Oklahoma Supreme Court says service contracts are a form of insurance

The Oklahoma Supreme Court has ruled that service contracts are a form of insurance, thus opening the door for bad-faith damages, including punitive damages, if issuers wrongfully deny consumers' claims.

By a 6-2 vote, the court rejected the argument by Enterprise Financial Group Inc. that it can be held liable only for breach of contract and thus potentially less extensive jury awards.

The ruling arose from Harry McMullan III's purchase of a $1,800 service EFG contract with a used 2004 Ford Mustang Cobra from Edmond Hyundai in Oklahoma City.

EFG allegedly refused to pay McMullan's claim for engine damage under his 48-month, 50,000-mile contract, so he sued for both breach of contract and bad faith.

The dealership isn't a defendant in McMullan's suit.

Lawyers said it is uncertain whether Oklahoma dealerships that sell their own branded service contracts could also be subject to costly bad-faith claims under the decision.

Same good faith covenants

Enterprise argued that vehicle service contracts fall outside the definition of insurance contracts, thus limiting the size of potential verdict.

A lower court agreed and dismissed the bad-faith allegation.

But the Supreme Court reinstated that part of the lawsuit.

“The consumer pays for indemnity and pays to shift the risk of paying for high repair costs to the vehicle service provider in exchange for a pre-paid premium,” Justice Yvonne Kauger said in the majority opinion.

“Because these contracts function like insurance, their providers should be subject to the same covenants of good faith that insurers must meet,” she continued.

Plaintiff's lawyer Murray Abowitz of Abowitz, Timberlake, Dahnke & Gisinger in Oklahoma City, said the decision imposes a fiduciary duty on contract-issuers.

“There's a duty to place the interest of the insured first,” he said. That means the insurer is required “to find a way that the damage is covered under the policy rather than find a way not to pay.”

Courts in other states are divided on whether vehicle service contracts are a form of insurance, Kauger noted. For example, Arizona and Utah treat them the same, while Ohio doesn't.

Dealer-branded contracts

If the court's reasoning applies to dealer-branded service contracts that include the same responsibilities as third-party issuers, dealerships may face punitive damages and attorney fees, according to the plaintiff's lawyers.

“It's iffy for a dealer. It is certain for a third-party service contact company,” said McMullan's other attorney, Daniel Hays of the Abowitz firm.

A lawyer for Enterprise, Cara Nicklas of the Oklahoma City firm Corbyn Hampton, said the possibility of winning punitive damages in such situations would make bad-faith allegations more attractive to plaintiffs' lawyers.

That's because most traditional breach-of-service-contract cases involve only a few thousand dollars in damages or perhaps the price of the vehicle, Nicklas said.

The Supreme Court expressed no view on the merits of McMullan's allegations against Enterprise and returned the case to Oklahoma County District Court for further proceedings.

Nicklas said most pretrial discovery is complete and “now a jury will have to decide whether or not there was bad faith on the part of” her client.

Abowitz said he may file similar individual or class action litigation on behalf of other Enterprise customers.

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“There's a duty to place the interest of the insured first,” he said. That means the insurer is required “to find a way that the damage is covered under the policy rather than find a way not to pay.”

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