Petition for Writ of Certiorari — Russell v. Mutual of Omaha Insurance
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PREMS COURT. tl. &
FEB 12 4969
i__JOHN F. DAVIS, oxanyé
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1968
No. 103 4
ELMER D. RUSSELL,
Petitioner,
vs.
MUTUAL OF OMAHA INSURANCE COMPANY,
a Corporation,
Respondent,
—_—
PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE TENTH CIRCUIT
CHARLES S. SCHNIDER
JOHN E. SHAMBERG
J. F. May, JR.
7th Floor, Huron Building
Kansas City, Kansas
Attorneys for Petitioner
E. L. MENDENHALL, Inc., 926 Cherry Street, Kansas City, Mo. 64106, HArrison 1-3080
INDEX
Opinions Delivered in the Courts Below
Jurisdiction
Questions Presented for Review
Statute Involved
Statement of the Case
Summary of Proceedings Below
Statement of Facts
The Insurance Sale
Argument and Authorities in Support of Allowance of
Writ .... 12
Introductory Statement 12
I. In Reversing the Trial Court’s Determination of '
an Important Question of Kansas Law Without
Citing Any Contrary Authorities in Support of
ts Decision, the United States Court of Appeals
Went Beyond Permissible Limits of Appellate
Review Necessitating the Exercise of This 5
Court’s Supervisory Powers 13
II. In the Absence of a Showing That the Trial
Court’s Determination of the Crucial Question
of Kansas Law Involved Here Was Clearly Er-
roneous, the Court of Appeals Was Bound to Ac-
cept That Determination. No Such Showing of
Error on the Part of the Trial Court Was Made
Here; Therefore, This Court Should Intercede
to Prevent an Unwarranted Extension of the :
Federal Appellate Court’s Power of Review .... | 21
Conclusion 26
Appendix A—Opinion of the United States Court of
Appeals, Tenth Circuit, filed September 30, 1968 .... Al
cited
IT Pr h OND
ROE Ts
nm INDEX
Appendix B—Memorandum, Findings of Fact and Con-
clusions of Law, United States District Court for the
District of Kansas, Case No. KC-1919, filed April 6,
1966 Al4
Table of Cases
Bartch v. United States, 330 F. 2d 466 (10th Cir.) ........ 21
Bernhardt v. Polygraphic Company, 350 U.S. 198 ........ 18, 23
Brandwein v. Provident Mutuai Life Insurance Com-
pany of Philadelphia, 3 N.Y. 2d 491, 146 N.E. 2d
693 (1957) 19, 26
City of Clay Center v. — 52 Kan. 363, 35 Pac. 25
(1893) = 13
Cliborn v. Lincoln National Life Insurance Company,
332 F. 2d 645 (10th Cir.) 21
Coe v. Helmerich-Payne, 348 F. 2d 1 (10th Cir.) ........ 21, 22
Datlison v. Sears Roebuck & Company, 313 F. 2d 343
(10th Cir.) 21
Erie Railroad Company v. Tompkins, 304 U.S. 664 ............ 24
Federal Land Bank v. Bailey, 156 Kan. 464, 134 P. 2d 409
(1943) 13
Foundation Reserve Insurance Company v. Kelly, 388
F. 2d 528 (10th Cir.) 21
Gammell v. Diethelm, (Wash.) 368 P. 2d 718 ................ 26
Gliedman v. Capital Airlines, Inc., (D.C. Md. 1967) 267
F. Supp. 298 24
Hausman v. Buckley, 299 F. 2d 696 (2nd Cir.) ................ 24
Helene Curtis Industries v. Pruitt, 385 F. 2d 841 (5th
Cir.) 24
Hendrix v. New Amsterdam Casualty Company, 390
F. 2d 299 (10th Cir.) 21
Huddleston, et al. v. Dwyer, 322 U.S. 232 17
INDEX II
Ideal Structures v. Levine-Huntsvilie Development Cor-
poration, 396 F. 2d 917 (5th Cir.) 24
Industrial Indemnity Company v. Continental Casualty
Company, 375 F. 2d 183 (10th Cir.) 21, 22
Joint School District v. Labette County Community
High School, 140 Kan. 63, 33 P. 2d 948 14
Kirby v. United States, 329 F. 2d 735 (10th Cir.) ........ 21
Lee Shops, Inc. v. Shatten-Cypress Company, 350 F. 2d
12 (C.A. Tenn.), cert. den. 382 U.S. 980 23
Logan v. Victory Life Insurance Company, i75 Kan. 88,
259 P. 2d 165 (1953) 18
Loucks v. McCormick, 198 Kan. 351, 424 P. 2d 555 ........ 14
Loye v. Denver U.S. National Bank, 341 F. 2d 402 (10th
Cir.) 21
McCallister v. M-A-C Finance Company of Tulsa, 332
F. 2d 633 (10th Cir.) 21
Mitton v. Granite State Fire Insurance Company, 196
F. 2d 988 (10th Cir.) 21
Mutual Casualty Company v. MFA Insurance Company,
384 F. 2d 111 (10th Cir.) 21
Owens v. White, 380 F. 2d 310 (9ti: Cir.) 23
Pittsburgh-Des Moines Steel Company v. American
Surety Company of New York, 365 F. 2d 412 (10th
Cir.) 21, 22
Robert Porter & Sons, Inc. v. National Distillers Product
i. mpany, 342 F. 2d 202 (10th Cir.) 23
Ruhlin v. New York Life Insurance Company, 304 US.
202 24
Smith v. Greyhound Lines, 382 F. 2d 190 (10th Cir.) ... 21
Solomon v. Northwestern State Bank, 327 F. 2d 720
(8th Cir. 1964) 23
Universai Underwriters v. Wagner, 367 F. 2d 866 (8th
Cir.) 23
Cp ive Bpstas Nad ss
IV INDEX
Statutes
Act of June 25, 1948, c. 646, 62 Stat. 944 ) 4
Rule 19, 1(b), Rules of the U. S. Supreme Court ............ 2
28 U.S.C., Section 1254(1) 2
Other Authorities
11 American Trial Lawyers Association Newsletter, De-
cember, 1968, p. 490 12
28 Col. L. Rev. 1928: 859, 902-903 26
Restatement of the Law of Contracts, Volume II, Sec-
tion 505 25
U. S. Law Week, October 8, 1968, Section 2, 37 L. W.
2193 12
Williston on Contracts, Revised Edition, Volume 5, Sec-
tion 1498, p. 4184; Section 1499, pp. 4185-4187 —......... 24-25
IN THE
SUPREME COURT OF THE UNITED STATES
OCTOBER TERM, 1968
No.
ELMER D. RUSSELL,
Petitioner,
VS.
MUTUAL OF OMAHA INSURANCE COMPANY,
a Corporation,
Respondent.
FETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR
THE TENTH CIRCUIT
Elmer D. Russell, petitioner, prays that a writ of cer-
tiorari issue to review the judgment entered by the United
States Court of Appeals for the Tenth Circuit on the 30th
day of September, 1968, reversing the judgment of the
United States District Court for the District of Kansas
which awarded petitioner a judgment against the respond-
Cs ae ae q
wor rane
2
ent for $20,000.00 together with statutory interest under
the law of Kansas from March 6, 1963. (R. 68-71) .?
References to the pages of the record will be preceded
by the letter “R.” References to pages of the Appendix will
be preceded by the letter “A.”
OPINIONS DELIVERED IN THE COURTS BELOW
The Memorandum Decision of the United States Dis-
trict Court for the District of Kansas was entered and filed
on April 6, 1966, but is not reported in any official or un-
official reports. However, it is appended hereto. The opin-
ion of the United States Court of Appeals for the Tenth
Circuit filed September 30, 1968, is reported in the Federal
Reporter, second series and is cited as 402 F. 2d 339. The
opinion is appended hereto.
JURISDICTION
The jurisdiction of this Court is invoked under 28
U.S.C., Section 1254(1) and Rule 19, 1(b), Rules of the Su-
preme Court of the United States, adopted June 12, 1967,
effective October 2, 1967, and particularly that part of the
aforementioned rule indicating that this Court will seri-
ously consider granting certiorari in a case where a Court
of Appeals has decided an important state question in a
way in conflict with the applicable state or federal law
or where it has so far departed from the accepted and usual
course of judicial proceedings as to call for an exercise of
this Court’s power of supervision.
1. Respondent, defendant in the trial court, appealed from the
trial court’s judgment. That appeal was designated No. 9169 in
the Court of Appeals. Petitioner here, plaintiff in the trial court,
cross-appealed from so much of the judgment as fixed the amount
of the recovery at $20,000.00 instead of $90,000.00 and from the
trial court’s ruling denying him an attorney’s fee. That appeal
was designated No. 9182 in the Court of Appeals. The two ap-
peals were consolidated and only one argument was had.
3
The judgment of the United States Court of Appeals
for the Tenth Circuit hereby scught to be reviewed was
filed on September 30, 1968.
Petitioner, appellee-cross-appellant in the Court of Ap-
peals, filed his petition for rehearing on the 19th day of
October, 1968. The petition was denied by the Court of Ap-
peals on the 9th day of December, 1968. On December 27,
1968, the mandate of the Court of Appeals was stayed for
a period of 30 days as provided by Rule 31(b) of the rules of
said Court and the stay was extended for an additional 15
days by order of the Court of Appeals entered on the 27th
day of January, 1969.
QUESTIONS PRESENTED FOR REVIEW
1. When the outcome of a diversity case depends upon
the determination of an important question? of state law
not previously decided by the state and the determination
of this que.tion is made by the trial judge, a distinguished
member of the bar of that state, did the United States
Court of Appeals exceed permissible limits of appellate re-
view, in reversing the trial court so as to compel this Court
to exercise its supervisory powers over the Appellate
Court’s action?
2. In the absence of a showing that the trial court’s
determination of a controlling question of state law was
2. The importance of the question involved is evident from
the manner in which the Court of Appeals framed it in the open-
ing paragraph of its opinion:
“Does the speed of the modern jet age and the restless, ir-
repressible, increased tempo of all who are in its vortex impose on
a flight insurer the obligation toward prospective policy buyers
of explaining the distinctive differences of the several available
coverages? Does the insurer’s attractive sales booth, neon signs
heralding the need for and availability of ‘flight insurance,’ and
the other catchy advertising come-ons carry the inevitable mes-
sage to scurrying people on the move the notion that the coverage
is for the traveler’s intended round trip rather than for a defini-
tive period of time?” (A. 2).
4
clearly erroneous, was the action of the United States
Court of Appeals in reversing the trial court’s judgment
such a departure from accepted and usual judicial pro-
ceclings as to compel this Court to exercise its supervisory
powers to prevent such an unwarranted departure?
3. In reversing the judgment of the United States Dis-
trict Court for the District of Kansas in favor of the peti-
tioner, which rested on the trial court’s ruling that under
Kansas law the seller of air travel insurance in a commer-
cial airport owed a duty to prospective purchasers to ex-
plain the distinctive features of coverage, did the United
States Court of Appeals decide the question in a way in con-
flict with Kansas law?
STATUTE INVOLVED
Act of June 25, 1948, c. 646, 62 Stat. 944. State laws
as rules of decision.
“The laws of the several states, except where the
Constitution or treaties of the United States or Acts
of Congress otherwise require or provide, shall be re-
garded as rules of decision in civil actions in the courts
of the United States, in cases where they apply.”
