Buyer beware—be very, very aware. As lawyers and non-lawyers know, to enter into a binding agreement, whether you're buying a car or signing up for phone service, one party must make an offer and the other must accept that offer. So, it would surprise many to learn that you can agree to an insurance policy provision without giving explicit consent, without being aware of the provision—and without ever receiving it.
Yet, that is exactly what the Alabama Supreme Court confirmed last month in American Bankers Insurance Company of Florida v. Tellis. Five homeowners sued their insurer, asserting that it had charged them excessive premiums. American Bankers moved to compel the homeowners to arbitrate their claims pursuant to an arbitration provision it alleged was part of each policy at issue. The lower court found in favor of the homeowners and American Bankers appealed.
As we previously have noted, mandatory arbitration clauses are an increasingly common feature of new insurance policies. But in most instances, policyholders purchase insurance with full knowledge that the policy contains an arbitration clause; the issue then is whether the policyholder should negotiate for different terms.
This is what makes the Tellis case interesting. The homeowners argued, and the insurer conceded, that they had not signed any documents containing an arbitration provision. The homeowners also submitted evidence, which the Court accepted, that the insurer never provided them with the documents containing the provision.
Even though the homeowners had no actual knowledge of the arbitration provision, the Alabama Supreme Court found the provisions enforceable based on its finding that the homeowners should have known about them—or, more specifically, should have known to hunt for them.
The Court determined that the homeowners received a "declarations page" included in their policies, which identified two forms as part of those policies. Those two forms contained or referenced the arbitration clause, and while one of those forms contained an empty signature line for the applicant, "it is undisputed that none of the policyholders executed it." It appears, however, that none of the policyholders actually received these forms.
The court found that the reference to those two forms (by only their identification numbers) created "some duty to investigate the contents of those forms because the declarations page indicated that the forms were part of the policy." Likewise, the homeowners "manifested their assent" to the policies (including the arbitration provisions) by "accepting and acting upon the policies" through their renewal of the policies and by paying their premiums.
The Court further found that the arbitration provision was not unconscionable because it called for the insurer to pay the costs of arbitration.
The insurance industry is highly regulated to protect policyholders, and as we have noted in our most recent post about arbitration (linked above), many states have laws prohibiting enforcement of mandatory arbitration clauses in insurance contracts. Moreover, most courts will protect policyholders—above all, individual policyholders as in Tellis—from hidden or ambiguous policy provisions. Still, the Tellis case should remind policyholders that they should be diligent in understanding the full scope of their policies, and should always review the terms, conditions, and exclusions carefully to make sure that the coverage they think they are purchasing is what they are actually purchasing, both at the time the insurance contract is first entered into and at each subsequent renewal. Moreover, Tellis should remind policyholders to carefully check to make sure that they have received all portions of the policies at the outset, lest they be surprised later. Lastly, Tellis should remind policyholders that courts may find that they agreed to (possibly otherwise undisclosed) terms and conditions by their conduct (e.g., renewing a policy or paying premiums), even without shaking hands or signing on the dotted line. Be careful!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
