Occidental Life Ins. Co. of Cal. v. Bob LeRoy's Inc.

• Decision Date: 17 July 1969
• Docket Number: No. 23124.,23124.
• Citation: 413 F.2d 819
• Parties: OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, Appellant, v. BOB LeROY'S INC., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

413 F.2d 819 (1969)

OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, Appellant, v. BOB LeROY'S INC., Appellee.

No. 23124.

United States Court of Appeals Fifth Circuit.

June 23, 1969.

Rehearing Denied July 17, 1969.

J. F. Hulse, El Paso, Tex., for appellant.

Jack L. Brewster, James F. Garner, El Paso, Tex., for appellee.

Before JONES and COLEMAN, Circuit Judges, and HEEBE, District Judge.

JONES, Circuit Judge:

This case presents the issue of whether or not a beneficiary may, under the terms of the particular insurance contract involved here and the law of Texas, recover proceeds on the death of the insured. The district court rendered judgment, pursuant to a jury verdict in favor of the beneficiary, for the face amount of the insurance coverage, in the sum of $50,000.

Appellant, the Occidental Life Insurance Company of California, solicited an application from Bob LeRoy's Inc., and Robert H. LeRoy, its president, for a policy of insurance on the life of LeRoy. The application was for a fifteen-year commercial term policy in the amount of $25,000, at standard rates, with an accidental indemnity rider for an additional $25,000. Prior to the submission of a written application, on July 3, 1963, LeRoy made himself available for a medical examination to a physician employed by Occidental, who rendered his report to the Company. The application itself was signed by LeRoy and submitted to Occidental on July 5, 1963. On the same day, LeRoy presented his company's check to the agent for Occidental, in payment of the first premium, and received from the agent a "Conditional Receipt." LeRoy died in an accident seventeen days later. No formal policy was issued by Occidental. The pertinent terms of the receipt were as follows:

"If the Company at its Home Office is satisfied that at the time of completing both Part I and Part II of the application the Proposed Insured was insurable under the Company\'s rules for a policy on the plan, in the amount, at the class of risk and otherwise exactly as applied for in Part I of the application with the same number of this receipt; then, but only after such conditions are met, the insurance will be effective, from the date of Part I, the date of Part II, or the date specifically requested in the application, whichever is latest, regardless of death or change of insurability of the Proposed Insured occurring after completion of both parts of the application."

Occidental made the determination that LeRoy was not "insurable under the Company's rules" and declined to make payment. The insured, Bob LeRoy's Inc., brought suit to recover and the primary issue was whether Occidental had made a good faith determination of the uninsurability of LeRoy. At the conclusion of the trial the district court gave instructions as to the applicable law and submitted the case to the jury on special interrogatories. It is not contended that the governing principles of law as contained in the court's charge were erroneous.

Before the court was evidence that LeRoy had some time previously been treated for a heart condition and there was evidence that the condition was not regarded by him as serious and that there was a reasonable basis for his views with respect to his condition. Occidental undertook to show that its standards of insurability were not met by LeRoy and that it would not in view of his medical history have issued the policy on his life for which application had been made.

The jury found in its responses to the interrogatories that LeRoy had given false answers to the questions in his application with respect to his health and previous medical history and that such answers were material to the risk but that LeRoy did not know of the falsity of the representations and that such answers were not falsely made with intent to deceive. The jury found that Occidental did not act in good faith and upon a reasonable basis in determining that LeRoy was an uninsurable risk for the insurance sought by the application.

The court entered its judgment for the insured, Bob LeRoy's Inc., from which Occidental has appealed. The only contention urged by Occidental on appeal is that the evidence required a judgment for it and did not permit a judgment for the appellee.

Federal jurisdiction is based upon diversity of citizenship. The contract is a Texas contract and the case was submitted to and decided by a Federal district court in Texas. It is to the Texas law that we look for a guide to decision.

By the quoted provisions of its conditional receipt, Occidental accepted the premium payment in return for insurance effective upon the issuance of the receipt. Occidental reserved the right to make such investigation it deemed proper into the applicant's past medical history and physical condition to the date of the application and the conditional binder was granted on the express condition that "the Company at its Home Office is satisfied that at the time of the application the Proposed Insured was insurable under the Company's rules for a policy * * * as applied for." All that Occidental agreed to waive was an investigation into the applicant's condition subsequent to the date of the binder agreement.

The binder provided for coverage only if Occidental was satisfied that the applicant was "insurable under the Company's rules." The agreement thus makes Occidental's satisfaction, not insurability per se, the condition of coverage. Obviously, a limitation must be imposed on such a condition if mutuality of obligation consistent with the intent of the parties is to be preserved. The determination cannot be an arbitrary one and must be made in good faith. See 1A Corbin on Contracts, Sec. 165, pp. 86-87. Such an interpretation has been...