Jones v. American Family Mut. Ins. Co.

• Decision Date: 27 February 1986
• Docket Number: No. 2-284-A-62,2-284-A-62
• Citation: 489 N.E.2d 160
• Parties: Larry D. JONES and Sandra L. Jones, Appellants (Plaintiffs Below), v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellee (Defendant Below).
• Court: Indiana Appellate Court

Page 160

489 N.E.2d 160

Larry D. JONES and Sandra L. Jones, Appellants (Plaintiffs Below), v. AMERICAN FAMILY MUTUAL INSURANCE COMPANY, Appellee (Defendant Below).

No. 2-284-A-62.

Court of Appeals of Indiana Second District.

Feb. 27, 1986.

Charles S. Gleason, Gleason, Hay & Gleason, Indianapolis, for appellants (plaintiffs below).

William M. Osborn, Thomas Todd Reynolds, Osborn & Hiner, Indianapolis, for appellee (defendant below).

SULLIVAN, Judge.

Larry D. and Sandra L. Jones appeal from summary judgment in favor of American Family Mutual Insurance Company. The controversy concerned a fire loss which the Joneses claimed was covered by American Family.

We affirm.

I FACTUAL BACKGROUND

The Joneses, who were building a house in Bargersville, sought extra funds to complete their home. Their lending institution, however, refused to lend to them until they had first obtained insurance.

On December 10, 1981, the Joneses met with W. Danny Brown, an agent of American Family Insurance Company, discussed fire insurance, and filled out an application. Mr. Jones wrote a $140 check to American Family as partial payment of the premium. Brown extended thirty days' credit for the remainder, orally bound coverage pursuant to the insurance policy, and informed the Joneses' lender of the transaction.

On December 12, 1981, the day after Brown deposited the Joneses' check, the lending institution disapproved the loan. On December 14, Mrs. Jones phoned Brown and informed him that the Joneses wished to cancel their coverage and moreover that their check was going to bounce. Brown then called American Family's underwriter and withdrew the Joneses' application, receiving it the next day, December 15, 1981.

The afternoon of the 15th, the Joneses' house was damaged by fire. Brown was instructed by American Family's underwriter to issue a cancellation notice effective as of his December 14th conversation with Mrs. Jones. ¹ As foretold, on December 24th, the Joneses' check was returned for insufficient funds. Finally, on March 18, 1982, the Joneses filed a Proof of Loss with American Family, claiming damages of $79,484.69.

II PROCEDURAL BACKGROUND

A. Federal District Court. On May 14, 1982, following the events summarized On March 11, 1983, the District Court granted a summary judgment on behalf of American Family. The Memorandum Entry accompanying its order indicates that the District Court reached the merits of the case:

American Family filed a federal diversity action in the Southern District of Indiana, seeking a declaratory judgment that inter alia the Joneses' coverage was ineffective, cancelled or rescinded.

"Many facts are undisputed. W. Danny Brown, plaintiff's agent, orally accepted a homeowners insurance application from the defendants on December 10, 1981. Partial premium payment was made by check; credit was extended for the balance.

The application provided in part:

INSURING AGREEMENT

We will provide the insurance described in this policy in return for your premium payment and compliance with policy provisions (American Family Mutual Insurance Company Homeowners Policy at 1.)

GENERAL CONDITIONS

1. Policy period--Renewal of Coverage ..... This policy may be continued for successive periods by payment of the required premium on or before the effective date of each renewal period. If the premium is not paid when due, this policy expires ... (Id. at 11.)

Fire destroyed the Jones' residence on the 15th day of December. Their check was returned for insufficient funds.

Premium Payment is Essential to the Existence of a Valid

Insurance Contract.

Payment of premiums is generally prerequisite to the existence of insurance coverage:

'The mere giving or sending of a worthless check to the insurer does not effect the payment of a premium; the result being, if that coverage never goes into effect; and if given for a subsequent premium, that the coverage is not thereby prevented from lapsing. In order for a worthless check to constitute a valid payment, it must have been unconditionally accepted as such by the insurer.' 14 Appleman, INSURANCE LAW AND PRACTICE, Sec. 8144, page 523.

Indiana courts concur:

' "Payment of a premium is of the essence of insurance contracts", 14 J. Appleman, INSURANCE LAWS [sic] AND PRACTICE, Sec. 7832, (1944) and most, if not all, insureds know that if they fail to pay the premiums, they are no longer insured.' Hargis v. United Farm Bureau Mutual Insurance Co., 180 Ind.App. 432, 388 N.E.2d 1175, 1179 (1979).

The contract required payment before the coverage became effective, and accordingly, no coverage existed." Record at 335-337.

