Gill v. General American Life Insurance Company, 20185.

• Decision Date: 11 December 1970
• Docket Number: No. 20185.,20185.
• Citation: Gill v. General American Life Insurance Company, 434 F.2d 1057 (8th Cir. 1970)
• Parties: Naoma R. GILL, Appellant, v. GENERAL AMERICAN LIFE INSURANCE COMPANY, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

434 F.2d 1057 (1970)

Naoma R. GILL, Appellant, v. GENERAL AMERICAN LIFE INSURANCE COMPANY, Appellee.

No. 20185.

United States Court of Appeals, Eighth Circuit.

December 11, 1970.

John R. Lineberger, Fayetteville, Ark., for appellant.

Phillip Carroll, Little Rock, Ark., for appellee.

Before MEHAFFY, GIBSON and LAY, Circuit Judges.

GIBSON, Circuit Judge.

The plaintiff Naoma R. Gill seeks to recover the proceeds of a certificate of group life insurance issued under a master policy by General American Life Insurance Company to the Trustees of the Arkansas Missouri Cotton Ginners Association covering the life of her deceased husband, Lester B. Gill. Jurisdiction is based upon diversity of citizenship. From an adverse judgment rendered by the trial court, the Honorable J. Smith Henley, the plaintiff-beneficiary, appeals.

The Association was a trade group composed of various individual cotton ginning companies. The group insurance policy was taken out by the trustees of the Association for the benefit of the employees of the member companies. The deceased, Lester B. Gill, was a director of the Farmers Gin Company, a corporate member of the Association, from 1957 until his death on December 25, 1967. In January 1962, during a promotional campaign designed to increase membership in the group insurance plan, Mr. Gill applied for membership. His application stated as his occupation "board of directors." A certificate of insurance was issued to him naming Mrs. Gill as beneficiary. Shortly afterwards, certain other insurance he carried was reduced. Premiums due on this certificate were regularly paid until his death. The evidence is clear that Mr. Gill performed no services for the corporation other than his ordinary duties as a director, for which he received no compensation.

The defendant insurance company tendered the premiums paid on the certificate, but resisted payment of the proceeds on the grounds that the deceased was not an "employee" as defined by the terms of the master policy, that an Arkansas statute prohibited the issuance of a certificate under a group life insurance policy to a director who was not otherwise an employee, and that therefore the certificate was void in its inception. Other defenses asserted by the defendant are not material to this opinion. The plaintiff contends that these defenses are barred by the incontestable clause in the master policy. The relevant policy and statutory provisions are as follows:

The master policy contained the following definition of employees who were eligible for coverage:

"The term `Employees\' is defined to mean: (a) All full time Employees of an Employer, including the individual proprietor of a sole proprietorship and the individual partners of a partnership where such sole proprietorship or partnership is an Employer."

The incontestable clause of this policy reads, "The validity of this policy shall not be contested, except for the nonpayment of premiums, after it has been in force for one year from its date of issue."¹ The regulatory statute under which this policy was issued, 6 Ark.Stat. Ann. § 66-3504 (1959), provides in pertinent part:

"The lives of a group of individuals may be insured under a policy issued to the trustees of a fund established by two (2) or more employers in the same industry * * *, which trustees shall be deemed the policy holder, to insure the employees of the employers * * * for the benefit of persons other than the employers * * *, subject to the following requirements:

"(1) The persons eligible for insurance shall be all of the employees of the employers * * *, or all of any class or classes thereof determined by conditions pertaining to their employment * * *. The policy may provide that the term `employees\' shall include retired employees, and the individual proprietor or partners if an employer is an individual proprietor or partnership. No director of a corporate employer shall be eligible for insurance under the policy unless such person is otherwise eligible as a bona fide employee of the corporation by performing services other than usual duties of a director." (emphasis added.)

The question before us is whether a certificate of insurance issued under a group policy to a corporate director, without fraud or misrepresentation, is void as against public policy because it is prohibited by statute, or whether this defense is barred by the incontestable clause. We have been unable to discover a case directly in point in either Arkansas or other jurisdictions, but we conclude that the defense must be allowed under Arkansas law.

The cases most nearly in point involve master policies which contain both an incontestable clause and a definition of "employees" which, if applied, would exclude from coverage a deceased to whom a certificate of insurance had been issued. The authorities are hopelessly split on the question of whether the incontestable clause bars the insurer from raising the defense that the insured was not an eligible employee. Those cases rejecting the defense adopt the theory that the incontestable clause bars any defense which is not specifically excepted in the clause itself and which the company could have discovered by investigation, while those allowing the defense take the view that the clause cannot be used to enlarge the coverage of the policy nor to compel the company to accept risks and hazards not within the scope of the policy. See generally, Annotation, Misrepresentation as to Employer-Employee Relationship as within Incontestability Clause of Group Insurance, 3 A.L.R.3d 632 (1969); in addition to the cases therein cited, compare First Pennsylvania Banking and Trust Co. v. United States Life Ins. Co., 421 F.2d 959 (3d Cir. 1969), with Baum v. Massachusetts Mutual Life Ins. Co., 357 P.2d 960 (Okl.1960). However, none of these cases involve a statutory provision expressly prohibiting coverage of a director who does not otherwise qualify as an employee, and hence they are not precisely applicable to the instant case.

There are two Arkansas cases which are of some relevance to the case at hand, both involving certificates issued under group health insurance policies.

In Palmer v. Standard Life and Accident Ins. Co., 238 Ark. 585, 383 S.W.2d 285 (1964), a group health insurance policy was issued to the employer, the Mid-South Grain Company, naming the plaintiff as an employee, and a certificate of insurance was issued to him under it. When Palmer filed a claim, the insurance company resisted payment on the grounds that he was not an employee of the grain company. The evidence showed that Palmer operated a crop-dusting service. He promoted sales of the grain company's products and in turn the company collected fees from the farmers for his crop dusting work, which were paid over to him. Approximately 90 per cent of his payments came from fees collected by the company, and in some cases the company paid him even when the farmer had not paid the company. Under these facts, the Arkansas Supreme Court held that since he was considered an employee at the time the policy was issued, and since there has been no change in his "status" with the company, he was entitled to coverage.

The plaintiff contends that, while the Arkansas Supreme Court did not speak directly in terms of estoppel, the Palmer case stands for the proposition that where an insurance company issues a certificate of group insurance to a person connected with an employer and where that person's "status" with the employer is not subsequently altered, the company is estopped to deny his eligibility as an employee. While this might appear to be a plausible reading of the Palmer case, we think it cannot be so applied in the instant case for two reasons. In the first place, there was no question in Palmer of a statutory restriction such as is involved in this case. Secondly, that reading of Palmer has been substantially undermined by the recent Arkansas case of Hargraves v. Continental Assurance Company, 247...