Grandpre v. Northwestern Insurance Life Insurance Co.

261 N.W.2d 804, 1977 S.D. LEXIS 130

• Court: South Dakota Supreme Court
• Decided: December 30, 1977
• Docket: 11875
• Status: Published

Opinions

MORGAN, Justice (on reassignment).

The plaintiff appeals from a judgment for the defendant after a trial to the court in an action which she brought as beneficiary to recover upon a temporary contract of life insurance upon her husband’s life. We affirm.

The case was submitted to the trial court on stipulated facts and therefore we review the same by our own reading of the stipulated facts without any presumption that the trial court saw or heard the witnesses. The facts as stipulated establish that on March 13, 1970, Elwood N. Caufield, an agent for defendant, and Glen Scott, a broker for defendant, went to the Stanley E. Grandpre (Grandpre) residence near Conde, South Dakota, and solicited an application for insurance. At that time, Grandpre (age 54) completed an application for a $10,000 life insurance policy; gave Caufield a check for $43.71, which represented the full initial premium for the policy applied for and executed a Master Account Plan Request and Agreement. In return, Grandpre received a premium deposit receipt and was advised by Caufield that a physical examination would be required to complete the application. Caufield made arrangements for a physical examination of Grandpre by Dr. Saxton, which took place at the Huron Clinic in Huron, South Dakota, on March 18. Defendant received Dr. Saxton’s report on March 20. After examining the report, defendant’s underwriting department requested more information from Dr. Lenz (also of the Huron Clinic) who had taken an electrocardiogram of Grandpre in 1968. The information from Dr. Lenz was received on April 3, 1970, and was sent on to one of defendant’s staff physicians for review. The staff physician discovered minor irregularities and he recommended that a current electrocardiogram be obtained for examination by a heart specialist.

In the meantime, defendant ordered and received on April 2, 1970, a Retail Credit Report which stated that Grandpre was “presently hospitalized in St. John’s Hospital in Huron, South Dakota, as he reportedly had a stroke on March 29, 1970, about 11 o’clock at night.” He was rushed to the hospital and wasn’t expected to survive as “known to local sources.” The defendant immediately mailed a request for a medical history of Grandpre to St. John’s Hospital.

Defendant received a medical report on Grandpre directly from St. John’s Hospital on April 9, 1970. The report revealed prior hospitalizations in July 1967 and March 1968, for “GI hemorrhage, probably duodenal ulcer” and in October 1968, for “upper GI hemorrhage.” Because of Grandpre’s ulcer history, defendant determined that he was not insurable on a standard basis and Grandpre’s application was declined on Friday, April 10,1970. On April 13, defendant issued a draft for $43.71, which represented a return of the premium deposit. On April 14, defendant wrote to Caufield declining Stanley Grandpre’s application, enclosing the draft. On April 15, Caufield telephoned defendant’s underwriting department to communicate the fact that Stanley Grandpre had died on April 9, 1970. On May 5, 1970, Caufield attempted to deliver defendant's draft to plaintiff who refused to accept. On May 14, 1970, defendant mailed the draft to plaintiff, but plaintiff has not cashed it.

Appellant urges that the deposit receipt provided coverage from the date of the application (the completion of the medical exam as per No. 3) unless the coverage was actually rejected (notice sent and received) prior to the date of the decedent’s death (assignments of error Nos. 2 and 3).

Both parties agree that the condition as set out in the deposit receipt was a condition subsequent and the trial court so held.

The issue we must decide is whether a contract of insurance arose immediately upon receipt by defendant of the premium and completion of the required medical examination of Grandpre, subject to the right of defendant to terminate the agreement by notification to the applicant during his lifetime if it concluded that Grandpre was not an insurable risk, as appellant contends, or whether the premium deposit receipt created a contract of insurance to become effective as of the date of application only after the respondent insurance company determined Grandpre satisfied the condition of being an insurable risk, as a condition subsequent which if not satisfied would void retroactively all previous temporary coverage.

The determination of this issue turns on the interpretation of the language of the premium deposit receipt. It should be noted that due to the uniqueness and variation of each insurance company’s conditional receipt or binder, the precedent evolved from this case may well be limited.