B. State Court. On May 14, 1982, the same day that American Family brought suit in federal court, the Joneses filed suit in the Johnson County Circuit Court, ² naming American Family and its agent, Danny Brown, as defendants. The Joneses alleged that American Family breached its insurance contract, and that certain conduct on behalf of American Family and Brown was outrageous, beyond the policy's scope, and designed to harass and intimidate the Joneses. ³

On May 20, 1983, American Family filed a motion for summary judgment contending that the District Court's March 11, 1983 decision operated as res judicata or estoppel by judgment. The Marion County Superior Court's granting of American Family's motion on November 11, 1983, is the subject of this appeal.

C. Federal Court of Appeals. On July 25, 1984, the Seventh Circuit Court of Appeals affirmed the District Court's judgment in favor of American Family. Although the Seventh Circuit's decision was not before the Marion County Superior Court at the time it granted American Family's summary judgment motion and is not, therefore, in the record of proceedings before us, the Court of Appeals' opinion is published at American Family Mutual Insurance Co. v. Jones (7th Cir.1984) 739 F.2d 1259. (Reprinted in Appellee's Brief, Appendix)

While acknowledging the District Court's view that "if a check is tendered in payment of an initial premium and is returned to the insured marked 'not sufficient funds,' the coverage is never effective (citation omitted)," the Seventh Circuit held:

"The analysis overlooks the rule that a check may be taken in absolute satisfaction of a premium claim. ... [C]ourts generally recognize that in appropriate circumstances, coverage becomes binding upon acceptance of the check. If the check is subsequently dishonored, the insurer may not then treat coverage as having been forfeited, but is relegated to an action on the instrument. (Citations omitted.)

Having recognized this rule, we hesitate to hold that the issue of whether the Joneses were covered turns on the integrity of their check. No one disputes that when Brown took their check and accepted their promise to pay the balance of the premium in thirty days, he orally bound coverage and told the Joneses' creditor that they were covered....

We need not decide whether an Indiana court would regard Brown's representations as rising to the level of an unconditioned receipt, because we are satisfied that even if the Joneses were covered, that coverage was cancelled when Sandra Jones telephoned Brown to tell him that the check would bounce. Under Indiana law, once a valid contract of insurance is created, the parties may cancel the contract by mutual agreement, and an agreement to cancel may be demonstrated by the parties' respective acts. Cook v. Michigan Mutual Liability Company, 154 Ind.App. 346, 289 N.E.2d 754 (1972). In the present case, we recognize that the parties dispute precisely what was said during Sandra Jones' conversation with Brown, although the parties agree that Mrs. Jones told Brown that the check would bounce, that Brown advised against cancellation, and that Brown concluded the conversation by saying that ... 'if that's what they wanted, I'd do it ...' Whatever doubts one might entertain about the parties' intentions are removed by the fact that Brown thereupon telephoned the American Family underwriter to have the application withdrawn and sent back to him. One can only conclude that the parties contemplated that any coverage be cancelled, and the cancellation was effective as soon as the telephone conversation between Brown and Mrs. Jones ended. (Citation omitted.) Therefore no coverage existed at the time of the fire." 739 F.2d at 1263, 1264.

III RES JUDICATA

Inasmuch as American Family's summary judgment motion was predicated upon the District Court's previous decision in favor of American Family, we begin our analysis with a discussion of the res judicata implications of the federal decision. The Joneses state in their Reply Brief: ⁴

"Appellant can find no basis for an Indiana Trial Judge sitting in a simultaneously filed suit granting summary judgment solely upon the basis of a Federal Trial Court interpretation of Indiana law; especially when that holding is clearly not in accord with Indiana law." Appellants' Reply Brief at 7.

In an effort to support this dubious proposition with some authority, the Joneses quote Indiana Insurance Co. v. Williams (1983) 3d Dist. Ind.App., 448 N.E.2d 1233, 1236, which stated, "It is axiomatic that a federal court's interpretation of Indiana law is not binding on this Court," and Clipp v. Weaver (1982) 4th Dist. Ind.App., 439 N.E.2d 1189, 1191, which noted, "A federal court's decision, however, is not binding on a state court when deciding a matter under state law. It is merely persuasive authority." ⁵

Needless to say, the Joneses' application of the preceding authorities to this case is unwarranted. In both Williams and Clipp the issue before the Indiana Court of Appeals was the precedential weight to be accorded prior federal decisions which had construed Indiana law. Neither state appellate court was confronted with a previous federal decision adjudicating the rights of the very same parties arising from the very same incident. The Joneses confuse stare decisis with res...