STATEMENT OF THE CASE
Because of the novel character of the question involved
end the peculiar circumstances under which respondent
sold petitioner the insurance policy in questioi. for his wife,
we must respectfully impose upon the Court by seiting
out a rather detailed statement of the facts.
Summary of Proceedings Below
Petitioner, Elmer D. Russell, commenced an action in
the United States District Court for the District of Kansas
to recover on an insurance policy issued by respondent for
5
the accidental death of his wife Bertha who was killed
when an incoming Continental Airlines plane on which she
was a passenger crashed at the Kansas City Municipal Air-
port at approximately 10:45 p.m. on the night of January
29, 1963. Petitioner sought recovery on one of two theories:
Reformation of the contract or, a construction of the con-
tract so as to extend the period of coverage to the time of the
insured’s death. (R. 23).
The trial Court reformed the policy sold to petitioner’s
wife so as to extend coverage to the time of the fatal crash
and entered judgment for petitioner against the respondent
for the sum of $20,000.00, the principal sum provided for
in the policy sold to Mrs. Russell. (R. 64). Respondent
appealed the judgment (Court of Appeals No. 9169) and
petitioner cross-appealed (Court of Appeals No. 9182),
from the portion of the judgment fixing the amount of re-
covery at $20,000.00 instead of $90,000.00, which was the
amount of insurance it was stipulated by the parties the
premium would have purchased if the company had sold
petitioner’s wife air travel insurance rather than the gen-
eral accident insurance (R. 472), and from the ruling of the
trial court denying his application for attorney fees. (R.
81).
The Court of Appeals reversed on the ground that the
insurer had no duty to explain to the assured the significant
differences in the types of coverage it offered for sale re-
gardless of the circumstances of the transaction. The ap-
pellate court’s judgment of reversal rendered moot the
cross appeal. (A. 13).
Statement of Facts
Petitioner Elmer D. Russell and his wife Bertha were
residents of Kansas City, Kansas. On January 24, 1963,
Mrs. Russell received word that a brother had died in
Lubbock, Texas, and on the following day she and her
husband and son Richard went to the Kansas City, Mis-
6
souri, Municipal Airport for the purpose of putting Mrs.
Russell and Richard on a Continental Airlines flight
to Lubbock. Both Mrs. Russell and her son bought
round trip tickets but the return portion was “left
open.” The reason for this was that the time and
date on which the funeral of Mrs. Russell’s deceased
brother was to be ! eld had not been set and in fact it
was not determined util Monday, January 28th, that the
funeral was to be held on Tuesday, January 29th. Prior
te receiving that information, there had been no tentative
or suggested date as to when the funeral was to be held.
Mrs. Russell had never flown before (R. 245, 256)
and was nervous and upset over the loss of her brother.
(R. 265). In addition the Russells had to hurry to get to
the airport and arrange to board the plane which left
shortly after their arrival. (R. 246-248).
Reverend Russell had made four air trips prior to
January 25, 1964, and on each of these occasions he had
purchased flight insurance to protect him on these trips
and the insurance which he purchased covered him for
the duration of the trip, however long it would take. (R.
256).
After Mrs. Russell and Richard Russell had obtained
their tickets from the airlines ticket counter, Reverend
Russell directed his wife and son to a nearby insurance
vending machine intending to purchase round trip air
travel insurance. However, he didn’t have the proper
change and so they went to a nearby insurance sales
booth. (R. 250-251).
The position of the airline ticket counter in relation
to the insurance vending machine and the insurance sales
booth where insurance was sold to Mrs. Russell has, as
the trial court found, relevance with respect to the offer
of insurance which respondent made to the traveling public
7
and the intent of the petitioner with respect to the cover-
age he expected to get for his wife. The terminal building
is entered from the east side. (R. 260). The insurance
vending booth is passed on the way to the Continental
Airlines ticket counter. (Pl. Ex. 2; R. 263, 491) shows the
respondent’s air travel insurance booth viewed from the
east. (R. 260). (Pl. Ex. 3; R. 263, 492) is also a view of
the same booth as one views it from -he east going west
toward the Continental Airlines ticket counter which can
be seen in the picture. (R. 260; 490). (Pl. Ex. 5; R. 263,
493) is a view of the insurarice booth looking from the
south to the north and shows respondent’s insurance ma-
chine in the picture. (Pl. Ex. 8; R. 263, 494) is another
view of respondent’s insurance vending machine in the
same position as in the previous exhibit. (R. 261). The
conditions depicted in the pictures prevailed at the time
of the transaction in question. (R. 262). The vending
machine was perhaps 25 to 30 feet from the Continental
Airlines ticket counter and appellant’s insurance booth
was perhaps about the same distance east of the vending
machine. (R. 264).
The Insurance Sale
As the Russells approached the insurance booth the
attendant asked if she could serve them whereupon
Reverend Russell replied that he wanted flight insurance
for his wife who was going to Lubbock, Texas and return.
(R. 251, 295). Richard at the same time laid the two
airline tickets on the insurance counter after removing
them from the envelope. The attendant then asked how
much insurance was wanted and Mrs. Russell asked what
was the least amount they could buy whereupon the at-
tendant replied, “$20,000.00.” The Russells indicated that
this was the amount they wanted. (R. 297). The attendant
immediately began writing up the policy and in the
8
process asked the Russells how long Mrs. Russell would
be gone or when she would return. (R. 252). Whereupon
Reverend Russell’s wife looked at him and in a quizzical
voice asked, “Three days, do you think we can make it
back in three days?” to which Reverend Russell replied,
“You better allow yourself more than that—at least allow
yourself another day.” This was purely a conversation
between appellee and his wife. (R. 253). The Russelis
made no direct answer to the attendant as to the duration
of Mrs. Russell’s trip although it is possible she heard the
conversation between them. (R. 253, 285). The attendant
never explained to the Russells why she had asked how
long Mrs. Russell wouid be gone or when she would return
and Reverend Russell did not know what the purpose of
the question was. (R. 266).
The attendant filled out the policy, turned it around for
Mrs. Russell to affix her signature to it (R. 253), and as
soon as Mrs. Russell signed it, immediately took the paper
back, took off and retained a part of the policy, closed and
stapled it together, and handed it to Mrs. Russell. (R. 268).
The policy was stapled together in two or three places.
(R. 280). Reverend Russell then asked the attendant what
the premium was and was informed that it was $2.25. Mrs.
Russell paid the premium in change. The policy was then
handed to her. (R. 270). Mrs. Russell and Richard then
hurriedly departed to board the plane and in the rush
Reverend Russell was hardly able to keep up with them.
(R. 271).
There was no mention by respondent’s attendant of the
duration of coverage under the policy sold to Mrs. Russell
except the previous question concerning the length of time
she intended to be gone (R. 254) and the trial court found
specifically that this question could not be considered as
an explanation of the extent of coverage. (R. 61).
9
The entire transaction took only a minute or two. (R.
425, 427). The respondent’s attendant never suggested that
petitioner or his wife should look at the policy or study it.
(R. 265). She never described the terms of the coverage
to petitioner or his wife. (R. 269). Nor did she ever explain
why she had asked about the duration of Mrs. Russell’s
trip. (R. 266). Reverend Russell did nct think that the ques-
tion had anything to do with the duration of the trip be-
cause he thought the insurance was good for the duration
of the round trip as ticketed. (R. 313). The only time the
policy was ever turned toward the Russells prior to it being
stapled together was for the purpose of obtaining Mrs.
Russell’s signature. (R. 268).
After the policy was stapled and handed to Mrs. Russell,
she handed it to petitioner and he stuck it in his pocket
(R. 272) and didn’t look at it until after his wife’s funeral.
(R. 273, 274, 316). Only one policy was furnished to the
Russells. Mrs. Russell did not have a copy in her pos-
session. (R. 276).
Although respondent sold 11 types of policies at the in-
surance booth in the Kansas City Municipal Airport, only
two policies were sold in any number (R. 45) and those
were the T-18 type policy which was the type sold to Mrs.
Russell—a short term general accident policy—and the
T-20 type policy which is the policy against loss in air
travel or while going to or from the airport. (R. 230, Pl. Ex.
16; R. 439, 616). The trial court considered that these were
the only two important types of policies involved in this
case. (R. 60). The T-20 type policy is in effect until com-
pleticn of the round trip or 12 months from the date of issue.
(R. 230). The T-18 type policy, the general accident policy,
is sold in daily units (R. 219) and remains in effect for the
stated number of days up to 31. (R. 220) (Pl. Ex. 11; 281,
497).
POT
10
When the T-18 type policy which respondent sold to
petitioner was stapled shut, it looked the same to petitioner
as the T-20 type policy, the type of policy he was familiar
with. (R. 280, 281). Prior to opening the policy, after his
wif2’s funeral, petitioner was not aware of any difference
between the policy sold to his wife and those which he had
previously bought at the airport. (R. 316). When petitioner
bought the policy in question for his wife, it was his under-
standing that the policy would remain in force until his wife
returned to Kansas City whenever that might occur, as long
as she returned on the round trip ticket which she had
purchased. (R. 133).
The trial court made a specific finding that the entire
transaction was handled by petitioner for his wife (Finding
No. 4, R. 62) and for the purpose of this petition we shall
sometimes refer to petitioner as the purchaser of insurance
although his wife was the insured.
According to respondent’s booth manager, a routine
sales procedure was prescribed for the attendant to follow.
(R. 45). Merely asking how long the customer was going
to be gone was not sufficient. If the customer said, for in-
stance, the trip would last three days, the attendant would
have to know if he was leaving on the day of the transac-
tion and she would then count off the days and ask
specifically the day of his return. Then they would tell the
eustomer that they had two policies, “the flight” policy and
the general accident policy which covered the flight with
continuous coverage during the trip. (R. 445).
Respondent’s booth manager explained that if a cus-
tomer was leaving on the 25th of the month as Mrs. Russell
was and planned to return on the 29th of the same month,
respondent would sell her a 5-day coverage. (R. 53). Ifa
person’s trip was for four days, it wouldn’t make any dif-
ference what time they came back on the fourth day because
11
the respondent always sells them an extra day’s coverage.
(R. 54-55). Mrs. Russell was sold a four-day policy.
The T-18 policy which was sold to petitioner’s wife was
actually being promoted by respondent at the time of the
sale because it was a newer policy. (R. 148, 149). It was
displayed on the booth counter so that the customer saw
it first and generally the customer purchased it. (R. 150,
151).
The evidence disclosed that in the instant case no ex-
planation was made concerning the different features of
coverage of the policy offered by respendent, and the pro-
cedures outlined for respondent’s attendant were not fol-
lowed:
In entering judgment for the petitioner, the trial court
first observed that under Kansas lew reformation would
be invoked where there was a mistake by one party and
the other party is guilty of constructive fraud or inequitable
conduct, citing Kansas cases. The Court then defined equi-
table fraud according to Kansas law. (A. 19). The Court
found that the insurance company knew what its policies
contained and knew that the prospective buyer cid not
know what they contained; found that respondent had
knowledge that the petitioner wanted to buy insurance to
protect his wife while riding on a plane but nevertheless
remained silent instead of telling petitioner that he was
buying a different coverage; and concluded that respond-
ent’s silence in the face of this knowledge violated a duty
owed by respondent to petitioner amounting to inequitable
conduct constituting constructive fraud under Kansas law
for which reformation would lie. (A. 22-24).
