Rohde v. Massachusetts Mut. Life Ins. Co.
| Decision Date | 13 October 1980 |
| Docket Number | No. 78-3582,78-3582 |
| Citation | 632 F.2d 667 |
| Parties | Patricia ROHDE, Plaintiff-Appellant, v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Michael R. Kube, Tricarichi, Carnes & Kube, Cleveland, Ohio, for plaintiff-appellant.
C. Richard Andrews, Burgess, Fullmer, Parker, Steck & Andrews, Cleveland, Ohio, for defendant-appellee.
Before LIVELY and BOYCE F. MARTIN, Jr., Circuit Judges, and PECK, Senior Circuit Judge.
This is a diversity action under Ohio law in which the district court entered judgment for the defendant insurance company declaring that no insurance contract existed on the life of plaintiff's deceased husband. Plaintiff contends that defendant's bad faith determination that her husband was an unacceptable risk entitles her, as beneficiary, to recover the full value of the insurance policy applied for by her husband. We agree and reverse the judgment of the district court.
Plaintiff is the widow of a man who applied for life insurance, arranged for payment of the initial premium, and took the required physical examination all on the same day. In exchange for these acts, defendant's agent completed a form designated as a "Conditional Receipt." 1 This form contained a promise by the defendant to insure the applicant under the policy sought, effective the latest date on which the applicant completed the application and physical examination. The receipt further stated that defendant had no obligation except to return payment unless the company determined that as of the completion of the physical and application the applicant was an acceptable risk under its "limits, rules, and standards."
The same day that the defendant applied for life insurance he died of an apparent heart attack. Acting under the condition of the receipt requiring the defendant to determine whether the applicant was an acceptable risk, the defendant investigated the application of plaintiff's husband and determined that the deceased had been uninsurable for the policy sought. Accordingly, defendant denied liability under the agreement with the decedent and returned the premium payment to plaintiff.
An application for life insurance is an offer to purchase a policy and the insurer must accept before a contract exists. During the time the offer is outstanding and unaccepted the applicant has the power to revoke the offer. Such revocation would not only deny the insurer the right to accept and complete a sale, but also would be likely to cause the insurer to lose the expense of processing and investigating an application.
Insurers discourage or prevent the revocation of offers by use of conditional receipts or "binders" that give the insurer the option of ultimately accepting or rejecting the offer while making the offer irrevocable by conditionally accepting it. The most straightforward of these binders accept the offer and, as consideration for the applicant's promise to purchase insurance, create immediate insurance for the applicant while reserving a right of the insurer to cancel all insurance after an opportunity to investigate the application.
The more prevalent form of binder, however, seeks to make the applicant's offer irrevocable without giving the applicant interim insurance in exchange. See 7 Williston on Contracts, § 902A, pp. 197-203 (3d. ed. 1963). In this form insurance is promised to begin as of the date of the application or receipt subject to the qualification that the application must first be accepted or approved before any coverage begins. With these two provisions standing side-by-side in the binder, all that the applicant actually receives in exchange for his promise to purchase is the possibility of interim insurance. If the insurer does not approve the application, then no coverage ever exists. Of course, by the time the insurer approves or rejects, it will be likely to know whether the applicant has incurred a covered loss and can exercise its option to reject. Thus, the possibility of interim coverage is largely illusory under this type of binder. Recognizing that such binders are confusing to applicants and that applicants generally would be unlikely to enter such bargains if they actually understood them, courts have tended to find that binders that condition liability on "approval" of the insurer are ambiguous and that the parties to such contracts actually intend interim insurance as consideration for the applicants' promises to purchase insurance if the insurer approves. E. g., Leube v. Prudential Life Insurance Company of America, 147 Ohio St. 450, 453, 72 N.E.2d 76 (1947).
Plaintiff in this case argues that the condition contained in defendant's receipt is ambiguous and that the receipt should be liberally construed to provide interim insurance for the applicant pending the defendant acting on the condition. We agree with the finding of the district court that this condition is unambiguous and cannot be construed to provide the applicant with coverage prior to defendant's determination that the applicant is "insurable."
Unlike conditions which make an insurer's liability depend solely on the insurer's approval of the application, the condition contained in defendant's receipt requires that the defendant determine whether the applicant meets limits, rules and standards of the defendant company regarding the policy sought by the applicant. This condition does not involve judgments based on subjective factors, but rather considerations of actuarial and medical prediction balanced against the company's ordinary risk assignment practices. The defendant's satisfaction or dissatisfaction with the risk represented by the applicant's offer must be based on a reasonable examination of the application. See Schatzinger v. Lake View Land & Improvement Co., 23 O.C.D. 247, 250 (1910), aff'd, 87 Ohio St. 505, 102 N.E. 1126 (1912); Clewell v. Toledo Metal Sign & Advertising Co., 34 O.C.D. 40, 42 (1903), aff'd, 71 Ohio St. 471, 74 N.E. 1134 (1904). The defendant's liability under the contract...
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