Paulson v. Western Life Ins. Co.

• Decision Date: 02 December 1981
• Docket Number: No. 190,720,190,720
• Citation: 292 Or. 38,636 P.2d 935
• Parties: Orville L. PAULSON, Petitioner on review, v. WESTERN LIFE INSURANCE COMPANY, Respondent on review. ; CA 16061; SC 27254.
• Court: Oregon Supreme Court

Page 935

636 P.2d 935

292 Or. 38

Orville L. PAULSON, Petitioner on review, v. WESTERN LIFE INSURANCE COMPANY, Respondent on review.

No. 190,720; CA 16061; SC 27254.

Supreme Court of Oregon.

Argued and Submitted Feb. 5, 1981.

Decided Dec. 2, 1981.

J. Michael Alexander, Salem, argued the cause for petitioner on review. With him on the petition and briefs was Brown, Burt, Swanson & Lathen, P. C., Salem.

John C. Mercer, Portland, argued the cause for respondent on review. With him on the Brief was Landis, Aebi & Bailey, Portland.

Before DENECKE, C. J., and TONGUE, LENT, LINDE, PETERSON and TANZER, JJ.

PETERSON, Justice.

The rapid growth of group insurance in the United States has given rise to a number of cases in which the principal issue is whether the employer-policyholder, in the administration of the policy, is the agent of the insurer, of the insured worker, or the agent of neither. That issue, among others, is involved in this case.

THE FACTS ¹

Roof & Floor Components, Inc., (hereinafter referred to as "employer" or as "policyholder") is a Salem concern that, in 1974, applied to the defendant for a "group insurance policy" that would provide its employees life insurance benefits, hospital expense benefits, supplemental accident expense benefits, and major medical expense benefits. The policy was issued and became effective on February 7, 1974. It provided for optional coverage of a worker's spouse and specified unmarried children.

The plan covered different classes of employees. A Class I employee qualified for personal coverage and dependents coverage without proof of insurability if application for coverage was made within 30 days following the first day of employment. Plaintiff was a Class I employee. Defendant issued a brochure, which the plaintiff never saw prior to the dispute which gave rise to this case, but which is nonetheless relevant. It provided:

"When you enroll for benefits for your eligible dependents more than 31 days after you are initially eligible, it is necessary that satisfactory evidence of insurability be furnished to the insurance company. Benefits will be effective when approved by the insurance company. You will be notified as to the effective date."

" * * *.

"If you enroll when initially eligible, merely complete an enrollment form authorizing necessary salary/payroll deduction and return it to your supervisor.

"Should you wish to enroll more than 31 days after your initial eligibility date for benefits on your eligible dependents, it is necessary that evidence of insurability satisfactory to the insurance company be furnished. Special forms are available for this purpose. Benefits for you and your dependents will be effective when approved by the insurance company." ²

The brochure also contained provisions relating to the duties of the insurer and the employer:

"The Insurance Company will perform the following functions:

1. Maintain records of all employees and dependents insured by the program.

2. Determine the eligibility of individual claimants for receipt of benefits.

3. Process claims for benefits.

4. Authorize the payment of benefits.

5. Make payments of benefits to beneficiaries.

6. Make determination on appeal of claim denials.

"The Plan administrator (the employer) will perform the following functions:

1. Receive and remit contributions for the program.

2. Maintain records of all employees and dependents insured.

3. Select the Insurance Carrier."

The insurance policy contained these provisions:

"Data Required from Policyholder (the employer): The policyholder shall furnish periodically to the Company such information relative to individuals becoming insured, changes in amounts of insurance, and terminations of insurance as the Company may require for the administration of the insurance under this policy. The Company shall have the right to inspect any records of the Policyholder which relate to the insurance under this policy at any reasonable time.

"Clerical Error: The Policyholder's failure, due to clerical error, to report the name of any individual who has qualified for insurance under this policy or to report the name of any individual whose classification has been changed shall not deprive such individual of insurance under this policy or affect the amount of insurance to which he is entitled; nor shall the Policyholder's failure to report the termination of insurance for any individual continue such insurance beyond the date of termination determined in accordance with the provisions of this policy."

The insurer provided the employer with enrollment forms and claim forms which, as necessary, were given to the employees by the employer. Claim forms, after they were filled out, were normally mailed to the insurer by the employee.