The conditional receipt is a sales device instituted by the life insurance industry whereby a life insurance company would warrant coverage upon payment of the initial life insurance premium at the time of application and the satisfaction of various conditions precedent to coverage. These conditions may include insurability, actual acceptance by the company and delivery and receipt of the policy.¹ The purpose of this sales device was to correct the disadvantageous situation that was present due to the necessary interval between the time a policy of insurance is applied for and the time it is issued. A lack of coverage during this interval before issuance of the policy, which may extend for days or weeks, is disadvantageous to the applicant in that he may suffer an illness or accident that will make him uninsurable. It is also disadvantageous to the insurer in that the insurance company runs the risk that the applicant may change his mind and buy from a competitor or may decline insurance altogether, in either event it incurs a net loss for the expenses of investigating and processing the application.² The conditional receipt remedies these problems by requiring an initial premium which is usually forfeited if the applicant revokes his desire for the insurance while the company is determining the insurability of the applicant. It also usually provides temporary insurance to the applicant while the company is determining the applicant’s insurability and consequently, any subsequent change in the applicant’s condition (i. e., death or his becoming unin-surable) will not result in lack of coverage if the company has determined that he was insurable at the time of the application.³ (emphasis added)

The premium deposit receipt that Grandpre received is similar to that of a conditional receipt as stated above. After stating that payment had been received from Grandpre “as premium deposit for proposed insurance,” the frontside of the receipt also contained the following language: “IMPORTANT: This receipt does not provide any insurance until after its conditions are met.” (see Appendix A) The terms and conditions on the back of the receipt provided that if (1) the full initial premium is paid, (2) any required physical examination is completed, and (3) the company is satisfied that the applicant is an insurable risk under the company’s rules and standards for the policy, the policy would become effective as of the application date, which was defined as “the latest of the date of Part I, the date of Part II, or the date of completion of the last of all medical examinations required, if any.” (see Appendix B)

The receipt here in question would be classified as the type generally referred to as the “insurable” type rather than approval type. As stated in Cliborn v. Lincoln Natl. Ins. Co., 332 F.2d 645 (10th Cir. 1964) the “insurable” type is usually interpreted as providing:

That the insurance would be in force if at the date the application is completed, the applicant be in good health, be a risk acceptable under the company rules on the plan of insurance applied for and at the rate of premium paid, (emphasis added)

Since the application is not subject to the approval or acceptance by the company as provided in the “approval” type receipt, it is not necessary to discuss the authorities considering the approval type of receipt.

The courts have generally construed conditional receipts with satisfaction provisions similar to the defendant’s in one of three ways: (1) The condition of insurability must be met before any contract of insurance exists, i. e., condition precedent;⁴ or (2) the condition of insurability, if not met, retroactively destroys any temporary insurance coverage which may have existed, i. e., condition subsequent (trial court’s and defendant’s position); or (3) temporary insurance coverage exists subject to termination by the company only upon notice to applicant. (plaintiff’s position).

In support of appellant’s position a number of jurisdictions have held that the conditional receipt gives rise to an interim contract of insurance, said insurance being terminable upon the company’s good faith determination that the applicant is uninsura-ble and notification of the applicant of this decision. These decisions are usually based on the premise that the conditions as set forth in the conditional receipt are ambiguous and uncertain and therefore must be most strongly construed against the insurer, and where provisions are susceptible to different interpretations, the interpretation which will sustain the policy should be adopted. In this light those courts have adopted the interpretation of the premium deposit receipt as providing a temporary contract for life insurance immediately upon execution of the application, payment of the premium and the completion of the medical examination. Consequently, the provision in the receipt that the company be satisfied that the insured be acceptable at the date of the application creates only a right of the insurer to terminate the contract if the company becomes dissatisfied with the risk before a permanent policy is issued or a loss incurred.⁵ Accepting this interpretation, the insurance company would be liable for they did not terminate the policy until after the applicant had died and thus had not given the applicant personal notice of termination.

