contract between the Town and its employees; (2) whether the Town was bound to pay the employees’ retirement group hospitalization and life insurance premiums by virtue of promissory estoppel; and (3) whether the Town’s reduction in benefits resulted in a taking without just compensation.  The case was decided against the employees on a summary judgment motion.  The majority opinion affirming was by Justice Gorman, with Justice Jabar dissenting and Justice Mead not participating.

The town (Millinocket) had a written personnel policy, contained in its Municipal Code since 1987.  Bear with me while I go through the initial text and its subsequent changes.

Before 1991, the policy said that  the Town was a participating member of the Maine State Retirement System and that the Town had life insurance and group hospitalization plans that were “funded 100 % by the Municipality for employees, spouse and children.”  In the Court's words, the policy "made no mention of whether or how the life or group hospitalization plans would apply to retirees."

In 1991, the Town amended the policy to add: "Employees, other than School Department employees, who retire from town service and qualify for retirement or disability benefits under the Maine State Retirement System shall continue as members of the town’s group hospitalization plan, at the town’s expense, to the same extent as current employees. The town shall also pay for coverage forthe former employee’s spouse. This benefit shall apply to former union employees of the town, as well as nonunion employees. The town reserves the right to change this benefit in the future as circumstances require. Any such changes shall apply only to employees hired after August 8, 1991."

In 1999, the Town changed the policy to reduce the amount of the premium paid by it from 100% to 90%.  It also added language reserving the right "to discontinue this benefit or to change coverage and providers from time to time as well as the portion of the premiums paid by the town and its employees with or without prior notice.”  Finally, the Town changed the language italicized above with the following:

"Employees hired prior to August 8, 1991, other than School Department employees, who retire from town service and qualify for retirement or disability benefits under the Maine State Retirement System shall continue as members of the town’s group hospitalization plan to the same extent as current employees. The town shall also provide coverage for the former employee’s spouse if the employee so elects. This benefit shall apply to former union employees of the town as well as non union employees…. "

Thereafter, the Town kept paying 100% of the premium for retirees, with the record not explaining why.  Three years later, the Town "amended its policy by including language that was even more explicit in explaining that no promises were being made nor contracts created," saying "The town reserves the right to discontinue this benefit or to change providers and coverage from time to time as well as the portion of premiums paid by the town and former employee with or without notice." 

Aside from this evolving policy language, the employees said the town manager promised to pay 100% of their premiums for life when hired; one alleged the Town Council also agreed ,but "[t]he employees [did not] produce[ ] any evidence that the alleged promises were made by official action of the Town Council, as opposed to statements of Council members or the town manager."  They also said that they took the municipal jobs instead of better paying mill jobs in reliance on these benefits.

Starting with the breach of contract claim, the Court said that it had previously rejected the "California Rule," pursuant to which a court is more apt to find a contract made by legislation and thereafter not allowing a lot of change.  The SJC said it rejected this still minority position in the past and now because it "unduly restrict[s] the power of the legislature." 

Instead, in Maine the Court "determin[es] whether the Town ever clearly expressed an intent to create binding contractual rights."   So, in theory, a town can make contract rights in an ordinance, but it needs to be very clear it's doing so.

Here, the fact that the Town kept changing the language, the SJC said, shows that it never wanted to be bound initially.  "There is a strong presumption against interpreting legislative acts to create contractual rights.  Because no legislative enactment by the Town used express language to create contractual rights, the employees cannot prevail on their claim for breach of contract" and summary judgment was affirmed.

On the issue of promissory estoppel, the Court noted that while it does apply the principle to governmental action, it does so "with caution."  The alleged statements and continuing act of payment of the premium were not enough, again as a matter of law.  "Absent our careful scrutiny of this threshold inquiry," the SJC said citing a law review, "claims of promissory estoppel in this area could devolve into “a case-by-case analysis for virtually every individual claiming reliance.”  In other words, a defendant is likely to get summary judgment on these types of claims.    

Unless the town official making the alleged promise has the authority under the town charter to do so, then there's no estoppel.  Nor could there have been ratification under these facts by town officials paying, the Court said, because only an act by the Town Council could bind the Town.

FInally, because there were not contractual rights, there could be no taking.   

In dissent, Justice Jabar agreed that there was no breach, but concluded that a factual dispute had been generated as to estoppel, explaining his view at length in the context of past precedent.

So the takeaways from these two cases are fairly straight forward. State Farm v. Carey teaches that unless you expressly tell the person who is borrowing your car to go directly to X, do not pass go and do nothing else but drive to that point X in the most direct route possible, the policy will probably be read as providing coverage.  It's beneficial to society to have insurance to pay for people injured in accidents, as reflected by Maine's policy of requiring insurance, so the burden is on the insurer and insured to show why there should be no coverage, and you have to take a lot of conscious steps to avoid it.

Budge indicates that unless an ordinance uses the term "contract" in its language bestowing benefits, there's no contractual right to them, and as a practical matter there isn't going to be any promissory estoppel against a town, at least when the official lacks the express power under the town charter to make the promise.  Society, the Court says, benefits from giving governments the ability to be flexible.  

How do these decisions tie together?  They illustrate two situations in which the right to contract is preserved, at least in theory, but the rules that apply to determining those rights and whether they exist are altered by public policy.

The Court didn't completely eliminate an ability for an insurer and an insured to avoid having to cover someone whom an insured gives some form of consent to use its car.  But ordinary rules of contract interpretation won't apply in this highly regulated insurance context.

Did changing the minor deviation rule itself implicate the contract clause in the constitution because the Court remanded for an existing contract to be interpreted under a newly announced rule?  I dimly (very dimly) recall that changing the burden of proof isn't viewed as altering a vested right; hence, even if unintended, the majority's conclusion just shifting the burden may have avoided this constitutional issue.  

In Budge, the Court similarly applied different rules about contract creation and estoppel in the governmental context than are applied contracts between private parties, again for public policy reasons.

If I were a law professor, and this weren't just a blog entry in which I have already gone on too long, I could launch into a riveting historical explanation of the change over time in the courts' view of contract rights and the contract clause as protecting them, starting with the Slaughterhouse Cases on through the post-Lochner precedent.  I will, however, refrain, simply noting that these cases reflect the current view that whenever public policy is deemed relevant, either because the contract was allegedly made with a public entity, or even between two private entities but in a highly regulated area, the ordinary rules of contract and estoppel law may not apply, and this is an area in which the SJC appears open to  resolution through a preliminary motion.

Another even broader takeaway from these decisions is that they show a willingness by this SJC to re-visit existing law.  The financial responsibility statute was enacted in 1987, and there have been plenty of insurance cases involving the scope of consent since then.  If someone (here Berman & Simmons) wants to say, hey, I think the rule should be changed, this Court is going to give them a serious hearing, which may, as here and unusually for this Court in the past, result in dissents or concurrences.  Justice Levy in presentations on appellate practice has often told the audience not to be shy about boldly seeking a change in the law.  These two decisions show that the SJC just might accept your new view.  Even in Budge, where the SJC basically retained its earlier view (perhaps stiffening it as Justice Jabar suggests), it thought about the question for a long time (argument was in April), and there was a dissent.