The Court of Appeals recognized the accuracy of the
legal principles relied upon by the trial court in reaching
la ala ea
12
its judgment, accepted the findings and conclusions con-
cerning the proof in the case as stated by the trial court,
but concluded that a proper application of the legal prin-
ciples to the facts did not warrant the trial court’s conclu-
sion that a duty to explain existed. In reversing the trial
court, the appellate court cited no authorities in support of
its holding on this point.
Kansas has not decided the substantive question upon
which the case *:rned in the lower courts, namely the duty
of an insurance company to explain the distinctive differ-
ences in coverage in similarly appearing policies offered to
the air traveling public, and to our knowledge the question
has not been decided elsewhere.
ARGUMENT AND AUTHORITIES IN SUPPORT
OF ALLOWANCE OF WRIT
Introductory Statement
The importance of the substantive question decided by
the Court of Appeals is evident from the fact that it will
undoubtedly affect procedures followed by the insurance
industry in the sale of air travel insurance in commercial
airports throughout the country. The publicity already
given to the Court of Appeals’ decision in this case is some
evidence of its importance.®
3. U.S. Law Week, October 8, 19€8, Section 2, 37 L. W. 2193:
11 American Trial Lawyers Association Newsletter, December,
1968, p. 490.
13
L
In Reversing the Trial Court’s Determination of an
Important Question of Kansas aw Without Citing
Any Contrary Authorities in Support of Its Deci-
sion, the United States Court of Appeals Went Be-
yond Permissible Limits of Appellate Review
Necessitating the ixercise of This Court’s
Supervisory Powers.
The question of Kansas law which the trial court ini-
tially was called upon to decide, and the question upon
which the Court of Appeals’ decision resied, was whether
there was a duty on an insurance company selling insurance
in a commercial airport to explain to the prospective pur-
chaser the distinctive differences in the types of policies it
sold, the two principal policies being a short-term general
accident policy and a flight policy insuring against loss in
flight and in going to or coming from the air terminal.
The trial court viewed the question in the light of the
law of Kansas concerning conduct which constituted equita-
ble fraud and the necessary conditions for reformation.
Under Kansas law reformation will be granted where there
is a mistake by one party, and the other party is guilty of
inequitable conduct amounting to constructive fraud. Fed-
eral Land Bank v. Bailey, 1&6 Kan. 464, 134 P. 2d 409 (1943).
The Kansas Supreme Court in City of Clay Center v. Myers,
52 Kan. 363, 365, 35 Pac. 25 (1893), quoted from Story and
Black, as follows:
“ ‘Fraud, in the sense of a court of equity, properly
includes all acts, omissions and concealments which
involve a breach of legal or equitable duty, trust, or
confidence justly reposed, and are injurious to another,
or by which an undue and unconscientious advantage
is taken of another.
at ey ane
14
“Constructive fraud consists in any act of omission
or commission contrary to legal] or equitable duty, trust
or confidence justly reposed, which is contrary to good
conscience, and operates to the injury of another. The
former implies moral guilt; the latter may be consistent
with innocence.’ (Black, Law Dict., § 517).” (p. 365).
The trial court noted that constructive fraud did not
necessarily indicate a bad intention on the part of the
fraudulent party; it merely indicated an act or omission
which injures a third party and which is contrary to a duty
imposed. (A. 20).
In Joint School District v. Labeitte County Community
High School, 140 Kan. 63, 66, 33 P. 2d 948, 950, the Kansas
court said:
“The parties agree on what constitutes constructive
fraud. Intent to deceive is not necessary to constitute
constructive fraud. All that is necessary is an act or
Omission in breach of legal or equitable duty, or of
trust or confidence justly reposed, which is contrary
to good conscience and takes undue and unconscien-
tious advantage of another, or otherwise operates to
his injury.” (Emphasis supplied).
These principles were reaffirmed in the recent Kansas
case of Loucks v. McCormick, 198 Kan. 351, 356, 424 P. 2d
555:
“Actual fraud is an intentional fraud and the intent
to deceive is an essential element thereof. Construc-
tive fraud is a breach of a legal or equitable duty
which, irrespective of the moral guilt, the law de-
clares fraudulent because of its tendency to deceive
others or violate a confidence and neither actual dis-
honesty of purpose or intent to deceive is necessary.”
Viewed against the background of the Kansas authori-
ties, the trial court reviewed the facts which were es-
15
tablished by the proof concerning the transaction in ques-
tion which he felt were relevant to an application of the
Kansas principles involving the intervention of equity.
The trial court specifically found that respondent was
guilty of constructive fraud and that petitioner was mis-
taken as to the coverage he was getting.
The sale of insurance of this kind usually is a hurried
transaction. There was testimony to the effect that this
transaction took only a couple of minutes. There are, in
the area of the sales booth, machines which sell the T-20
type of flight insurance. The booth has the legend “Flight
Insurance” prominently displayed. The plaintiff intended
to get insurance which would cover the deceased from the
time she left until she returned and, indeed, thought that
the insurance had been procured. The defendant encour-
aged the sale of the general short-term accident insurance
(T-18) over that of the “straight flight policy”. (T-20). The
agent did not explain the ypes of insurance available, but
sold the T-18 contract to the Russells. There was a discus-
sion of the four-day term, but the Russells were not told
that the insurance would expire as of 11:00 a.m. the follow-
ing Tuesday. (A. 20).
The Court found that all of these circumstances re-
lated to what a prospective purchaser of insurance might
reasonably believe would be included in the coverage and
constituted a part of the company’s offer and were relevant
to the question of whether a duty rested on the company
to explain the type of coverage it was offering. The court
had no difficulty whatsoever in finding that the company
knew what its policies contained and knew that the pros-
pective purchaser did not. The court reasoned that it was
certainly not unreasonable to assume that everything sur-
16
rounding the transaction led the purchaser to believe he
was buying air flight insurance and that if the company
wished to sell short-term accident insurance, it should so
inform the buyer so that he could make a decision between
the two types of coverage. (A. 22).
The court concluded there was a “positive duty” on
the insurance company to explain its two types of policies
to the buyer and that in the instant case the duty was
violated. The court concluded (A. 22):
“The fact that the duty was violated put the plaintiff
in a disadvantageous position, and he subsequently
was mistaken as to what type of policy he had. The
violation of the duty, and subsequent injury to plain-
tiff, amounted to such inequitable conduct as to con-
stitute constructive fraud under Kansas law. See City
of Clay Center v. Myers, supra. Why this happened,
is not important. As was said in Gilbert v. Mutual
Benefit Health and Accident Association, 172 Kan. 586,
593, 241 P. 2d 768 ........ (1952), ‘* * * reformation of
an instrument will be granted without regard to the
cause of the failure to express the contract as actually
made, whether due to fraud, mistake in the use of
language, or any other thing which prevented the ex-
pression of the true intention of the parties.’ ”
In reversing the trial court, the Court of Appeals ac-
knowledged the accuracy of the trial court’s statement of
the general principles of equity that applied (A. 9),
acknowledged that reformation would lie where there was
mistake on the part of one party coupled with construc-
tive or equitable fraud on the part of the other (A. 9),
and then narrowed its inquiry to the question of the proper
scope of the doctrine of equitable fraud and how it relates
to the duty of an insurer to warn the customer about what
he was buying. But in deciding that no duty existed, the
Court seems to have abandoned the application of equitable
17
principles and placed its holding on the rule of non-variabil-
ity of written contracts. (A. 11).
We call attention to the following significant features
of the Court of Appeals’ decision:
(1) The Court acknowledged the accuracy of the legal
principles stated in the Kansas decisions which
were relied upon by the trial court.
(2) The Court cited no Kansas law which compelled
a conclusion different from the trial court’s.
(3) It accepted the correctness of the trial’ court’s
findings of fact.
(4) It cited no general authority which conflicted with
the trial court’s conclusions.
(5) It cited no general authority in support of its cwn
decision.
We respectfully submit that the language of the Court
of Appeals’ decision indicates quite clearly that it rests on
that Court’s own opinion as to what the law ought to be
rather than on what Kansas would have said its law is.
The Honorable Arthur J. Stanley, Jr., the trial judge
who reformed the contract in question, is a distinguished
member of the Kansas bar and was, before becoming a
United States District Judge, an eminent and respected
practicing Kansas lawyer engaged in an cxtensive insur-
ance law practice. Probably no Kansas lawyer was better
informed as to the “intricacies and trends of local law”,
and his views and analysis of the law of Kansas in arriving
at his judgment is, as this Court has said, “a highly de-
sirable and imporiant aid in its interpretation of state
law.” Huddleston, et al. v. Dwyer, 322 U.S. 232, 237.
It is with good reason that this Court has said that
special weight will be given to the interpretation of the state
18
law by the trial judge who is a member of the bar of that
state. Bernhardt v. Polygraphic Company, infra.
The Kansas Legislature, as well as the decision law of
that state, has announced the high public policy of that
state in insurance transactions. Kansas has made it clear
that insurance contracts will not be regarded as ordinary
contracts whereby the parties may bind themselves as they
wish and out of this concern for the rights of the public in
connection with insurance contracts the provisions of the
State Insurance Code, which by law becomes a part of in-
surance policies, are strictly construed to protect the public
interest. Logan v. Victory Life Insurance Company, 175
Kan. 88, 93, 97, 259 P. 2d 165, 169, 171 (1953).
The distinguished trial judge was in a particularJy ad-
vantageous position by virtue of his years of practice as a
Kansas lawyer to understand and appreciate the deep pub-
lic concern with which Kansas scrutinized insurance
transactions (R. 17) and it was with this special knowledge
of the public policy of Kansas with respect to insurance
transactions that he examined the duty of the respondent
in the instant case.
In deciding whether the respondent owed a duty to
petitioner to explain its insurance policies to petitioner, the
Court of Appeals felt that the answer turned on a balancing
of the competing interests of the parties; “the right of the
public to be free of fraud and oppression wrought by those
in a superior bargaining position” on the one hand and on
the other the “realities of dealing with the public, enforce-
ment of contracts, and instability which flo vs from opening
up written contracts to oral accretions.” (A. 11).
In reaching its decision, the appellate court appeared
to co-mingle principles of equity and legal rights arising
from the “long held notions of the non-variability of writ-
19
ten contracts.” (A. 12). In this regard, we respect-
fully submit that the appellate court was applying consid-
erations which in its own judgment were relevant rather
than considerations which the Kansas court would probably
have applied in reaching its decision.
We submit that the rule of maintaining the stability of
the written contract is not a relevant consideration in a case
which warrants reformation on equitable grounds. In
Brandwein v. Provident Mutual Life Insurance Company
of Philadelphia, 3 N.Y. 2d 491, 146 N.E. 2d 693 (1957), the
New York Court of Appeals when cgnfronted with similar
objections to reforming a written contract said (l.c. 695):
“As to the alleged defenses, it is settled that neither
the Statute of Frauds nor the parol evidence prohibi-
tion forbids reformation of a written contract to in-
clude material orally agreed upon but, because of mu-
tual mistake or unilateral mistake plus fraud, not in-
serted in writing. The authorities so holding are nu-
merous and consistent (Gillespie v. Moon, 2 Johns Ch.
595, 5 Williston on Contracts (rev. ed.), § 1552, 2 Reed
on the Statute of Frauds, § 475; Browne on the Stat-
ute of Frauds (5th ed.), § 441d; Dodge v. Wellman, 1
Abb. Ct. App. Dec. 624; 515, 517; Prior v. Williams, 42
N.Y. 231; 3 Abb. Ct. App. Dec. 624; DePeyster v.
