C & J Fertilizer, Inc. v. Allied Mutual Insurance Co. – Case Brief

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Modified: 19th Nov 2023
Wordcount: 1000 words
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Keywords: unconscionability, case briefs, interpretation of terms, insurance, implied warranty, law, doctrine of reasonable expectations, burglary

Summary of C & J Fertilizer, Inc. v. Allied Mutual Ins. Co., 227 N.W.2d 169 (Iowa 1975).

Facts

C & J Fertilizer (P) operated a fertilizer plant and was insured by Allied Mutual Insurance Co. (D). The insurance contract defined “burglary” as “the felonious abstraction of insured property from within the premises by a person making felonious entry therein by actual force and violence, of which force and violence there are visible marks made by tools, explosives, electricity or chemicals upon, or physical damage to, the exterior of the premises at the place of such entry.”

Employees reporting for work one morning found the front office door unlocked. The door could be forced open without leaving visible marks or damage. The door to an interior room used to store chemicals was damaged and had marks apparently made by tools. Chemicals worth $9,582 and other property valued at $400 was taken from the building.

The plaintiff brought this lawsuit when Allied Mutual Insurance refused payment on its claim. The trial court entered judgment in favor of Allied Mutual on the grounds that the definition of “burglary” as stated in the contract was unambiguous. Evidence that the burglary was an “inside job” was negated by the fact that the thief was required to break into the interior room.

Issues

1) Will a contract term in an adhesion contract be enforced if the strict enforcement of that term results in forfeiture? 2) Does the doctrine of reasonable expectations apply to insurance contracts?

Holding and Rule (Reynoldson)

1) No. A contract term in an adhesion contract will not be enforced if the strict enforcement of that term results in forfeiture. 2) Yes. The doctrine of reasonable expectations applies to insurance contracts.

The court held that an insurance policy carries an implied warranty of fitness for its intended purpose and the reasonable expectations of the policy holder are to be enforced. In construing and applying a standardized contract, courts seek to effectuate the reasonable expectations of the average policy holder. An insurance company tenders the insurance upon a ‘take it or leave it’ basis. Policy holders do not read the detailed, cross-referenced, standardized, mass-produced insurance forms, and would not understand them if they did. The courts have therefore adopted the doctrine of reasonable expectations.

Reasonable Expectations:

The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations. The court held that customers are not bound to unknown terms beyond the range of reasonable expectation. A party who adheres to the other party’s standard terms does not assent to a term if the other party has reason to believe that the adhering party would not have accepted the agreement if he had known that the agreement contained that term. Reason to believe may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly agreed to, or from the fact that it eliminates the dominant purpose of the transaction.

The court held that the definition of “burglary” stated in this policy comports neither with the concept a layman might have of that crime, nor with a legal interpretation. Although implied warranties of fitness for intended purpose have traditionally been attached only to sales of tangible products, there is no reason why they should not be attached to ‘sales of promises’ as well.

Unconscionability

The court held the insurance policy breached the implied warranty of fitness for its intended purpose. Standardized contracts such as insurance policies are carefully scrutinized to avoid enforcement of unconscionable clauses. If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. Gross inequality of bargaining power, together with terms unreasonably favorable to the stronger party, may confirm indications that the transaction involved elements of deception or compulsion, or may show that the weaker party had no meaningful choice, no real alternative, or did not in fact assent or appear to assent to the unfair terms. The court held that in this case the plaintiff’s evidence demonstrated that definitional provision was unconscionable.

Disposition

Reversed and remanded.

Dissent (Legrand)

The purpose of the provision is to exclude “inside jobs” from coverage. The overwhelming weight of authority upholds such provisions as legitimate. The doctrine of reasonable expectations cannot be applied here.

See Taylor v. Caldwell for a law school contracts case brief in which the court held that if a contract cannot be performed unless some specified thing continues to exist, the parties will be excused from performance unless one party gives an express or implied warranty.


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