Holt v. American Progressive Life Ins. Co.

Decision Date04 March 1987
Docket NumberNo. 86-273-II,86-273-II
Citation731 S.W.2d 923
PartiesCharles R. HOLT, Sr., Plaintiff-Appellee, v. AMERICAN PROGRESSIVE LIFE INSURANCE COMPANY, Defendant-Appellant. 731 S.W.2d 923
CourtTennessee Court of Appeals

Mary Ann Reese, Nashville, for defendant-appellant.

Elaine R. Jett, Nashville, for plaintiff-appellee.

OPINION

CANTRELL, Judge.

The jury in the court below returned a verdict against the administrator of an insurance plan for fraud or outrageous conduct, punitive damages, the medical payments due on an insurance policy and a statutory bad faith penalty. The administrator asserts that it was entitled to a directed verdict on the question of liability on the policy and the fraud or outrageous conduct claim. In addition the administrator claims that the trial judge prejudiced the jury in the charge.

American Progressive Life Insurance Company is qualified to issue life insurance policies in the state of Tennessee. In addition American Progressive serves as the administrator for Financial Assurance Incorporated, a Colorado corporation, which writes accident and health insurance issued through the National Business Trust. This arrangement allows American Progressive to put together a package of group term life insurance and group accident and health insurance for small businesses.

In January of 1981 Sabina Totty, an employee of Marketing Through Production, a subsidiary of American Progressive, contacted Cagle's Trucking Company for the purpose of quoting a life and health insurance package for the company's employees. Cagle's Trucking Company was a small, individually-owned company that employed the three sons and a son-in-law of the owner.

The son-in-law was Charles R. Holt, the plaintiff in this action. Mr. Holt had suffered a heart attack in March of 1980 and had been unable to work for a period of approximately five months. In January of 1981 he was still taking medicine that had been prescribed by the doctor who treated him after his heart attack.

Cagle's Trucking Company carried health insurance through another company and Mr. and Mrs. Cagle were concerned that Mr. Holt might be excluded from coverage by a new carrier because of his prior health problems. They testified that they described Mr. Holt's condition fully to Ms. Totty and told her that he was still taking medicine for his blood pressure. Mrs. Cagle even called Mr. Holt to get the name of the medicine he was taking. After receiving the information over the telephone, Mrs. Cagle spelled the name of the medicine for Ms. Totty, who wrote it down. On the assurance that Mr. Holt would be covered as long as he was not then under a doctor's care, Mr. Cagle signed the application for the insurance package and authorized the payment of the first month's premium.

Each of the employees of Cagle's Trucking Company thereafter received a certificate of insurance from American Progressive for $5,000 of life insurance and from Financial Assurance for the medical expense insurance. Mr. Holt read his individual certificate and discovered that it contained the following exclusory provision:

"A pre-existing condition which is any injury, illness or disease, including mental illness or functional disorder, that requires treatment, services or medications and/or drugs during the 180 day period preceeding the effective date of coverage. If such a condition exists, benefits otherwise applicable to that particular condition will not be provided for the individual covered member until a period of 90 days has elapsed during which no treatment, services, medication, and/or drugs is used or received for it or until the individual with such condition has been covered under the Plan for a period of one year; whichever occurs first; unless this exclusion is waived in the Schedule of Benefits."

Mr. Holt was concerned about the exclusion because he was still taking medicine following his heart attack. He called Mrs. Cagle and she in turn called Ms. Totty, who reiterated that Mr. Holt was covered so long as he was not under a doctor's care.

Mr. Holt suffered another heart attack in August of 1981. After investigating the claim for approximately four months, American Progressive denied the claim on the ground that prior to his second attack Mr. Holt was still under the care of a doctor for his heart condition and was taking a prescription heart medicine and nitroglycerin in addition to the medicine for his blood pressure.

Mr. Holt sued Financial Assurance and American Progressive for the benefits due under the health policy, for outrageous conduct, fraud and gross misconduct. At the close of the plaintiff's proof in chief, both defendants moved for a directed verdict. These motions were renewed and overruled at the close of all the proof. The trial judge submitted the case to the jury on the question of Mr. Holt's right to collect the benefits under the policy plus the statutory bad faith penalty and on the question of the outrageous conduct, fraud and gross misconduct of American Progressive. The jury returned a verdict of $8,427.43 against American Progressive and Financial Assurance for the benefits under the Financial Assurance policy and added a $1,000 bad faith penalty against American Progressive. On the outrageous conduct, fraud, and gross misconduct claim the jury returned a verdict against American Progressive for $5,000 compensatory damages and $18,000 in punitive damages.

THE CONTRACT CLAIM

American Progressive asserts that the trial judge should have directed a verdict in its favor on the claim under the Financial Assurance policy and on the statutory bad faith penalty. We agree that this claim is on the contract of insurance issued by Financial Assurance, and since there was no contract between American Progressive and Mr. Holt for the medical payments, Mr. Holt cannot collect that claim from American Progressive.

In group insurance cases when an insurer issues a certificate of insurance to the individual employee, a contractual relationship exists between the employee and the insurer. Paul v. Insurance Company of North America, 675 S.W.2d 481 (Tenn.App.1984). On the other hand, a contract with a known agent for a disclosed principal is the contract of the principal unless circumstances show that the agent intended to be bound or assumed the obligations under the contract. Hammond v. Herbert Hood Company, 31 Tenn.App. 683, 221 S.W.2d 98 (1948). Even in a situation involving an undisclosed agency, the third party may sue either the principal or the agent, but not both. Sparkman v. Phillips, 51 Tenn.App. 645, 371 S.W.2d 162 (1962).

Under the circumstances of this case, we think that liability for benefits under the Financial Assurance policy can only be imposed on Financial Assurance. Therefore we reverse the judgment below against American Progressive for the payments due under the Financial Assurance policy.

On the same reasoning we think that the statutory bad faith penalty assessed against American Progressive must also be reversed. The statute provides:

The insurance companies of this state, and foreign insurance companies and other persons doing an insurance business in this state, in all cases when a loss occurs and they refuse to pay the same within sixty (60) days after a demand shall have been made by the holder of the policy on which said loss occurred, shall be liable to pay the holder of said policy, in addition to the loss and interest thereon, a sum not exceeding twenty-five percent (25%) on the liability for said loss; provided, that it shall be made to appear to the court or jury trying the case that the refusal to pay said loss was not in good faith, and that such failure...

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    ...(Tenn. 1997) (recognizing three separate torts based on misrepresentation, including fraud or deceit); Holt v. Am. Progressive Life Ins. Co., 731 S.W.2d 923, 927 (Tenn. Ct. App. 1987). For the most part, the common-law tort of deceit is limited to cases where there was an intent to mislead.......
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