Hasbrouck, 11 N.Y. 582; Meyer v. Lathrop, 73 N.Y. 315;
Friedman & Co. v. Newman, 255 N.Y. 340, 174 N.E.
703, 73 A.L.R. 95).”
The soundness of the trial court’s interpretation of
Kansas law in the instant case is fortified by the fact that
even the most sophisticated of purchasers of insurance
were deceived by respondent’s sales methods. It so hap-
pened that the president of a chain of super markets, a Mr.
McNabb (R. 367), was in the act of buying insurance at re-
spondent’s booth at the same time that petitioner was buying
insurance for his wife. He thought he was buying air travel
insurance. (R. 376). He was not interested in any other
kind of insurance. He was well covered otherwise. The
only protection he wanted was in the air because he had
all kinds of other insurance and he wouldn’t pay extra
money for the additional coverage. (R. 386-387). But,
it turned out that Mr. McNabb too, thought he was getting
one kind of insurance and got another. He too was sold
the short-term general accident policy rather than the air
travel policy! (See Exhibit 13; R. 377, 623).
The Court of Appeals observed that even though it was
not explained to Reverend Russell by the insurer what
the distinctive features of the coverage were, he was really
better off because if Mrs. Russell had been killed on the
ground or in a hotel fire she would still have had insurance.
But the trial court, we believe, answered this argument most
effectively by pointing out that the general accident policy
was more expensive than the flight insurance, might be
repetitious of other policies the insured had, and was more
restrictive as to duration of coverage than straight flight
insurance. As the trial court pointed out, the purchaser
should have the right to select the kind of insurance he
wants. (R. 59).
We respectfully submit that in view of the vantage
point from which the trial judge examined the Kansas law
and the fact that he was in a much more likely position
to know what the Kansas courts would have done in the
instant case, and the fact that the Court of Appeals made
no effort to relate its holding to an extension of the Kansas
cases nor to weigh the importance of the sensitivity of Kan-
sas toward insurance transactions, all warrant the conclu-
sion that the Court of Appeals decided this case in a way
that was probably in conflict with the law of Kansas.
21
II.
In the Absence of a Showing That the Trial Court’s
Determination of the Crucial Question of Kansas
Law Involved Here Was Clearly Erroneous, the
Court of Appeals Was Bound to Accept Thai De-
termination. No Such Showing of Error on the
Part of the Trial Court Was Made Here; Therefore,
This Court Should Intercede to Prevent an Unwar-
ranted Extension of the Federal Appellate Court’s
Power of Review.
In a long line of cases the United States Court of Ap-
peals for the Tenth Circuit has restricted its authority to
reverse the trial court’s determination of local law unless
that determination is clearly erroneous. Mitton v. Granite
State Fire Insurance Company, 196 F. 2d 988 (10th Cir.);
Dallison v. Sears Roebuck & Company, 313 F. 2d 343 (10th
Cir.); Kirby v. United States, 329 F. 2d 735 (10th Cir.);
Bartch v. United States, 330 F. 2d 466 (10th Cir.); McCal-
lister v. M-A-C Finance Company of Tulsa, 332 F. 2d 633
(10th Cir.); Cliborn v. Lincoln National Life Insurance
Company, 332 F. 2d 645 (10th Cir.); Loye v. Denver U. S.
National Bank, 341 F. 2d 402 (10th Cir.) ; Coe v. Helmerich-
Payne, 348 F. 2d 1 (10th Cir.); Pittsburgh-Des Moines Steel
Company v. American Surety Company of New York, 365
F. 2d 412 (10th Cir.); Industrial Indemnity Company v.
Continental Casualty Company, 375 F. 2d 183 (10th Cir.);
Smith v. Greyhound Lines, 382 F. 2d 190 (10th Cir.); Mu-
tual Casualty Company v. MFA Insurance Company, 384
F. 2d 111 (10th Cir.); Foundation Reserve Insurance Com-
pany v. Kelly, 388 F. 2d 528 (10th Cir.); Hendrix v. New
Amsterdam Casualty Company, 390 F. 2d 299 (10th Cir.)
In Dallison v. Sears Roebuck & Company, supra, the
Court of Appeals for the Tenth Circuit, said (l.c. 347):
“In the absence of a decision by the Colorado Supreme
Court on the question, we are governed by the well
*! Cea
22
established rule of this Court that we will accept the
considered determination of the trial court as to the
local law, unless clearly convinced to the contrary.”
In Coe v. Helmerich-Payne, supra, the Court of Ap-
peals for the Tenth Circuit said with respect to the inter-
pretation of Kansas law by the same trial judge whose
judgment was reversed in the instant case (l.c. 3-4):
“Since the proper application of these facts finds no
completely convincing solution in the adjudicated Kan-
sas cases, we accept the trial judge’s interpretation
upon a matter of purely locablaw.”
In Industrial Indemnity Company v. Continental Cas-
ualty Company, supra, the Court of Appeals for the Tenth
Circuit said (l.c. 185):
“There thus appear to be no decisions from Oklahoma
courts which are in point or are analogous. Under
these circumstances we have held in many cases that
the decision of the trial court on what is the prevailing
law of the state where he is sitting will be accepted
on appeal unless it is clearly wrong. (Cite) The au-
thorities from all jurisdictions are meager but the trial
court’s decision is within recognized bounds, and we
cannot say that it is clearly wrong.”
In Pittsburgh-Des Moines Steel Company v. American
Surety Company of New York, supra, the Court of Appeals
for the Tenth Circuit said (l.c. 416):
“The Wyoming Supreme Court does not appear to have
considered the question but the Judge of the United
States District Court of Wyoming, experienced in
Wyoming law, found the statute not to be a bar and,
under the circumstances, we will follow the decision
of the local judge.”
The Court of Appeals for the Tenth Circuit has fur-
ther held that in matters pertaining to the law of a par-
ticular state where there are no decisions of that state
23
in point the determination of the local law by the trial
judge will be accepted unless that determination is clearly
contrary to the general authorities. Robert Porter & Sons,
Inc. v. National Distillers Product Company, 342 F. 2d 202,
205 (10th Cir.).
The rule of abstention from interfering with the trial
judge’s interpretation of local law is observed in the other
circuits. Owens v. White, 380 F. 2d 310 (9th Cir.); Uni-
versal Underwriters v. Wagner, 367 F. 2d 866 (8th Cir.).
Where the state law is doubtful the Court of Appeals
will not reverse if the trial court has reached a permissive
conclusion as to state law. Solomon v. Northwestern
State Bank, 327 F. 2d 720 (8th Cir. 1964); Lee Shops,
Inc. v. Shatten-Cypress Company, 350 F. 2d 12 (CA.
Tenn.), cert. den. 382 U.S. 980.
This Court has ruled that in a diversity case, where
- the trial judge who is a member of the bar of the state
whose law he is called upon to interpret decides a question
of local law differently from the interpretation put upon
it by the Court of Appeals, special weight will be given to
the trial judge’s statement of the local law. Bernhardt
v. Polygraphic Company, 350 U.S. 198. In rejecting the
Court of Appeals’ interpretation of the state law which
overruled the trial judge’s interpretation and reinstating
the trial judge’s determination, this Court said in the
Bernhardt case (l.c. 204):
“Since the federal judge making those findings is from
the state of Vermont, we give special weight to his
statement of what the Vermont law is.”
In diversity cases it is not the federal court’s function
to apply the rule of interpretation of state law which it
thinks is wiser or better. It is the federal court’s duty to
ascertain what the state law is, not what it ought to be.
24
Hausman v. Buckley, 299 F. 2d 696, 705 (2nd Cir.); Ideai
Structures v. Levine-Huntsville Development Corporation,
396 F. 2d 917, 922 (5th Cir.).
The Court of Appeals certainly needed to make a more
detailed analysis of the law of Kansas and the authorities
generally before it was warranted in upsetting the trial
judge’s determination of Kansas law as clearly erroneous.
Where there is no state decision determinative of the
question, the federal court must consider all available
data, including statements of law, treatises, law review
commentaries, and the majority rule. Helene Curtis Indus-
tries v. Pruitt, 385 F. 2d 841 (5th Cir.). It should consider
trends in modern legal thought which the court thinks would
be accepted by the state court. Gliedman v. Capital Airlines,
Inc., (D.C. Md. 1967) 267 F. Supp. 298.
In a case controlled by Erie Railroad Company v.
Tompkins, 304 U.S. 64, as this case is, the federal courts
must search for and apply the entire body of substantive
law governing the identical question in the state courts.
This inquiry inciudes the decisions of the state courts.
Ruhlin v. New York Life Insurance Company, 304 USS.
202, 209.
The authorities generally confirm the accuracy of the
trial court’s determination of the law of Kansas. In
Williston on Contracts, Revised Edition, Volume 5, Sec-
tion 1498, it is stated as follows:
“* * * but if the transaction is known to be based by
one party on the assumption of the existence or non-
existence of a material fact, non-disclosure by the
other party of his knowledge that the assumption is
unfounded should fall within the definition of fraud.”
(p. 4184).
25
With particular reference to insurance contracts,
Williston states (ibid, Section 1499):
“In the case of insurance contracts, * * * failure to
disclose material facts is already recognized by the
law as fraudulent under the doctrine of uberrimae
fidei, and the tendency in the law of sales, as well
as in other contracts, is doubtless toward requiring
a somewhat higher degree of good faith than formerly,
especially where the opportunities for information are
not equally open to both parties.” (pp. 4185-4187)
(Emphasis ours).
The Restatement of the Law of Contracts, Volume
II, Section 505, states the law as follows:
“REFORMATION WHERE A MISTAKE OF ONE
PARTY IS KNOWN TO THE OTHER.
Except as stated in §§ 506, 509-511, if one party at the
time of the execution of a written instrument knows
not only that the writing does not accurately express
the intention of the other party as to the terms to be
embodied therein, but knows what that intention is,
the latter can have the writing reformed so that it
will express that intention.
Comment:
a. Under the rule stated in § 71 (c) knowledge
py one party that the other is under a mistake as to
the meaning of his words or acts prevents them from
operating as an offer or acceptance. In cases covered
by the rule stated in thé present Section, there may
be therefore not even a voidable contract; but knowl-
edge of one party not only that the other party’s in-
tention is something different from what the writing
expresses, but also what the intention is, is sufficient
ground for reforming the writing to conform to the
unexpressed intention. * * * On the other hand, where
a reformation is based on mistake of one party and
fraud of the other the defrauded party has also as an
alternative the power of avoidance. (Emphasis sup-
plied).
26
b. The rule stated in the Section is applicable
whether the mistake was caused by misrepresenta-
tion by the other party or not.
Illustration:
1. A and B enter into a written contract for the
transfer by A to B of certain land. B believes the
conveyance contracted for will transfer ownership of
underlying minerals, whereas it will not. A knows
B’s belief when the contract is executed. It will be
reformed to conform to B’s understanding.”
The Court of Appeals stated that reformation is an
ancient remedy rarely used and that the courts were re-
luctant to grant this relief. However, our research indi-
cates the remedy is more freely granted. 28 Col. L. Rev.
1928: 859, 902-903; Gamriell v. Diethelm, (Wash.) 368 P. 2d
718, 720-721 (1962); Brandwein v. Provident Mutual Life
Insurance Company of Philadelphia, 3 N.Y. 2d 491, 146 N.E.
2d 693 (1957).