The plaintiff came to work for the employer on June 23, 1976. His medical insurance then in effect-with another carrier-remained effective until October 1, 1976. Prior to going to work for the employer, he talked to the owner of the business, a Mr. Largent, about the company health insurance. Mr. Largent told the plaintiff that he could elect coverage for himself and for his dependents any time in the first six months of employment without any evidence of insurability required. Paulson therefore decided to keep his other coverage in effect "until it ran out" and then apply for coverage with the employer's carrier. Accordingly, on September 1, 1976, he received and filled out an application for coverage which was sent to the defendant, with appropriate premiums.

On November 3, 1976, the defendant wrote to the employer advising the employer that because the application was not made " * * * within the eligibility period as specified in your policy, evidence of insurability is required." A form was enclosed for Mr. Paulson to execute and return.

After this letter was received, Mr. Largent went "back and forth for about two weeks" with the company's agent, without resolution of the matter. Plaintiff was then advised of the problem. At about the same time, plaintiff's daughter became ill, and he incurred substantial medical expenses to treat the illness. The plaintiff's claim for payment of these medical expenses was denied on the ground that the policy was not in effect.

The plaintiff thereafter filed this action against the defendant, alleging that on September 1, 1976, the defendant entered into an insurance contract with the plaintiff which, on November 25, 1976, was " * * * in effect or should have been in effect." The defendant filed an answer admitting its corporate status and denying the remainder of the plaintiff's complaint. The answer also contained an affirmative defense, which is not otherwise relevant to this opinion. The plaintiff's reply denied the affirmative allegations of the defendant's answer, and affirmatively alleged that plaintiff had relied upon the "statements by the Plaintiff's employer," and that the defendant was estopped from denying coverage.

On trial, at the conclusion of all the evidence, the defendant moved for a directed verdict on several grounds, one being that " * * * Largent was not acting as (the insurer's) agent * * * and the court should rule as a matter of law that he was not. * * * "

The plaintiff, on the other hand, requested a peremptory finding that Largent " * * * be considered the insurance company's agent as a matter of law," citing ORS 744.165, the significance of which is discussed below. After extended argument, the trial court granted the defendant's motion for directed verdict, saying:

"The evidence shows me that the acts of the employer, in this case, Mr. Largent, are nothing more than keeping a supply of application forms, claim forms, brochures, withholding premiums and terminating coverage when the employment ceases and such. It is merely administerial and nothing indicates to me that Mr. Largent was given any authority, apparent or actual, to actually represent the insurance company as agent in any respect."

The Court of Appeals, 47 Or.App. 376, 613 P.2d 1115 in a two-line per curiam opinion, affirmed, citing Bowes v. Lakeside Industries, Inc., 297 Minn. 86, 209 N.W.2d 900 (1973).

"INSURER-ADMINISTERED PLANS" VIS-A-VIS "EMPLOYER-ADMINISTERED PLANS"

The defendant asserts:

"The majority rule is that the employer-master policyholder is not the agent of the insurer in a group insurance context. Boseman v. Connecticut General Life Ins. Co., 301 U.S. 196, 57 S.Ct. 686, 81 L.Ed. 1036 (1937); Duvall (Duval) v. Metropolitan Life Ins. Co., 82 N.H. 543, 136 A. 400, 50 A.L.R. 1276 (1927). This longstanding rule is still the majority rule. * * * "

Many courts and commentators also discuss cases such as this in terms of a "majority rule" and "minority rule." See cases cited and discussion in D. Gregg, Group Insurance: Agency Characterization of the Master Policy-holder, 46 Wash.L.Rev. 377 (1971), and R. Borst, Group Policyholder as Agent of Insurer or Group Member, Vol 14, No. 2, Federation of Insurance Counsel Quarterly 11 (1963). Our analysis of the decisions convinces us that many courts, even though they purport to apply a "majority rule" or a "minority rule," actually base their decision upon the facts relating to the division of functions between the insurer and the employer-policyholder, and that any "majority" or "minority" rule is more apparent than real. It is more correct to say that when the plan is exclusively administered by the insurer, as a matter of law no agency relationship exists between the insurer and the employer. But if the employer performs all of the administration of the policy, an agency relationship exists between the insurer and the employer, as a matter of law. Between these two extremes, as the division of functions becomes less separate, or to put it another way, as the employer assumes responsibility for more administrative or sales functions which are customarily performed by an insurer, a question of fact will...