Casey v. Transamerica Life Ins. & Annuity Co.

• Decision Date: 14 April 1975
• Docket Number: No. 73--1789,73--1789
• Citation: 511 F.2d 577
• Parties: Harold B. CASEY and Floyd S. Casey, Plaintiffs-Appellants, v. TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 577

511 F.2d 577

Harold B. CASEY and Floyd S. Casey, Plaintiffs-Appellants, v. TRANSAMERICA LIFE INSURANCE AND ANNUITY COMPANY, Defendant-Appellee.

No. 73--1789.

United States Court of Appeals Seventh Circuit.

Argued Sept. 27, 1974.

Decided Feb. 12, 1975.

Rehearing Denied April 14, 1975.

Howard De Trude, Jr., John T. Lorenz and Mark W. Gray, Indianapolis, Ind., for plaintiffs-appellants.

Charles M. Wells, Indianapolis, Ind., for defendant-appellee.

Before SWYGERT, Chief Judge, HASTIE ^*, Senior Circuit Judge, and PELL, Circuit Judge.

HASTIE, Senior Circuit Judge.

The beneficiaries named in a term insurance policy on the life of James Casey brought this suit in the District Court for the Southern District of Indiana against the insurer to recover on the policy after Casey's death. Holding that the policy had never become effective, the district court denied recovery of death benefits. This appeal followed.

Casey's home was in Indiana. There he applied for the insurance now in suit, using an application form provided by the insurer, a California corporation. The policy issued from the insurer's home office in California and became effective, if at all, upon its delivery to the insured in Indiana. Without discussion of the matter, the district court and the parties seem to have regarded the question of the validity or initial effectiveness of the policy as a matter governed by Indiana law. We agree. ¹ However, we have found no Indiana adjudication of the question presented by this case.

The application, which was signed by Casey and became a part of the policy, contained the following printed provision: 'Any policy issued from this application shall not take effect unless . . . the policy is delivered . . . during the lifetime and continued insurability, as stated in this application, of the Proposed Insured . . ..' Thus, the insurer undertook to make 'continued insurability, as stated in this application' a condition precedent to the initial effectiveness of the policy upon delivery.

The application included numerous specific questions concerning the applicant's health and a general inquiry about the survival and health of any brothers or sisters. Also, there were inquiries about the applicant's occupation, how much other insurance was in force on his life or pending, whether he was 'a military risk', whether he contemplated foreign travel and finally whether 'you intend to fly other than as a passenger'.

This question about intention to fly other than as a passenger and the applicant's conduct after answering it have created the present controversy. Casey answered 'No' to the question as stated. The district court found, justifiably on the evidence, that this answer was truthful. However, the policy was not delivered until more than three months after the application had been submitted. During that interval Casey decided to learn to fly, enrolled as a student pilot and flew as such several times. About a year and a half after the policy was issued he died in a crash of a plane he was piloting.

After this fatal accident, the insurer learned that Casey had flown as a student pilot before the policy had been delivered. It has been stipulated that, had the insurer been informed before the policy delivery that the applicant was flying 'other than as a passenger' it would have required him to elect between paying an additional premium of $3.50 per $1,000 of insurance ² or having aviation coverage excluded from the policy. In these circumstances, the insurer and, agreeing with it, the district court treated the policy as never having become effective.

We begin our analysis by considering what a layman, unschooled in the practices and terminology of the insurance business, can fairly be held to understand from the words, 'continued insurability, as stated in this application', as he reads them in a life insurance application form. ³ The words 'as stated in this application' indicate that the meaning of 'continued insurability' appears on the face of the application. However, that phrase is nowhere defined or explained. Thus, the applicant is left to speculate what truthful information supplied by him in answer to which questions must continue to be correct up to the time his policy is delivered and his premium paid in order for his life to be insured.

We have pointed out the variety of questions asked in the application. Most of them sought particular information about the applicant's health. And the very nature of life insurance should cause a layman to understand that the willingness of an insurer to act favorably upon his application will depend largely upon the indicated state of his health.