Petitioner respectfully submits that the reversal of the
trial court’s judgment, in the absence of any clear showing
that his determination of the state law of Kansas as it ap-
plied to the facts in the instant case was erroneous,
amounted to action on the part of the Ccurt of Appeals
that so far departed from accepted and established limits
of judicial proceedings that this Court should exercise its
supervisory power by granting the petition for the writ of
certiorari.
CONCLUSION
The careful analysis of Kansas law by the trial judge
in arriving at his judgment in the instant case, his es-
pecially intimate knowledge of Kansas law as a distin-
guished member of the Kansas bar, and on the other hand
the failure of the Court of Appeals to challenge this
27
analysis of Kansas law or to cite any authorities which
opposed the trial judge’s determination oi Kansas law, war-
rants the conclusion that the Court of Appeals’ decision con-
flicts with the applicable law of Kansas and that the trial
judge’s determination of Kansas law was not clearly
erroneous.
For all of the reasons stated herein this Court should
grant a Writ of Certiorari to the United States Court of Ap-
peals for the Tenth Circuit.
Respectfully submitted,
CHARLES S. SCHNIDER
JOHN E. SHAMBERG
J. F. May, Jr.
7th Floor, Huron Building
Kansas City, Kansas
Attorneys for Petitioner
Sb en or
.
a cceneneemeeamenasin ”
APPENDIX A
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
SEPTEMBER 1967 TERM
MUTUAL OF OMAHA INSURANCE )
COMPANY, a Corporation,
Appellant,
ie Pee & No. 9169
ELMER D. RUSSELL,
Appellee. |
ELMER D. RUSSELL, 1
Cross-Appellant,
vs.
MUTUAL OF OMAHA INSURANCE
COMPANY, a Corporation,
Cross-Appellee. |
APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF KANSAS
(Filed in the United States Court of Appeals, Tenth.
Circuit, September 30, 1968, William L.
Whittaker, Clerk)
Henry G. Eager, for Appellant and Cross-Appellee.
John E. Shamberg, for Appellee and Cross-Appellant.
Before MURRAH, Chief Judge, BROWN* and
HICKEY, Circuit Judges.
BROWN, Circuit Judge:
Does the speed of the modern jet age and the restless,
irrepressible, increased tempo of all who are in its vortex
: No. 9182
*Of the Fifth Circuit, sitting by designation.
sate Bi ha late én = Rises Ris ttaaat a Sata a ase
impose on a flight insurer the obligation toward prospec-
tive policy buyers of explaining the distinctive differences
of the several available coverages? Does the insurer’s at-
tractive sales booth, neon signs heralding the need for and
availability of “flight insurance,” and the other catchy
advertising come-ons carry the inevitable message to scurry-
ing people on the move the notion that the coverage is for
the traveler’s intended round trip rather than for a definitive
period of time? And to avoid this misreading by people
in a hurry of printed contracts plain enough that even those
who run may read, must the insurer affirmatively take steps
by extra-contract informational statements to overcome
such misapprehension?
The District Judge, in effect, answered these broad
inquiries in the affirmative. The failure to give such in-
formational advice became, in his analysis, a constructive
fraud upon which to base reformation of a flight insurance
policy which, all now agree, did not by its terms cover the
death of the Assured. In more austere terms the main issue
presented for decision is whether the Assured’ is entitled
to reformation of a general accident flight insurance policy
purchased at Insurer’s* sales booth in the lobby of an air-
port. The District Court reformed the contract and awarded
plaintiff $20,000. We hold that under the unusual fact
situation of this case the insurance policy should not have
been reformed and the decision of the District Court must
be reversed.
To understand fully the Assured’s theory a full recita-
tion of the facts is helpful. Rev. and Mrs. Russell were resi-
dents of Kansas City, Kansas. On Thursday, January 24,
1963, upon receiving word that one of her brothers had died
1. This term includes Mrs. Russell and the named beneficiary
Rev. Russell.
2. Mutual of Omaha Insurance Company, a corporate resi-
dent of Nebraska.
EN Pee | we :
A3
in Lubbock, Texas, Mrs. Russell decided to fly to Lubbock
for the funeral. Reservations were made for a flight the
next day, Friday, but the return flight was left open be-
cause the funeral date had not been set. On Friday Rev.
and Mrs. Russell and their son* went to the airport in
Kansas City, Missouri, picked up their tickets at the Con-
tinental Airlines counter, and proceeded toward the await-
ing plane.
As the three Russells passed one of Insurer’s vending
machines for dispensing flight insurance, Rev. Russell de-
cided that Mrs. Russell should have insurance to cover her
during the trip. This machine dispensed Insurer’s policy
T-20. In many ways the T-20 affords severely limited cov-
erage in that it provides protection only for accidents while
aboard an airplane or in established limousines going to
or coming from the airport. On the other hand, the T-20’s
coverage expressly remains in effect for the duration of the
round trip or for twelve months, whichever occurs first.
Similarly, since events and covered occurrences were more
restrictive, the face amount of insurance per premium dollar
was larger than other policies. Had a T-20 been machine-
issued the Assured’s death would have been covered. But
no one had the proper change to operate the machine, so the
Russells stepped just south of the machine to one of In-
surer’s staffed insurance booths. The booth had signs over-
head reading “Flight Insurance” and was attended by a Miss
Fletcher.
Rev. Russell asked either for flight insurance or in-
surance* to cover his wife on her round trip to Lubbock.
3. The Russell’s son Richard had decided at the last moment
to join his mother on the trip because Mrs. Russell was upset
over the death of her brother and had never flown before.
4. The testimony is conflicting as to what the exact state-
ment was.
A4
Miss Fletcher then asked “How much?”, meaning what
amount of insurance coverage. Mrs. Russell asked for the
least amount and $20,000 was the amount agreed upon.
Without then explaining various policies available (see note
8 infra), Miss Fletcher took out an application form and
began to fill it out. She then asked either how lung would
Mrs. Russell be gone or when would she be returning. Mrs.
Russell turned to her husband and asked “Three days?”.
Rev. Russell said she should allow herself more than that—
at least four days. Miss Fletcher completed the form® and
turned it around for Mrs. Russell’s signature. Mrs. Russell
signed and paid the $2.25 premium. Miss Fletcher stapled
the policy together and handed it to Rev. Russell.
The policy purchased was not, however, the T-20;
rather it was the T-18, a significantly different policy. The
T-18 is a general accident policy that covers almost all
risks—whether air related or not—during the life of the
policy. The policy term is stated in terms of twenty-four
5. The following is a reproduction of the insurance form
filled out by Miss Fletcher and Mrs. Russell.
SCHEDULE
Policy Number _ Please Print
TI8BA 29140 F Name of
Insured Mrs. Bertha Russell
No. &
Capital Sum $20,000 Address of Street 735 Osage
Insured City KC State Kans
Name of
Principal Sum $10,000 Beneficiary Rev. Elmer Russell
No. &
Address of Street
Term of Cov. Prem. Beneficiary City same state
Effective at: Hour 11:00 xA.M.
4 Days $2.25 P.M.
Date Jan. 25, 1963
Countersigned by Place Kansas City, Mo.
Dorothy Fletcher
Licensed Resident Agent Signature:
Bertha Russell
A5
hour periods on a daily basis up to thirty-one days.®° The
premium is higher on the T-18 for the same dollar amount
of insurance, and the T-18 is not sold in vending machines.
As the Schedule signed by Mrs. Russell shows (see note 5
supra), the T-18 was issued for only four days, and expired
at 11:00 a.m., Tuesday, January 29, 1963, about twelve hours
prior to the Assured’s death.
The District Court credited Rev. Russell’s testimony
that Miss Fletcher never mentioned any other available
policies,” did not explain the T-18, and did not warn plain-
tiff that the policy would expire at 11:00 a.m. on Tuesday,
January 2, 1963.2 The Judge also found that the Assured
6. “(a) This policy is issued in consideration of the pay-
ment in advance of the premium stated in the Schedule. It takes
effect on the Date and Hour stated in the Schedule, Standard
Time at the Place specified in the Schedule for the policy to be-
come effective, and expires on the same hour at the end of the
number of days stated in the Schedule as Term of Coverage.”
7. Insurer sold eleven different types of insurance policies
at its sales booth.
8. Insurer introduced testimony to show that the basic sales
procedure of its employees was to explain at least two policies,
the T-18 and the T-20, and let the customer choose between them.
This testimony gained credence through the introduction of figures
to show that the total number of T-18 and T-20 policies sold
were about equal. But on this conflicting evidence, the trial
judge found that no explanation was given of the different policies,
eer satay this finding as not clearly erroneous. See F.R.
iv.P. a).
On the issue of whether Miss Fletcher brought home the fact
that the policy would expire at 11:00 a.m., Tuesday, January 29,
1963, the findings of the trial court are not crystal-clear. In a
finding dictated into the record at the conclusion of the trial
hearing, the Judge found that Miss Fletcher did state the term
of the policy to be four days. But in a later formal memorandum
decision, the Judge stated that “Miss Fletcher and the plaintiff
and his wife discussed a four-day period fo: the insurance, but
Miss Fletcher did not specifically tell the plaintiff and his wife
that the policy would expire at 11:00 a.m. on Tuesday, January
29, 1963.” On this record the Judge had ample basis for recon-
sideration and contrary to Insurer’s insistence he was not bound
to the earlier court-reporter recorded impression. We credit the
finding that Miss Fletcher did not warn plaintiff about the ex-
piration date at all.
A6
intended to buy insurance that would cover Mrs. Russell’s
round trip, which both she and her husband thought would
occur within four days.
After buying the insurance, Mrs. Russeil boarded her
plane and arrived safely in Lubbock, Texas. There the
funeral was delayed because a son of the deceased had not
arrived from England. The funeral was finally held on
Tuesday, January 29, and Mrs. Russell was fatally injured
when her airplane crashed that night at 10:45 p.m. while
attempting to land at the Kansas City, Missouri, airport.
The insurance policy had expired by its own terms about
twelve hours earlier. The Insurer denied liability.
The Assured then pursued Insurer in this diversity of
citizenship suit in Kansas on the theories that either (1)
the insurance contract should be construed to cover the
death of Mrs. Russell, or (2) the policy should be reformed
to provide coverage for the return flight from Lubbock to
Kansas City. The District Judge held that the contract
was clear and unambiguous and as written did not cover
the accident. But now of direct importance he held that
as 2 matter of equity the policy should be reformed to cover
the accident. Judgment for $20,000 was entered for the
9. The Judge after discussing the facts summarized above
followed this reasoning:
“Under the circumstances, the [Insurer] created a situa-
tion in which its offer consisted of more than the words of
the girl at the booth. It is commonly believed that insurance
at airports purports to protect a person flying on a plane.
The machines, the booth (with ‘Flight Insurance’ on it), and
the fact that Mrs. Russell was at the airport for the purpose
of boarding a plane, combined to give the Russells the idea
of what they were buying before they stepped up to the booth.
Viewed realistically, the Russells knew the general nature of
the policy to be bought before they heard the sales girl’s
statements. Against this background, the gir] at the booth
did not explain that there were two different kinds of policies,
but sold the one [T-18] urged by the [Insurer]. This policy
purports to cover a different risk (general accident for a
short term) than that covered by what is commonly under-
stood to be flight insurance [T-20].
A7
Assured. Insurer appealed contending that it is not liable
since the policy had expired and the company was not guilty
of any inequitable conduct that would give rise to the
remedy of reformation. The Assured cross-appealed con-
tending that the judgment should have been for $90,000,
the amount of straight flight insurance (T-20) that $2.25
would have bought, but the Assured did not appeal the
decision that the policy could not be construed to cover the
accident. Thus the only substantive problem before us is
whether the contract should, as a matter of equity, be re-
formed.
