Norby v. Bankers Life Co. of Des Moines, Iowa

• Decision Date: 11 July 1975
• Docket Number: No. 45036,45036
• Parties: Fred G. NORBY, Guardian Ad Litem of Lowell D. Norby, Respondent, v. BANKERS LIFE COMPANY OF DES MOINES, IOWA, Defendant and Third-Party Plaintiff, Appellant, v. HOFFMAN BROTHERS, INC., Third-Party Defendant, Respondent.
• Court: Minnesota Supreme Court

Page 665

231 N.W.2d 665

304 Minn. 464

Fred G. NORBY, Guardian Ad Litem of Lowell D. Norby, Respondent, v. BANKERS LIFE COMPANY OF DES MOINES, IOWA, Defendant and Third-Party Plaintiff, Appellant, v. HOFFMAN BROTHERS, INC., Third-Party Defendant, Respondent.

No. 45036.

Supreme Court of Minnesota.

July 11, 1975.

Syllabus by the Court

Where the claim of an employee eligible for coverage under his employer's group insurance policy is denied by the insurer because of the employer's negligent failure to make timely transmittal of the employee's enrollment application to the insurer, who had delegated that function to the employer: (a) The employee has standing as a real party in interest to sue on the policy, the employer policyholder having been impleaded by the insurer as a third-party defendant and having ratified employee's suit; (b) the employer may be found to be the agent of the insurer with respect to the performance of that function; and (c) the insurer has no right to indemnity against the employer upon making the payments as provided in the policy, having suffered no loss (except for unproved loss of premiums) in making the payment under the coverage it would have accorded had the employee's application been submitted when made.

Hulstrand, Anderson & Larson and Ronald C. Anderson, Willmar, for appellant.

Ronald R. Frauenshuh, Paynesville, for respondent.

Heard before PETERSON, MacLAUGHLIN, and YETKA, JJ., and considered and decided by the court en banc.

PETERSON, Justice.

Important issues in the administration of group insurance programs for the benefit of employees are raised in this appeal.

The issues arise out of an uncomplicated factual situation. Hoffman Brothers, Inc. (hereafter Hoffman), third-party defendant, is a member of the Upper Midwest Employers Association. The association is named as policyholder in a group accident and sickness policy issued by The Bankers Life Company of Des Moines, Iowa (hereafter Bankers Life), defendant. The policy provides for reimbursement of a portion of the medical bills incurred by covered employees of the association's employer members, including dependents of employees. Plaintiff, Fred G. Norby, is an employee of Hoffman, and claims benefits for the expense of medical care for his injured child in the undisputed amount of $3,460.49.

Plaintiff commenced his employment with Hoffman in August 1970. He completed an application for coverage under the policy in September 1970, which was thereupon delivered to his employer, Hoffman. If Hoffman had transmitted the application to Bankers Life, plaintiff's insurance coverage would have begun immediately and his subsequent claim would have been paid. But, through oversight or neglect, Hoffman failed to forward the application.

Plaintiff, on discovering Hoffman's error, completed a second application on December 31, 1970, which was promptly transmitted to Bankers Life. Because of an intervening period of Temporary layoff, plaintiff's coverage, under the terms of the policy, was not effective until January 20, 1971--that is, unless the initial, untransmitted application was binding upon Bankers Life. Plaintiff's child, for whom the claim is made, was injured on January 19, 1971.

Bankers Life denied the claim, asserting that plaintiff was not effectively covered until it had received his application form from Hoffman. Plaintiff then brought this action on the policy against Bankers Life, which in turn instituted a third-party action against Hoffman for indemnity or contribution. The trial court ordered judgment for plaintiff, finding and concluding that Hoffman stood in the relationship of agent to Bankers Life with authority to accept the application, thus binding Bankers Life at the time of plaintiff's initial application. The court ordered the third-party complaint dismissed. This appeal followed raising the primary issue of whether such an agency relationship existed and secondary issues concerning plaintiff's standing as a real party in interest and Bankers Life's claimed right of indemnity from Hoffman.

1. The threshold issue is whether, under the circumstances of this case, plaintiff is a real party in interest with standing to assert this claim. Hoffman, after Bankers Life denied plaintiff's claim, paid plaintiff the amount he would have received under the policy had he been covered. Whether plaintiff will actually repay that sum to Hoffman if the judgment in this action is affirmed is not known, but it is known that neither plaintiff nor Hoffman considers that plaintiff is under any obligation to do so. Bankers Life contends that because plaintiff has suffered no loss, Hoffman is the real party in interest to litigate the issue of liability. ¹ We hold otherwise.