However, that is not the case in this situation. The trial court found and we agree, that the language within the premium receipt is not ambiguous. This court has held in Strong v. State Farm Mutual Insurance Co., 76 S.D. 367, 78 N.W.2d 828 (1956) that a contract of insurance is to be construed liberally in favor of insured and strictly against the insurer only when the language of the contract is ambiguous and susceptible of more than one interpretation. Thus, the insurance contract’s language must be construed according to its plain and ordinary meaning. It does not permit the court to make a forced construction or a new contract for the parties.⁶ There is stated on the front of the receipt in boldface letters “IMPORTANT: This receipt does NOT provide any insurance until after its conditions are met.” (emphasis added). We feel that the plain and ordinary meaning of the words involved in the conditions would alert any ordinary person to understand what had to be completed before the temporary or interim insurance would be effective.⁷ Even the fact that the conditions of the receipt were on the back of the form has not persuaded courts to find such terms and receipts ambiguous.⁸

Since we can find no ambiguity in the receipts, we apply a strict contractual construction in holding that the receipt clearly means that a contract of insurance is to be effective as of the date that the applicant signed the application, paid the premium deposit, or completed the physical examination, whichever occurred later, conditioned however upon the subsequent finding by the insurer of the applicant’s insura-bility as of such date.⁹ This interpretation means that, if and when the company has made a good faith determination that the condition has not been satisfied and the applicant is uninsurable, this determination would retroactively defeat all previous existing temporary insurance coverage, i. e., insurability is a condition subsequent. We feel that this construction clearly expresses the intention of the parties.¹⁰

The insurance company is not receiving a premium without assuming any risk. It is assuming the risk that if something unrelated to insurability had happened to Grandpre subsequent to the application date and regardless of whether the company accepted or rejected the policy, the insurance company would be liable if Grandpre had been insurable at the date of application, as defined. The insurance industry is a risk industry, operated on a supposedly sound actuarial basis. The conditions that must be met to attain insurance coverage were reasonable and were very clearly stated in the receipt. We cannot expect the insurers to write their contracts in the language of children’s primers, “see the dog run, run dog run” style.

The obvious advantage that the applicant acquired was that if the insurance company made a determination that he was insurable at the date of the application, he would be covered during the interim period in case something would happen to his health.¹¹

With respect to the question of insurability at the date of application it is important to notice that the receipt specifically provided:

. shall be satisfied that each person proposed for insurance under the policy applied for was on the Application Date insurable under the Company’s rules and standards for the policy in the amount and on the form applied for and for the premium specified in Part I.

This type of clause has usually been interpreted to mean the applicant must meet an objective standard of insurability, and that this standard is the company’s own standard for the plan, the amount and the benefits applied for and at the rate applied for.¹² Based on this standard of insurability, Grandpre, at the time of application, was not insurable. Affidavits by the company officers and the stipulation of facts, point No. 8 show that the application was made on the standard basis but, because of Grandpre’s ulcer history, defendant had determined that he was not insurable on a standard basis. Counsel for the plaintiff had stipulated to this fact. The company had a right to decline issuance of policy even though applicant may have been eligible for different or rated policy.¹³

This is not to say that the insurer’s officers could defeat the applicant’s right to temporary insurance by arbitrarily refusing to form an opinion of the applicant’s insura-bility until after applicant’s death. They must prove at trial that at the commencement of interim coverage they had determined that applicant was an uninsurable risk in the amount and form applied for. (Damm, supra) It must be shown that the determination by the officers of the applicant’s insurability at the time of his application must have been made in good faith and was not an arbitrary act. If a reasonably prudent and careful officer, acting in good faith, would on available evidence find that applicant was insurable for the type of insurance applied for, that insurance policy would be effective from the application date, thus allowing the insurance proceeds to go to the beneficiary.¹⁴ In examining the record we find that the insurer proceeded expeditiously and in good faith in determining that Grandpre was uninsurable in the amount and form applied for. The ulcer condition did not happen subsequent to the application date and therefore would have necessitated a change from the policy applied for.

We distinguish this case from Duerksen v. Brookings Life & Casualty, 84 S.D. 20, 166 N.W.2d 567 (1969) in which this Court held that the period of effective insurance was from the date the policy is accepted by the company, not the date of application, even though in that case the policy was back dated to the date of application. In the instant case the policy specifically states:

insurance under the terms and conditions of each policy applied for shall become effective as of the application date regardless of the occurrence after the application date of death or change of insura-bility .