But before we reach the merits, with the suit being
brought in a Kansas District Court by a Kansas resident on
a contract made in Missouri, an Erie’® problem of determin-
ing what state’s law to apply arises. The District Court
held that the Kansas conflicts rule is to apply Kansas law
to this insurance policy. Insurer contends, albeit without
“Under these circumstances, does the company have a
duty to explain what is being sold, and what is available?
If the duty exists, there was a violation of it here, and this
violation could constitute sufficient inequity to be a basis
for reformation. * * *
“What is really involved in this situation is that the [In-
surer] is in a position to know what its policies contain, and
knows that the prospective buyer cannot know. The buyer
can make no intelligent choice if he does not know there is
a choice to be made. It is not unreasonable in this situation
to hold the [Insurer] to the knowledge that the [Assured]
is asking about, talking about, and eventually buying insur-
ance for the purpose of protection while riding on a plane.
If the [Insurer] wishes to sell a different policy (short-term
accident, personal property theft, or whatever), it should be
required to inform the buyer, who is in the position of having
to take what is offered. * * *
“T therefore find that if it wishes to sell the short-term
accident policy, there is a positive duty on the [Insurer]
in this situation to explain that there are two types of policies, .
in order that the buyer may make a choice between them. In
ae case this explanation was not given; the duty was
vio \
10. Erie R.R. Co. v. Tompkins, 1938, 304 U.S. 64, 58 S.Ct.
817, 82 L.Ed. 1188.
much vigor, that Kansas follows the lex locus contractus
rule and a Kansas state court would apply Missouri law."
Even the trial judge acknowledged that the Erie—Stenitor
Electric’ lights are dim here. Although it makes iittle
difference in this case what the Kansas conflicts rule may
be since Insurer admits there is no substantia! variation
between the relevant Kansas and Missouri law, we hold for
Kansas that in a suit such as this one, involving an adhesion
insurance contract, Kansas would apply its own law to a
suit brought in its court by a Kansas resident. AJthough
this is deciding what Kansas would decide on a question
they have never decided,” the case of Hildebrand v. Wash-
ington Natl Ins. Co., i155 Kan. 220, 124 P.2d 510 (1952),
is inferentia!lly controlling. In that case the conflicts prob-
lem was pleaded and argued in a suit on an insurance policy
made in another state by a Kaasas resident. Without dis-
cussion of the problem, the Kansas court applied Kansas
law. Without further discussion we do the same.**
ll. Cf. Hefferlin v. Sinsinderfer, 2 Kan. 491 (1864), a non-
insurance contract action in which the Kansas Supreme Court fol-
lowed the traditional conflict rule of lex locus contractus.
12. Klaxon Co. v. Stentor Elec. Mfg. Co., 1941, 313 US.
487. 61 S.Ct. 1020, 85 L. Ed. 1477. In that case the Supreme Court
held that a District Court sitting in a diversity suit must apply
the conflicts of law rules that the state court would follow.
13. This is a little less difficult than the problem posed in
Judge Friendly’s celebrated Erie comment: “Our principal task,
in this diversity of citizenship case, is to determine what the New
York courts would think the California courts would think on an
issue about which neither has thought.” Nolan v. Transocean
Air Lines, 2 Cir., 1960, 276 F.2d 280, 281, rev’d, 1961, 365 U.S. 293,
81 S.Ci. 585, 5 L. Ed. 2d 571, on remand, 290 F.2d 904.
14. No case cited by Insurer shuws that this court has ever
really decided this question before. Thomas v. Continental Cas.
Co., 10 Cir., 1955, 225 F.2d 728, involves much the same problem
as the a one, but sinve there neither party disagreed on the
applicable principles of law, no analysis of the problem was made
by this Court. On the other hand, the District Judge below made
an extended analysis of Kansas decisions before reaching hi- ~e-
sult. Since there are no Kansas decisions in point, we will fo. _.w
his decision unless clearly convinced to the contrary. Cliborn v.
Lincoln Nat'l Life Ins. Co., 10 Cir., 1964, 332 F.2d 645.
A at A A IE bi
The question thus remains: What would Kansas do
with this case? More specifically, can the Trial Judge’s
approach of a duty to explain and a failure to do so which
he set forth in his opinion (see noite 9 supra) in persuasive
fashion be sustained? We think not.
Neither party disagrees about the general principles
of equity applicable here.** The rub comes in the proper
application of those principles to the facts of this case.
Reformation is ari ancient remedy used to reframe written
contracts to reflect accurately the real agreement between
contracting parties when, either through mutual mistake
or unilateral mistake coupled with actual or equitable
fraud by the other party, the writing does not embody the
contract as actually made.'®
But reformation is an extraordinary remedy, and courts
exercise it with great caution. 13 Appleman, Insurance
Law and Practice § 7608 (1943). Even in situations where
The following provision of the insurance policy should also
be considered in connection with the choice-of-iaw problem:
“11. Conformity with State Statutes. Any provision of this
policy which, on its effective date, is in conflict with the statutes
of the state in which the Insured resides on such date is hereby
—* to conform to the minimum requirements of such stat-
utes.
The trial judge held that the only reasonable explanation for
this provision was that the parties had contracted with Kansas
law being contemplated as the applicable law. Since Kansas will
allow parties to contract in regard to the appiicable law, see
Rankin v. United Commercial Travelers, 1964, 193 Kan. 248, 392
P.2d 894, we agree that this reasoning provides a basis for holding
that Kansas law is the proper law to apply.
; 15. And neither party disagrees that this is a case of first
impression.
16. Simmons Creek Coal Co. v. Doran, 1892, 142 U.S. 417,
12 S.Ct. 239, 35 L. Ed. 1063; Prudential Ins. Co. v. Strickland, 6
Cir., 1951, 187 F.2d 67: Gilbert v. Mutual Benefit Health & Acc.
Ass’n, 1952, 172 Kan. 586, 241 P.2d 768; Hoxsey Hotel Co. v. Farm
& Home Savings & Loan Ass’n, 1942, 349 Mo. 889, 163 S.W.2d 766;
3 Pomeroy, Equity Jurisprudence §870 (Symous ed. 1941); Re-
statement, Contracts §491 (1932); Covington, Reformation of Con-
tracts of Personal Insurance, 1964 U. Ill. L.F. 548.
Ald
obvious mistakes have been made, courts will not rewrite
the contract between the parties, but will only enforce the
legal obligations of the parties according to their original
agreement.” Strouhal v. Allied Dev. Co., 10 Cir., 1955,
220 F.2d 541; 76 C.J.S. Reformation of Instruments § 18
(1952). Here, of course, the Assured does not contend that
mutual mistake occurred and it is well that he does not do
so for obviously the Insurer intended to sell the exact policy
with the exact coverage that it did. Rather, the Assured’s
theory rests on another accepted reformation doctrine—
mistake by one party coupled with constructive or equitable
fraud by the other.’®
Thus the whole case boils down in reality to one ques-
tion: Did Insurer have a duty to tell the Assured that
several insurance policies were available and to explain
fully the provisions and limitations of those policies? With-
out this supposed duty (and its breach) the District Judge
would have had no basis for judge-reformation of the con-
tract to conform to a regular straight flight insurance policy
which Insurer was offering for sale. Rules of construction,
17. The most common situation calling for reformation is
where both parties commit error in embodying the final written
agreement, thereby giving rise to the mutual mistake doctrine.
See, e.g., Russell v. Shell Pet. Corp., 10 Cir., 1933, 66 F.2d 864;
Waddle v. Bird, 1927, 122 Kan. 716, 253 Pac. 576; 76 C.J.S. Refor-
mation of Instruments § 28 (1952).
18. See, e.g., Stern v. National City Co., D.Minn. 1938, 25
ae a City of Clay Center v. Meyers, 1893, 52 Kan. 363,
ac. 25.
The general definition is stated in 1 Story, Equity Jurispru-
dence §258 (1852):
“By constructive frauds are meant such acts or contracts,
as, although not originating in any actual evil design, or con-
trivance to perpetuate a positive fraud or injury upon other
persons, are yet, by their tendency to deceive or mislead other
persons, or to violate private or pubJic confidence, or to impair
or injure the public interests, deemed equally reprehensible
with positive fraud... .”
See also 37 C.J.S. Fraud § 2(c) (1943).
See Ra i a iin R ES in at eS ca nae ER
All
either generally”® or with particular reference to the liber-
alizing impact of traveler haste in acquiring air-flight in-
surance,” are of little help since on construction the Assured
fails altogether. The problem is one of the proper scope of
the doctrine of equitable fraud and the manner in which
that doctrine relates to the duty of an insurer to warn the
customer avout what he is buying.
As in nearly ail cases, an inquiry of this type involves
consideration of the competing interests. On the one hand
we kave the right of the public to be free of fraud” and
oppression wrought by those in a superior bargaining posi-
tion. But on the other hand we are confronted with the
realities of doing business, the enforcement of contracts,
and instability which flows from opening up written con-
tracts to oral accretions.
The Assured urges, and the District Court declared,
that an explanation was owing. By whom was it to be
given? In what form was it to be offered? Orally or in
writing? If orally, how would an insurer conscious of its
duty of fair dealing toward a peripatetic public in a hurry
19. Insurance contracts, because of the inequality of the bar-
gaining position of the parties, are construed strictly against the
insurer. See, e.g., Indemnity Ins. Co. v. Pioneer Valley Sav. Bank,
8 Cir., 1965, 343 F.2d 634; Prime Drilling Co. v. Standard Acc.
Ins. Co., 10 Cir., 1951, 189 F.2d 315; Connecticut Fire Ins. Co. v.
Reliance Ins. Co., D.Kan., 1962, 208 F.Supp. 20.
20. See Rosen v. Fidelity & Cas. Co., E.D.Pa., 1958, 162 F.
Supp. 211. Nor does the Assured get any help from the two
state cases, Stevens v. Fidelity & Cas. Co., 1962, 27 Cal. Rptr. 172,
377 P.2d 284, and Lachs v. United States Fid. & Cas. Co., 1954, 306
N.Y. 357, 118 N.E.2d 555, so heavily pressed by the Assured.
There courts reformed flight insurance policies which excluded
coverage for flights on non-scheduled airlines operating out of the
terminal where the policies were bought. We express no opinion
as to the correctness of these decisions, but say only that they are
not in point here. Those policies had deeply-buried provisions to
deny recovery, and the policies were sold by machines set up right
in front of the non-scheduled airlines’ ticket counters.
21. Misrepresentation and fraud in the usual sense, not
present here, call for quite different considerations.
Al2
assure that an adequate, reliable statement was made? The
“explanation” would vary as work shifts changed and sales
personnel rotated. They would be expansive or restrictive
as the loquacious or taciturn quality of the employee pre-
dominated. If the insurer turned to a written statement,
how or in what manner would it assure itself that the im-
patient prospect would pay any more heed to it than the
terms of the policy contract? And what happens when, out
of an abundance of good faith, an effort is made to explain
(in nonlegalese) what a legal document prescribes? And
as to either method or a mixture of both, what are the
significant distinctions to be pointed out? Which ones to
emphasize? To minimize? To omit? How many policies
need to be explained? Just the two most common—T-20
and T-18? Or all eleven? In the meantime what is hap-
pening to time—that precious irreplaceable which accounts
for the traveler’s pressure at the airport facing either dis-
pensing machine or an attractive sales person who may
well try harder but without benefit of a legal education?