But beyond that, reasonable laymen could differ. Suppose the applicant should apply elsewhere for additional insurance while waiting for delivery of his policy. Suppose one of his siblings had sickened or died. Suppose he should change his employment to the hazardous work of a policeman or an electric line repairman. Suppose he should decide to visit the Middle East, or, as in this case, he decides to take flying lessons. Although the application form included questions about occupation, relatives' health, additional insurance, prospective foreign travel and intention to fly an airplane, we think reasonable laymen can differ in their judgment whether a change of circumstances in relation to any of these matters after submission of an application containing truthful answers about them is within the meaning of the phrase 'continued insurability, as stated in this policy'. The intended meaning is made all the more doubtful by the fact that accidental death in a crash of a plane piloted by the insured is not an excepted risk in the policy, so that an insured who takes up flying after the policy becomes effective is fully covered. Of course this is a much greater risk than that involved in flying during the normally very short period between application and policy delivery.

The district court recognized that this is not a fraud case. The meaning of the continued insurability clause which the insurer inserted as a condition precedent to initial coverage was unclear. Having thus created a basis for reasonable misunderstanding which it could have avoided by more precise language, with the result that the prospective insured received and paid for what he could reasonably consider a valid policy, the insurer will not be permitted to impose its construction of ambiguous language after the death of the insured. ⁴

We have not overlooked a number of decisions, relied upon by the appellee, in which courts have sustained the refusal of an insurer to reinstate a lapsed life insurance policy on the ground that, in reasonable professional judgment, a change of circumstances, other than a deterioration of health, has made the applicant for reinstatement 'uninsurable'. ⁵ However, a typical policy reinstatement clause is explicitly conditioned 'upon presentation of evidence of insurability satisfactory to the insurer'. Thus, the insured has assented to an arrangement under which the insurer is expressly authorized to make a decisive rational decision whether, in professional judgment, the new evidence satisfies the imprecise standard of insurability. But this cannot logically or fairly be analogized to imposing upon a layman who thinks that he is currently insured under a policy delivered and paid for, and upon his beneficiaries after his death, the risk of not being insured at all if he has not understood imprecise language the way a professional insurer might.

The judgment is reversed.

Reversed.

PELL, Circuit Judge (dissenting).

Being of the opinion that the record requires an affirmance of the judgment for the defendant, I respectfully dissent.

As a preliminary matter, it appears to me that it is necessary for a proper perspective of the appeal to amplify the facts. While ordinarily in the case of disputed facts we would look at the facts from the viewpoint most favorable to the party prevailing below, here it is not necessary as there is no real dispute about the facts but merely as to the applicable law.

It is clear in this case that the policy was not to become effective until delivered and that the delivery date was December 24, 1968. The original application for the insurance was executed on September 17, 1968. At that time Casey's insurance age was 40 years being less than six months from the date of his birth, February 28. As an additional instruction on the application it was requested that the policy be dated to say age 40. At the time the policy was delivered, however, Casey's insurance age was 41 which he acknowledged in an Amendment to Application executed on December 24, 1968. He thereby also made it clear that he was aware that the policy was not effective at the date of the original application. It is also clear that a conditional receipt was not issued.

The last stated facts make inapplicable to the present case the line of cases following Judge Learned Hand's opinion in the Gaunt case, note 3 of the majority opinion. The niceties of life insurance to which Judge Hand was referring was the ambiguity inherent in the situation in which a conditional receipt is issued at the time of the original application. This receipt establishes the effective date of the policy as of the date of the receipt provided that in the company's opinion the applicant was insurable on that date at the rate and plan for which he applied. Judge Hand simply held that not one person in a hundred would have supposed that he would be covered not as of the date of completion of the application but only as of the date of approval. It is not necessary to decide here whether Gaunt and its progeny represent good law, even though they have been characterized as 'a strong minority. ¹ The situation we have here is not that involved in Gaunt; Casey was clearly aware that his insurance remained in fieri even though an application had...