Elfstrom v. New York Life Ins. Co.

• Citation: 67 Cal.2d 503,63 Cal.Rptr. 35,432 P.2d 731
• Court: United States State Supreme Court (California)
• Decision Date: 26 October 1967
• Parties: , 432 P.2d 731 Edgar F. ELFSTROM et al., Plaintiffs, Cross-defendants and Appellants, v. NEW YORK LIFE INSURANCE COMPANY, Defendant, Cross-complainant and Respondent. L.A. 28494.

Page 35

63 Cal.Rptr. 35

67 Cal.2d 503, 432 P.2d 731

Edgar F. ELFSTROM et al., Plaintiffs, Cross-defendants and Appellants, v. NEW YORK LIFE INSURANCE COMPANY, Defendant, Cross-complainant and Respondent.

L.A. 28494.

Supreme Court of California In Bank.

Oct. 26, 1967.

Harney, Ford & Schlottman and Robert E. Ford, Los Angeles, for plaintiffs, cross-defendants and appellants.

Meserve, Mumper & Hughes and Downey A. Grosenbaugh, Los Angeles, for defendant, cross-complainant and respondent.

Chandler P. Ward, Van Nuys, as amicus curiae on behalf of defendant, cross-complainant and respondent.

MOSK, Justice.

Edgar F. Elfstrom and the Fullerton Publishing Co., of which he is president and majority stockholder, brought this action to recover the proceeds of a group life insurance policy issued by defendant to Elfstrom's daughter, Brenda. Defendant filed a cross-complaint asking that the certificate of life insurance issued to Brenda be rescinded. The trial court, sitting without a jury, found in favor of defendant, and this appeal ensued.

The primary issue to be decided is whether an employer (here, plaintiff and cross-defendant Fullerton Publishing Co.) who is the named insured under a group insurance policy for the benefit of its employees, acts as the agent of the employees or of the insurer in performing the functions necessary to administer the insurance provided by the policy. For the reasons discussed hereinafter, we conclude that the employer acts as the agent of the insurer in undertaking these responsibilities and that the employer's errors in administration are attributable to the insurer.

The insurance policy in question was a group policy issued to Fullerton on behalf of its employees. Fullerton paid a portion of the premiums and deducted the remainder from the wages of the insured employees. The policy provided health and life insurance benefits to stated classes of employees in specified amounts. Only those employees were covered who worked more than 32 hours a week and who had completed six months of continuous employment in an eligible class. Employees in Class C were entitled to $4,000 in life insurance benefits and were required to earn at least $200 a month.

Brenda, a student at the University of Southern California, worked for Fullerton at various times when she was not attending classes. In the spring of 1959 she was employed only occasionally and was paid a salary of $50 a month, but sometime in June of that year she began to work longer hours, and her salary was raised to $200 a month. She attended a morning class at a local college during the summer and reported for work immediately after conclusion of her class, serving six days a week. She was employed in this manner until the middle of September, when she began the fall semester at the university and thereafter worked at Fullerton only on those weekends when she was at home. After she returned to school, her salary was reduced to $100 a month.

Brenda's father was insured under the group insurance plan, and she was covered under his policy as a dependent. This status entitled her to health insurance benefits but not to life insurance coverage. Brenda was 18 years old in the summer of 1959, and under the policy she could not be carried as a dependent when she reached the age of 19. Elfstrom was planning a European vacation and desired to put his affairs in order before leaving on the trop in September. Realizing that Brenda would become 19 in December 1959, he instructed his bookkeeper, Mrs. Sabina Still, 'to be sure that Brenda was covered while we were gone' and 'left it to her to see that Brenda was covered.'

In August, before Elfstrom's departure, Mrs. Still informed Brenda that she was a full-time employee, that the waiting period of six months for joining the insurance plan would expire on the first day of December, and that she would then be added to the plan as an employee. Brenda signed an enrollment card provided to Fullerton by defendant. The card was entitled 'Application to New York Life Insurance Company,' and above the signature line it stated: 'I hereby request the issuance of the insurance to which I am now entitled, or to which I may become entitled, under the terms of the group policy or policies issued to the group policyholder by the New York Life Insurance Company, and I authorize the proper deductions from my earnings as my contributions toward the cost of this insurance.'