A literal reading of Grandpre’s policy demonstrates that the policy is effective at the application date, whereas, in Duerksen there is no mention that there was a relation back clause within the contract. In Duerksen the insurance company back dated the policy on their own volition. Duerk-sen can still be good law for policies that do not include within the policy a relation back clause as was found in Grandpre. Also, the insurance policy in Duerksen was of the type conditioned upon acceptance and delivery which stated that the insurance company would not incur any obligation or would not go into effect until it was accepted by the insured. Therefore, a contract of insurance did not arise until the point of acceptance in Duerksen by the specific contractual agreement.

We therefore affirm the holding of the trial court.

DUNN, C. J., and WOLLMAN, J., concur. ZASTROW and PORTER, JJ., dissent.

Appendices to follow.

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1 . Brown v. Equitable Life Ins. Co. of Iowa, 60 Wis.2d 620, 211 N.W.2d 431 (1973).

2 . Keeton, Insurance Law, § 2.3(a) at p. 36.

3 . Brown v. Equitable Life Ins. Co. of Iowa, supra.

4 . We will not discuss the condition precedent question any further since as previously mentioned both parties and the trial court have addressed the conditional receipt as a condition subsequent.

5 . Toevs v. Western Farm Bureau Life Ins. Co., 1971, 94 Idaho 151, 483 P.2d 682; Service v. Pyramid Life Ins. Co., 1968, 201 Kan. 196, 440 P.2d 944; Jones v. John Hancock Mutual Life Insurance Co., 416 F.2d 829 (6th Cir. 1969); Metropolitan Life Insurance Co. v. Wood, 302 F.2d 802 (9th Cir. 1962); Ransom v. The Penn Mutual Life Ins. Co., 1954, 43 Cal.2d 420, 274 P.2d 633; Gaunt v. John Hancock Mutual Life Ins. Co., 160 F.2d 599 (2 Cir. 1947).

6 . Strong v. State Farm Mutual Insurance Co., supra; Thompson v. State Auto Ins. Ass’n, 70 S.D. 412, 18 N.W.2d 286 (1945).

7 . Gaunt v. John Hancock Mutual Life Ins. Co., supra.

8 . Morgan v. State Farm Life Insurance Co., 240 Or. 113, 400 P.2d 223 (1965).

9 . Damm v. National Insurance Co., N.D., 200 N.W.2d 616 (1972).

10 . Couch on Insurance, § 14.45, p. 631; Reynolds v. NW Mutual Life Insurance Co., 189 Iowa 76, 176 N.W. 207; Damm v. National Ins. Co. of America, supra; Taylor v. New York Life Ins. Co., 324 F.2d 768 (10th Cir. 1963); American National Bank & Trust Co. of Chicago v. Certain Underwriters of Lloyd’s of London, 444 F.2d 640 (7th Cir. 1971); Rivota v. Fidelity & Guaranty Life Ins. Co., 497 F.2d 1225 (7th Cir. 1974).

11 . Other advantages that would accrue to the applicant would be: (1) The insurable applicant who dies prior to the completion of the company’s evaluation of the application is protected; (2) the policy would sooner become incontestable; (3) the policy would earlier reach maturity with corresponding acceleration of dividends and cash surrender; (4) if the insured’s birthday was between “completion” and “approval” the premium would be computed at a lower rate; (5) when the policy covers disability, the coverage dates from “completion.” Rivota v. Fidelity & Guaranty Life Ins. Co., supra; Gaunt v. John Hancock Mutual Life Ins. Co., supra.

12 . Simpson v. Prudential Ins. Co. of America, 227 Md. 393, 177 A.2d 417 (1962).

13 . Cortez v. Life Ins. Co., 408 F.2d 500 (8 Cir. 1969).

14 . United Founders Life Insurance v. Carey (Tex.) 363 S.W.2d 236 (1962); Occidental Life Ins. Co. v. Bobs LeRoy’s Inc., 413 F.2d 819 (5 Cir. 1969).