The posture of this action is fully sustained by the provisions of Rule 17.01, Rules of Civil Procedure:

'Every action shall be prosecuted in the name of the real party in interest. * * * No action shall be dismissed on the ground that it is not prosecuted in the name of the real party in interest until a reasonable time has been allowed after objection for ratification of commencement of the action by, or joinder or substitution of, the real party in interest; and such ratification, joinder, or substitution shall have the same effect as if the action had been commenced in the name of the real party in interest.'

Hoffman, sued as a third-party defendant by Banker's Life, has stated that its interests are not adverse to plaintiff's, a statement confirmed by the fact that both are represented by the same counsel. ² By this conduct, Hoffman has effectively retified plaintiff's action within the meaning of Rule 17.01.

The purpose of this rule is to save a defendant against whom a judgment may be obtained from further demands by other claimants for the same relief. If that purpose is satisfied, the requirements of the rule are satisfied. Anderson v. Connecticut Fire Ins. Co., 231 Minn. 469, 43 N.W.2d 807 (1950). As a result of Hoffman's ratification of plaintiff's suit, defendant-insurer is protected from duplicate judgments; thus, the ultimate question of defendant's liability may be conclusively determined.

2. The principal issue for determination is whether an employer may be held to be acting as an agent of a group insurer for the purpose of accepting insurance applications from eligible employees. If, as the trial court here found, Hoffman acted as the agent of Bankers Life with respect to plaintiff's timely initial application, Bankers Life is bound by Hoffman's action, since a principal is bound by the acts of its agent. Blumberg v. Taggart, 213 Minn. 39, 5 N.W.2d 388 (1942); Rommel v. New Brunswick Fire Ins. Co., 214 Minn. 251, 8 N.W.2d (1943); Restatement, Agency 2d, § 144. We hold that it was.

Conventional wisdom has been that the employer functions in the administration of a group insurance policy solely for its own interests or for the benefits of its employees, rather than serving the purposes of the insurer, and that the employer and the employees are allied in their interests adverse to the insurer. Judicial precedent, including the older precedents, are numerically weighted against finding the existence of an employer-insurer agency relationship. ³

Pragmatic, as well as theoretical, considerations induce us to undertake, as others have, a reappraisal of these concepts. ⁴ Group insurance is today a widespread and most significant form of insurance protection, particularly for employee groups, as shown by data published by the Institute of Life Insurance, Life Insurance Fact Book (1974). Group life insurance coverage amounted to over 708 billion dollars in 1973, which is nearly 40 percent of all life insurance in force in this country. Over 86 percent of group life insurance is of the employer-employee type. It may not be an impermissible assumption that data for the general category of health insurance in the private sector of the economy would parallel those for life insurance.

The growth of group insurance in labormanagement situations undoubtedly relates to the advantages inherent in it. The advantage to the employee is that it permits insured protection, generally without necessity of physical examination, at little or no cost. The advantage to the employer is that it is able, at moderate cost, to satisfy the felt needs of its employees, thereby reducing the labor unrest or turnover that impairs productivity. The advantage to insurers is that the mass sale and administration of group insurance involves a low rate of lapse and low per capita expense of administration, the efficiency and economy of which are profitable to the insurer.

Administration of group insurance policies entails some rather routine functions, such as enrolling employees through their completing applications for themselves and dependents; collecting employee contributions, if any, and remitting premiums to the insurer; terminating and reinstating insurance; and assisting in the processing of claims. Employers may have a role in determining eligibility for coverage, at least to the txtent that the classification and employment status of employees relates to whether or not an employee is within the insured group. There may be situations where the insurer performs all these functions itself, in which case the plan is wholly 'insurer-administered,' and in which case no issue of agency between the employer and insurer arises. There are the other situations, as in this case, in which the employer performs such a number of these functions that, at least as a shorthand expression, it may be considered, in whole or in part, to be 'employer-administered.' To the extent the employer, with the consent of the insurer, performs the functions of the insurer, it may properly be considered the insurer's agent.

An agency relationship is based upon consent by one person that another shall act in his behalf and be subject to his control. Restatement, Agency ...