Mrs. Still filled in the blanks on the card indicating that Brenda was earning $200 a month and was entitled to Class C coverage, and designating Elfstrom as the beneficiary. Although the record is not entirely clear, it appears that Brenda merely signed the card in blank and that the data were inserted sometime later. ¹ Mrs. Still placed the card in her 'pending' file and on November 30, 1959, she removed it from the file and inserted the date '11/30/59.' On that date Brenda had already returned to the university as a full-time student and her salary had been reduced to $100 a month.

On the December 1st report to defendant of the number of lives insured and the premiums paid, Mrs. Still added Brenda as an insured under the group policy. The premium for her policy was paid entirely by Fullerton. Mrs. Still also completed an insurance certificate provided by defendant, indicating the effective date of the policy as December 1, 1959, the coverage as $4,000, and the beneficiary as Elfstrom. She did not recall whether she gave the certificate to Brenda or placed it on Elfstrom's desk. Mrs. Still was familiar with the terms of the master policy at the times in question, and knew on November 30, 1959, that Brenda was neither earning $200 a month nor working 32 hours a week.

Defendant paid $141.39 in medical benefits to Brenda during the life of the policy. She died of aplastic anemia in June 1960, and defendant refused to pay the life insurance benefits on the ground that she was not eligible for insurance under the terms of the master policy issued to Fullerton. Defendant also demanded return of the medical benefits paid under the policy and tendered back the premiums.

Plaintiffs alleged in their complaint that Mrs. Still was defendant's agent and prepared the application and certificate knowing that Brenda worked irregular hours at Fullerton and earned less than $200 a month, and that defendant's payments of medical benefits under the policy constituted a waiver of the employment and salary requirements because, assertedly, defendant knew of Brenda's employment and salary status at the time of the payments.

Defendant denied it knew Brenda was ineligible for coverage and denied Mrs. Still was its agent. By way of affirmative defense it was alleged that defendant did not know until after Brenda's death that she was ineligible for the insurance applied for and that Brenda, Elfstrom and Fullerton were aware of her ineligibility. In its cross-complaint defendant sought cancellation of the insurance certificate on the grounds that Brenda's application contained false representations and that Fullerton, Elfstrom and Brenda concealed material facts from defendant.

The trial court found that Brenda was not eligible for insurance as an employee of Fullerton at the time the policy was issued because she had not been employed for a period of six months for 32 hours a week and that she was not eligible for Class C coverage because she was not earning $200 a month. It also found that Mrs. Still was not defendant's agent, that she prepared the application form executed by Brenda, and that she knew Brenda was not earning $200 a month and was working irregular hours. According to the findings, Elfstrom and Fullerton knew when the application was made that Brenda was not earning $200 a month or working 32 hours a week and that she was not eligible for $4,000 in insurance coverage. Defendant, it was found, did not know or have reason to know the employment or salary status of Brenda. As to the cross-complaint the court found that Fullerton and Elfstrom concealed material facts from defendant. The court concluded that defendant was entitled to rescind the insurance certificate issued to Brenda.

The evidence related above is substantially without conflict and establishes, as the trial court found, that Brenda was not eligible for insurance as an employee under the group policy because she had not been employed for a perod of six months for 32 hours a week. It is equally evident, however, that although Brenda signed the enrollment card she did not insert the misstatements relating to salary and coverage and that this act was performed by Mrs. Still. The record does not indicate that Brenda was aware the application contained misstatements or that she knew or suspected she was not eligible for insurance. ²

If Mrs. Still was acting as defendant's agent in completing the application, there seems to be no doubt that as between Brenda and defendant, the latter would be held liable for Mrs. Still's conduct. (See Rest.2d Agency, §§ 165, 282(2).) ³

Group insurance is a relatively new social device ⁴ the use of which has phenomenally increased since 1945. In 1966 group life insurance alone amounted to more than 300 billion dollars in coverage and constituted 35 percent of all life insurance in force. Eighty-five percent of the group policies written were issued to employer-employee entities. (Life Insurance Fact Book (1967) pp. 26--27.)

This type of insurance differs significantly from ordinary personal insurance. The policy is issued in the name of a group, usually an employer, which acts as a functionary in the collection and payment of premiums and in performing related duties. Most policies, such as that with which we are here concerned, require an employee to pay a portion of the premium, which the employer deducts from wages; the remainder is paid by the employer. The premiums are considerably lower than rates on policies issued on an...