Grounds For Rescission By The Insured

Mineral Wells attorneys and those in Graford, Weatherford, Cool, Millsap, Garner, and other places in Parker and Palo Pinto Counties need to understand how insurance policies work and are interpreted.
There is a Texas Supreme Court opinion issued in 1999, that is worth reading. The case is styled Urrutia v. Decker.
This case required the Court to determine the validity of liability insurance a truck leasing company provided to its customer as part of a rental transaction. Based on representations that $20,000 was all the insurance available, the claimant settled his bodily injury claim for that amount. When he later discovered the nature of the leasing company’s insurance arrangement, he sued the leasing company and its customer, seeking to set aside the previous settlement. The claimant urged that the settlement was obtained by fraud or resulted from the parties’ mutual mistake about the insurance available to pay his claims.
The trial court granted summary judgment for the leasing company and its customer. The court of appeals reversed holding that the rental agreement was not written on a form approved by the Texas Department of Insurance and was not written into the policy,as required by the Texas Insurance Code. This Court disagreed and reversed and rendered.
Old Republic Insurance Company insured Penske Truck Leasing Company under a commercial business auto policy. This policy provided one million dollars of liability protection to Penske. An endorsement to the Old Republic policy enlarged the policy’s definition of “insured” to include certain customers of Penske as follows:
WHO IS AN INSURED It is agreed Section II. A. 1 of Business Auto Coverage Form CA0001 (12-93) is amended to include the following:
C. Both lessees and rentees of covered autos as insureds, but only to the extent and for the limits of liability agreed to under contractual agreement with the named insured.
This endorsement authorized Penske to add any rental customer as an insured under the Old Republic policy for the liability limits negotiated in a particular rental agreement.
Emilio Urrutia leased a truck from Penske in Houston. As part of the transaction, Penske agreed to provide liability protection to Urrutia. The rental agreement limited this insurance to the minimum coverage required by our state financial responsibility law. The rental agreement accordingly provided Urrutia with liability coverage of $20,000 for bodily injury to a single third party. While operating the Penske truck, Urrutia collided with a car driven by Ferol Decker. Mr. Decker sustained serious injuries and incurred substantial medical expenses. He nevertheless agreed to settle his personal injury claims against Urrutia and Penske for $20,000 because he understood from an insurance adjuster calling on behalf of Urrutia that this was all the insurance available. As part of the settlement, Decker released both Urrutia and Penske. Later, Decker learned about Penske’s million-dollar liability policy and filed this suit, seeking to reopen his personal injury claim.
The Texas Insurance Code provides that a “contract or agreement not written into the application and policy is void and of no effect.” Applying this statute, the court of appeals concluded that the rental agreement between Penske and Urrutia was void as insurance because the agreement was not “written into” the Old Republic policy. The court did not find a similar problem with the Pennsylvania endorsement, however, which allowed Penske to extend its insurance to Urrutia.
Texas law has long provided that a separate contract can be incorporated into an insurance policy by an explicit reference clearly indicating the parties’ intention to include that contract as part of their agreement.
Moreover, although the court of appeals held that the rental agreement was void for insurance purposes, it nevertheless relied on the agreement to identify Urrutia as an insured. The court did not explain why the rental contract was void for the purpose of defining Urrutia’s coverage but valid for the purpose of making Urrutia an insured in the first place. This Court found no justification for this selective application of the rental contract.
Urrutia’s coverage under the Old Republic policy depended on both the Texas rental contract and the Pennsylvania endorsement. The Pennsylvania endorsement enlarged the policy’s definition of “insured,” authorizing the named insured, Penske, to add its rental customers as additional insureds. The endorsement, however, allowed Penske to determine in the rental contracts themselves which customers would be insured and the amount of their respective coverage. An insurer may validly agree to add as an additional insured “any person or organization to which the named insured is obligated by virtue of a written contract to provide insurance.” Such an endorsement also “may provide lower coverage limits to the additional insured than to the named insured,” as the rental contract did here. The Texas rental contract was thus also an endorsement to the Old Republic policy, supplying the limits of coverage and extending those benefits to the customer identified therein as accepting Penske’s offer of insurance.
Furthermore, the Pennsylvania endorsement clearly referred to the rental agreements between Penske and its rental customers as the basis for extending and limiting insurance coverage to these customers. Accordingly, Penske’s rental agreement with Urrutia was sufficiently “written into” the Old Republic policy through the Pennsylvania endorsement. The insurance provisions in the rental agreement were therefore not void by reason of inadequate incorporation into the policy.
The court of appeals also held that the Texas rental contract was void as an endorsement to the Old Republic policy because it was not in a form approved by our State Board of Insurance. While this Court agrees that the rental agreement did not have board approval for use as an insurance contract, this Court did not agree that this rendered the insurance provisions of the rental agreement void.
Here the insurance provisions in the Texas rental contract, while lacking board-approval, do not conflict with any approved standard form policy or provision. In fact, the unapproved Texas rental endorsement to the Old Republic policy is the only basis for extending insurance benefits to Urrutia. To void the insurance provisions in the Texas rental agreement under these circumstances would penalize the innocent insured, not provide him more protection. Because insurance sold through an unapproved policy is voidable, the insured may, upon learning that the insurance is unapproved, elect to rescind it. If the insured elects to accept the insurance, however, he or she must do so under the agreed terms.
In this case, Urrutia had accepted the insurance benefits extended to him through the Texas rental agreement. Accordingly, the court of appeals erred in voiding the insurance provisions in the rental agreement merely because they were not written on forms prescribed by the State Board of Insurance.
In summary, the liability insurance Penske sold Urrutia was voidable because it did not have board approval. It was not void, however. Furthermore, the Texas rental agreement was sufficiently incorporated into the Old Republic policy. Finally, the rental agreement clearly limited the liability protection extended to Urrutia to $20,000 for bodily injury.
If this case is confusing, that is okay. See an experienced Insurance Law Attorney for explanation.

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