Grandpre v. Northwestern Nat. Life Ins. Co., 11875

• Decision Date: 30 December 1977
• Docket Number: No. 11875,11875
• Parties: Bernice N. GRANDPRE, Plaintiff and Appellant, v. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY, an Insurance Corporation, Defendant and Respondent.
• Court: South Dakota Supreme Court

Page 804

261 N.W.2d 804

Bernice N. GRANDPRE, Plaintiff and Appellant, v. NORTHWESTERN NATIONAL LIFE INSURANCE COMPANY, an Insurance

Corporation, Defendant and Respondent.

No. 11875.

Supreme Court of South Dakota.

Dec. 30, 1977.

Terence A. O'Keefe of Siegel, Barnett, Schutz, O'Keefe, Ogborn & Jewett, Aberdeen, for plaintiff and appellant.

D. J. McClure of Gillette & McClure, Redfield, for defendant and respondent.

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 uninsurable) 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 uninsurable 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....