The flight would either be missed or the “offer” of flight
insurance withdrawn for want of adequate time for equity’s
mandated “explanation.”** Hardship, or what seems to be
hardship, may sometimes occur if the law adheres to its
long-held notions of the non-variability of written contracts.
But a too-quick relaxation in the contrails of the jet age
might well be worse, not better.”
22, Of course, if an answer to an inquiry by a prospect or by
an affirmative statement made by the insurer’s agent to the pros-
pect it was indicated that the policy would cover the round trip,
then the insurer would certainly have to give some explanatory
warning before issuing a T-18 policy which is for a fixed period
of time, and not written in terms of round trip.
23. Consider, for example, the T-18 policy which Rev. Rus-
sell bought. Although it is a short-term policy, the coverage pro-
visions are much broader and more inclusive than a straight flight
insurance policy (the T-20). For example, if Mrs. Russell had
been killed in a taxi smash-up while riding to the Lubbock airport
for her return flight, or had she been killed in a hotel fire while
Al3
We think that imposing a duty to offer such explana-
tions under circumstances of this kind—requiring as it does
an effort by lay persons to interpret the legal meaning of
the proposed contract as well as others available—would
be fraught with great danger to the stability of contracts.
We do not think Kansas would embrace such a view and
for Kansas we decline to sky-write such an Erie judgment.
The printed contract controls. There it ends.”4
REVERSED.
there, she would have been covered under the T-18 but not under
the T-20. Would the machine-sale of a T-20 be defective for
want of a warning recording that at the nearby counter, better or
different coverage was available?
24. This disposition of the suit makes unnecessary any dis-
cussion of the assured’s cross-appeal in which $90,000 was claimed
as the proper reformed recovery. It also renders unnecessary
any discussion of Insurer’s covert assertions that the Assured’s
proof did not rise to the necessary clear and convincing degree.
See Federal Land Bank v. Bailey, 1943, 156 Kan. 464, 134 P.2d 409.
Al4
APPENDIX B
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
ELMER RUSSELL, ’
Plaintiff,
— . No. KC-1919
MUTUAL OF OMAHA INSURANCE
COMPANY,
Defendant. |
Memorandum, Findings of Fact and Conclusions of Law —
(Filed April 6, 1966.)
MEMCRANDUM
The first issue presented is whether the law of the
state of Missouri, or that of Kansas, governs this action. It
is admitted that the policy was sold and delivered in Mis-
souri, and the parties originally stipulated at the pretrial
conference that Missouri law would govern. However, the
plaintiff later filed a motion to modify the pretrial order
to provide that Kansas law is applicable in this action. As
grounds therefor, the plaintiff points to a provision in the
insurance contract which reads:
“11. Conformity with State Statutes: Any pro-
vision of this policy which, on its effective date, is in
conflict with the statutes of the state in which the In-
sured resides on such date is hereby amended to con-
form to the minimum requirements of such statutes.”
The insured in this case lived in Kansas, and the plaintiff
contends that Kansas law is thus contemplated by the par-
ties as being the applicable law. The plaintiff states that
he had overlooked this provision of the policy in the orig-
Al5
inal pretrial conference. Ruling on the motion was de-
ferred until this time.
This court, in deciding a diversity question, must apply
the law of Kansas, including that state’s conflicts of laws
rules. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487
(1941). The question, then, is what is Kansas’ conflicts
rule in this case. The defendant contends that Kansas fol-
lows the doctrine of lex loci contractus (see Hefferlin v.
Sinsinderfer, 2 Kan. 401 (1864) ), and thus the law of Mis-
souri, where the contract was made, is applicable. The
plaintiff, however, maintains that in the determination of
insurance questions, the Kansas Supreme Court would ap-
ply the law of Kansas. Also the plaintiff points to the
above-mentioned provision cf the policy as expressing an
intention of the parties to be bound by Kansas law.
The answer to the question is somewhat in doubt. It
is true that the federal courts, interpreting Kansas law,
have often followed the lex loci contractus doctrine in acci-
dent or life insurance cases. See, e. g., Preferred Acc. Ins.
Co. v. Clark, 144 F.2d 165 (10th Cir. i944); Prudential Ins.
Co. of America v. Carlson, 126 F.2d 607 (10th Cir. 1942);
Fagan v. John Hancock Mut. Life Ins. Co., 200 F.Supp. 142
(D. Kan. 1961). Thus, laws of other states than Kansas
have been applied in all of these cases. However, in all
of the federal cases on the subject, the Kansas case cited
for authority is the Sinsinderfer case, supra, and that case
did not involve insurance.
On the other hand, extended research has failed to re-
veal any cases in Kansas where the Supreme Court has
applied any other state’s law to accident or life insurance
(with one exception, which is discussed below). In
many cases, this probably is because the conflicts issue
was never raised. In others (see, e. g., See v. United Ins.
Co., 171 Kan. 146, 230 P.2d 1008 (1951); Stewart v. Mutual
Al6
Benefit Health & Acc. Ass’n, 135 Kan. 138, 9 P.2d 977
(1932)), the usage of Kansas law is consistent with the
lex loci contractus doctrine, in that the holding seems to
be that there are actually Kansas contracts involved. How-
ever, in Hildebrand v. Washington Nat'l Ins. Co., 155 Kan.
220, 124 P.2d 510 (1942), the question of conflicts was
specifically pleaded and raised. The action was on an acci-
dent insurance policy. The defense in part was that the
policy was issued and delivered in Iowa and hence was not
subject to Kansas law. The court ignored the contention
and applied Kansas law, eventually deciding for the de-
fendant. The rule to be gleaned from this case would seem
to be that where a Kansas resident is involved in an in-
surance question, the public policy of Kansas requires the
usage of Kansas law. The Supreme Court of Kansas has
recognized the quasi-public nature of insurance contracts.
In another context, but speaking of insurance, the court
has stated, “(I)nsurance contracts are not regarded in the
law as are ordinary contracts where parties may bind them-
selves as they wish.” Logan v. Victory Life Ins. Co.,
175 Kan. 88, 93, 259 P.2d 165, 168 (1953). Although that
case involved a contract clearly subject to Kansas law, it
is important to note the high public policy of Kansas in the
protection of its citizens in matters of insurance.
In none of these cases does the Kansas Supreme Court
state that the rule it is following is any different from the
traditional lex loci contractus. However, the holdings do
not always conform with that doctrine. The federal court
cases cited above are somewhat persuasive, but are not
compelling. I must decide what the Kansas Supreme Court
would do with the question today, not what other courts
have thought the Kansas Court would do. The net result
of the Kansas opinions in the area lead me to the conclu-
sion that Kansas has a high policy interest in insurance,
and where possible, it will apply Kansas law to insurance
cases involving Kansas citizens.
Al7
The only case found in which another state’s law was
applied was Rankin v. United Comm’I Travelers of America,
193 Kan. 248, 392 P.2d 894 (1964). Unfortunately, that
case does not illuminate this area because there the parties
agreed that Ohio law should govern. The court specifi-
cally cited the agreement by the parties as its reason for
using Ohio law. Thus, while this case does demonstrate
that the Kansas Court will use another state’s law in de-
ciding an insurance question, it is authority only for the
proposition that the parties can agree to such a decision.
The added element in the instant case is the provision
in the insurance contract providing for conformity with
the statutes of the insured’s state. According to general
conflicts law, parties can contract for the applicability of a
certain state’s law, where the law of that state is not re-
pugnant to the public policy of the forum. Of course, Kan-
sas law is not repugnant to this forum. The poiicy provi-
sion in question applies to the other parts of the insurance
policy, and affects the validity of other provisions. The
only meaning that can reasonably be given, is that the par-
ties at the time of the contract contemplated the applica-
tion of Kansas law. If this were not true, the insured’s
residential state would be of no importance and need not
be mentioned. Although no Kansas cases have been cited
in which the Kansas Court followed the doctrine of allow-
ing a party to contract to the application of a certain state’s
law, the Rankin case, supra, shows that the court did allow
the parties to agree as to which state’s law should be ap-
plied.
In view of the clear language of the provision in the
policy, along with the Kansas Supreme Court’s interest in
insurance and its readiness to find Kansas law applicable,
I believe that the Kansas conflicts rule in this case is that
Kansas law applies.
Al8
As to the merits of the case, the plaintiff relies on two
theories. Its position is (1) that on equitable grounds the
contract of insurance purchased by the plaintiff was not
the contract he expected or asked for, and therefore the
court should reform the contract to reflect the true inten-
tion of the parties; or (2) the proper construction of the
contract should be that the coverage extended beyond
when Mrs. Russell met her death in the air crash. The
defendant maintains that the plaintiff paid for, and got, a
clear, unambiguous insurance policy, and that he is bound
by the language of the policy.
I will deal with plaintiff’s second theory first. The con-
tract provides, under Additional Provisions, that:
“(a) This policy is issued in consideration of the
payment in advance of the premium stated in the
Schedule. It takes effect on the Date and Hour stated
in the Schedule, Standard Time at the Place specified
in the Schedule for the policy to become effective, and
expires on the same hour at the end of the number of
days stated in the Schedule as Term of Coverage.”
This language is clear and unambiguous. “All ambiguities
will be resolved against the insurer, but the insured is
charged with the plain ordinary meaning of inartistic
words, and we will not torture words to import ambiguity
where ordinary meaning leaves no room for such.” Thomas
v. Continental Cas. Co., 225 F.2d 798, 801 (10th Cir. 1955).
_. is evident that the plaintiff cannot recover on the contract
_3 written, for it expired before the fatal crash occurred.
Thus, even under plaintiff’s second theory, a reformation
of the contract would be necessary. This theory, as an ac-
tion at law, must therefore fail. The facts involved, how-
’’ ever, are relevant to the first theory—i.e., whether the
plaintiff is entitled to reformation.
Before discussing the actual question of whether or not
the contract is to be reformed, it is noted that the plaintiff
A19
has asked in the alternative for $20,000 and $90,000. The
$20,000 is the face amount of the policy issued, and the
$90,000 is the stipulated amount of insurance the plaintiff’s
premium would have bought if the T-20 flight policy had
been issued. In light of the finding of fact that the plaintiff
intended to buy only $20,000 of insurance, it is apparent
that he would not be entitled to recover $90,000. Reforma-
tion is an equitable remedy and is designed to effectuate
a meeting of minds of the parties. See Gilbert v. Mutual
Benefit Health & Acc. Ass’n, 172 Kan. 586, 241 P.2d 768
(1952). The parties’ minds in the instant case clearly met
on the sum cof $20,000. A recovery of a greater sum would
not be doing the justice for which equity is designed.
With the preliminary matters disposed of, we now
come to the central issue in this case—i.e., is the plaintiff
entitled to have the policy reformed? The doctrine of
reformation may be invoked where there is a mistake by
one party, and the other party is guilty of constructive
fraud or inequitable conduct. Federal Land Bank v.
Railey, 156 Kan. 464, 134 P.2d 409, (1943). The Kansas
Supreme Court in City of Clay Center v. Myers, 52 Kan.
363 (1893), quoted from Story and Black, as follows:
“ *F'raud, in the sense of a court of equity, properly
includes‘ all acts, omissions and concealments which
involve a breach of legal or equitable duty, trust,
or confidence justly reposed, and are injurious to
another, or by which an undue and unconscientious
advantage is taken of another.’ (1 Story, Eq. Jur.,
§ 187.)
“ ‘Constructive fraud consists in any act of omis-
sion or commission contrary to legal or equitable
duty, trust or confidence justly reposed, which is con-
trary to good conscience, and operates to the injury
of another. The former implies moral guilt; the latter
may be consistent with innocence.’ (Black, Law Dict.
§ 517.)” (p. 365).
SERNA Bin ea a nA Hs! PH eahe
A20
Thus constructive fraud does not necessarily indicate a
bad intention on the part of the fraudulent party; it merely
indicates an action or omission which injures the third
party and which is contrary to a duty owed.
Whether reformation is to be granted in a given case
will depend upon the circumstances of that case. It is
helpful here to review the facts relevant to the transac-
tion in question.
The sale of insurance of this kind usuaily is a hurried
transaction. There was testimony to the effect that this
transaction took only a couple of minutes. There are in
the area of the sales booth, machines which sell the T-
20 type of flight insurance. The booth has the legend
“Flight Insurance” prominently displayed. The plaintiff
intended to get insurance which would cover the deceased
from the time she left until she returned, and, indeed,
thought that that insurance had been procured. The
plaintiff and Mrs. Russell thought that she would be re-
turning within four days. The defendant encouraged the
sale of the general short-term accident insurance (T-18)
over that of the “straight fiight policy” (T-20). The
agent did not explain the types of insurance avail-
able, but sold the T-18 contract to the Russells. There
was a discussion of the four-day term, but the Russells
were nct told that the insurance would expire as of 11:06
a.m. the following Tuesday.
Under the circumstances, the insurance company
created a situation in which its offer consisted of more
than the words of the girl at the booth. It is commonly
believed that insurance at airports purports to protect
a person flying on a plane. Ti. machines, the booth
(with “Flight Insurance” on it), and the fact that Mrs.
Russell was at the airport for the purpose of boarding a
plane, combined to give the Russells the idea of what
A21
they were buying before they stepped up to the booth.
Viewed realistically, the Russells knew the general nature
of the policy to be bought before they heard the sales
girl’s statements. Against this background, the girl at
the booth did not expiain that there were two different
kinds of policies, but sold the one urged by the defendant
company. This policy purports to cover a different risk
(general accident for a short term) than that covered by
what is commonly understood to be flight insurance.
Under these circurnstances, does the company have a
duty to explain what is being sold, and what is avail-
able? If the duty exists, there was a violation of it here,
and this violation could constitute sufficient inequity to
be a basis for reformation.
With this in mind, I turn specifically to that question.
No cases have been found, or cited, which are di-
rectly in point. The area of insurance sold at airports
has received some discussion in other contexts. It has
been held that these policies are to be construed liberally
(Fidelity & Cas. Co. of N. Y. v. Smith, 189 F.2d 315 (10th
Cir. 1951)), and that that construction rule “is applicable
in the highest degree to a policy of this kind.” Rosen
v. Fidelity & Cas. Co. of N. Y., 162 F. Supp. 211 (ED.
Pa. 1958). The court in the Rosen case recognized that
the hurried nature of the transaction placed a higher duty
on the insurance company. These construction cases are
not applicable to this case because here the policy is not
being construed, it is being reformed. They do, however,
suggest the inequality of the bargaining positions of the
parties. See also Messina v. Mutual Benefit Health &
Acc. Ass’n, 228 F.Supp. 865 (D. D.C. 1964), aff'd, 350
F.2d 458 (D.C. Cir. 1965), cert. denied, 34 Law Week
3283 (February 22, 1966).
Pa ee ee eS
AAS OSE
Ee A TR Ee Ie ee
A22
What is really involved in this situation is that the
insurance company is in a position to know what its pol-
icies contain, and knows that the prospective buyer cannot
know. The buyer can make no intelligent choice if he
does not know there is a choice to be made. It is not un-
reasonable in this situation to hold the company to the
kaowledge that the plaintiff is asking about, talking about,
and eventually buying insurance for the purpose of pro-
tection whiie riding on a plane. If the company wishes
to sell a different policy (short-term accident, personal
property theft, or whatever), it should be required to in-
form the buyer, who is in the position of having to take
what is offered. The argument that the short-term ac-
cident policy not only covers what the flight pclicy dows,
but more, is not impressive. The accident policy is more
expensive, may be repetitious to other policies the in-
sured has, and, most importantly, contains limitations
not contained in the straight flight policy. It could not be
argued seriously that the company could sell a completely
different type of insurance (a theft policy, for example)
without explaining the difference to the buyer.
I therefore find that if it wishes to sell the short-
term accident policy, there is a positive duty on the in-
surance company in this situation to explain that there
are two types of policies, in order that the buyer may
make a choice between them. In the instant case this
explanation was not given; the duty was violated.
The faci that the duty ‘vas violated put the plaintiff
in a disadvantageous position, and he subsequently was
mistaken as to what type of policy he had. The violation
of the duty, and subsequent injury to plaintiff, amounted
to such inequitable conduct as te constitute constructive
fraud under Kansas law. See City of Clay Center v.
Myers, supra. Why this happened, is not important.
A23
As was said in Gilbert v. Mutual Benefit Health & Acc.
Ass’n, 172 Kan. 586, 593, 241 P.2d 768, ........ (1952), “* * ¢
reformation of an instrument will be granted without re-
gard to the cause of the failure to express the contract as
actually made, whether due to fraud, mistake in the use
of language, or any other thing which prevented the ex-
pression of the true intention of the parties.” (Emphasis
added).
There is an additional factor in this case which has |
not been discussed. It was established by the evidence
that although Miss Fletcher did not specifically say that
the policy was to expire at 11:00 a. m. Tuesday, she did
have a discussion with the Russells relative to a four-
day period. No one could remember specificaily what
was said. If the plaintiff should have known from this
discussion that the policy expired before the airliner
crashed, he would not be entitled to reformation of the
instrument because he would have known before he left
the booth what he had bought. However, I do not be-
lieve that this general discussion bars the plaintiff in
this case. The plaintiff is a layman, unskilled in the
technicalities of the insurance business or the law. The
discussion was held in the context of the date Mrs. Russell
would be returning from Texas. It is probable that the
plaintiff understood the language to be more informational
for the company than essential to the coverage. In the
absence of a specific statement as to when the policy
would expire, it is unrealistic to give this conversation
much importance when viewed in the context of the plain-
tiffs misunderstanding as to what type of policy he was
buying. This is especially true because the defendant,
albeit inadvertently, was responsible for the misunder-
standing.
in short, the general situation presented is one of the
insurance company offering one thing and selling another.
bt a ad aN
A24
Its advantageous dealing position enabled it to do this with-
out the piaintiff’s knowledge. The result, in effect, is an
unconscionable bargain, amounting to that degree of unin-
tentional inequitable conduct which—combined with the
mistake of the plaintiff—gives rise to the remedy of re-
formation.
There is one more point which must be considered.
After the policy was sold, and before the accident, the
plaintiff had the policy in his possession and had an op-
portunity to read it. The question this presents is usually
framed in terms of whether this constitutes negligence on
the part of the plaintiff which would bar him from the
remedy of reformatior. See Annot. 81 A.L.R.2d 7 (1962).
This is one area that the Kansas Supreme Court has
fully decided. The view taken by the court is that the
insured has the right to rely on the policy being as it was
intended to be in the parties’ agreement. Thus, there is
no duty to read an insurance policy, and failure to so do
will not be a bar to reformation. Stewart v. Common-
wealth Cas. Co., 137 Kan. 919, 22 P.2d 435 (1933);
Hammond v. Insurance Co., 100 Kan. 582 (1917); Pfiester
v. Insurance Co., 85 Kan. 97 (1911)
The plaintiff is entitled to reformation of the policy
in the instant case, and the failure to read the policy will
not bar him from this remedy.
Counsel for the plaintiff will prepare and submit a
judgment entry in accordance with the views herein ex-
pressed.
FINDINGS OF FACT
1. The plaintiff is a resident of the state of Kansas,
and the defendant is a corporation, organized and having
its principal place of business in the state of Nebraska.
A25
2. The amount in controversy exceeds $10,000.
3. On January 29, 1963, at approximately 10:45 p. m.,
the plaintiff's deceased, Bertha Russell, was killed while
traveling by air from Lubbock, Texas, to Kansas City, Mis-
souri. Plaintiff was the beneficiary under the insurance
policy (Erhibit 11).
4. On January 25, 1963, the plaintiff purchased the
policy in question; although the policy was paid for by Mrs.
Russell, the entire transaction surrounding the purchase of
the policy was handled by the plaintiff.
5. On at least four earlier occasions the plaintifi had
purchased insurance on his own life while traveling by air,
but neither on any of those occasions, nor on J anuary 25,
1963, did the plaintiff have any real conception as to any
difference or any unaerstanding of any difference in the
types of policies sold to air travelers.
6. There is no evidence that the plaintiff or his wife
asked for any particular type or plan of insurance.
7. The plaintiff and his wife intended to purchase a
policy that would insure Mrs. Russell’s life from the time
of her departure from Kansas City to her return to Kansas
City, in the amount of $20,000.
8. The plaintiff and Mrs. Russell believed that the pol-
icy purchased would insure Mrs. Russell’s life from the
time of her departure from Kansas City, to the time of her
return to Kansas City, in the amount of $20,000.
9. Both the plaintiff and his wife believed that her
return would be within four days from the time of departure
from Kansas City.
10. The plaintiff and Mrs. Russell did not intend to,
and did not believe, that insurance in any amount exceed-
ing $20,000 had been purchased.
CLE LMIEILE IO ST LEN OT ES FOIE LE NEEL AO Die
CREAN «
PATIL SOLS RE
;
it alr i a aaa hit i
A26
11. The defendant, as a matter of policy, encouraged
the sale by its agents of the T-18 form of policy rather than
the T-20 form of policy, and those agents included Miss
Fletcher.
12. Miss Fletcher did not explain to the plaintiff or
to his wife the difference between the types of policies
available. She did not state to the plaintiff, “We have two
separate kinds of policies,” or words to that effect.
13. Miss Fletcher and the plaintiff and his wife dis-
cussed a four-day period for the insurance, but Miss
Fletcher did not specifically tell the plaintiff and his wife
that the policy would expire ai 11:00 a. m. on Tuesday, Jan-
uary 29, 1963.”
14. Neither the plaintiff nor his wife read the policy
purchased (Exhibit 11), before the crash of the plane,
Flight 290, in which Mrs. tussell lost her life, although the
policy was in the possession of the plaintiff and could have
been read by him.
CONCLUSIONS OF LAW
1. This court has jurisdiction.
2. The law of Kansas governs this action.
3. The contract of insurance clearly and unambigu-
ously provides for termination of coverage at 11:00 a. m.,
Tuesday, January 29, 1963. Thus, the plaintiff cannot re-
cover on the basis of the contract as written.
4. The defendant owed a duty to plaintiff to make
it clear what he was purchasing; this duty was breached.
5. The plaintiff is entitled to reformation of the con-
tract, to cover the return flight from Texas,
A27
6. The plaintiffs failure to read the insurance po’ ¢y
is not negligence such as to bar him from recovery here.
7. The plaintiff is entitled to judgment in the sum of
$20,000.
Dated at Kansas City, this 6th day of April, 1966.
(Signed) Arthur J. Stanley, Jr.
Chief Judge
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.