Smith v. Westland Life Ins. Co.

• Decision Date: 28 August 1975
• Docket Number: S.F. 23205
• Parties: , 539 P.2d 433 Delores J. SMITH, Individually and as Administratrix, etc., Plaintiff and Appellant, v. WESTLAND LIFE INSURANCE COMPANY, Defendant and Respondent.
• Court: California Supreme Court

Page 649

123 Cal.Rptr. 649

15 Cal.3d 111, 539 P.2d 433

Delores J. SMITH, Individually and as Administratrix, etc., Plaintiff and Appellant, v. WESTLAND LIFE INSURANCE COMPANY, Defendant and Respondent.

S.F. 23205.

Supreme Court of California In Bank.

Aug. 28, 1975.

Donald P. McCullum and Charles O. Tribel, Jr., Oakland, for plaintiff and appellant.

John R. Pascoe, Hancock, Rothert & Bunshoft, San Francisco, for defendant and respondent.

SULLIVAN, Justice.

Plaintiff Delores J. Smith brought this action as the widow and administratrix of the estate of Solomon Smith, Jr., against Westland Life Insurance Company ¹ (Westland) to recover $10,000 under a temporary life insurance contract allegedly insuring the life of her husband at the time of his death. Westland denied liability, claiming that no contract of insurance was in effect at the time Smith died. After a nonjury trial, the court entered judgment in favor of defendant Westland and against plaintiff. Plaintiff appeals.

The facts of the case are not in dispute. On April 8, 1963, Reed Evans, ² a soliciting agent for Westland, called on Solomon Smith at his home for the purpose of selling him a life insurance policy. At this meeting, Smith agreed to purchase the following insurance coverage: (1) basic life insurance in the amount of $3,000, (2) mortgage security protection in the amount of $8,000, (3) accidental death benefits in the amount of $3,000 and (4) a provision for waiver of premium in the event of total disability. Evans informed Smith that, based on his age and his being a standard risk, the monthly premium for such coverage would be $14.66. Satisfied with these terms, Smith signed an appropriate application prepared by Evans. Smith paid the first month's premium and received from Evans a conditional receipt, ³ sometimes referred to as a 'binder.'

Evans delivered the signed application and the premium payment to his employer, Robert W. Marshall, Jr., a general agent for Westland, who in turn submitted them to the insurance company. Westland began its investigation to determine whether Smith was eligible for the above coverage.

About April 15, 1963, at the request of Westland, Smith was examined by a medical doctor who transmitted to Westland a report indicating that Smith was a 'first class' risk. ⁴ At the same time, Westland requested an investigative report by an independent agency as to Smith's employment, finances, health and habits of living this was received by the company on April 16, 1963.

Westland thereupon completed the processing of Smith's application and on April 24, 1963, issued to him a policy of insurance which 'modified' the coverage applied for by eliminating the provisions for accidental death benefits and for waiver of premium in the event of total disability, and by increasing the premium to $19.23 per month. The reason given by Westland for these changes was that Smith's employment as a railroad laborer was considered to be hazardous.

Westland delivered the policy to its general agent, Marshall, with instructions that it would not take effect until Smith had signed an amendment to the application specifying the proposed changes in coverage and premium rate and Westland had received a copy of the amended application together with an additional $4.57 for the first month's premium.

Evans, the soliciting agent, promptly went to Smith's home and submitted the modified policy to him for his approval, informing Smith of the increased monthly premium and of Westland's unwillingness to issue a policy providing for either accidental death benefits or a waiver of premium. Smith refused to accept the policy as amended and refused to pay the additional premium. Evans left, taking the policy with him; he said nothing to Smith about terminating negotiations or refunding the premium. Evans informed his employer, Marshall, of these events and suggested that the latter, a more experienced salesman, call on Smith and try to persuade him to accept the policy as modified.

After a number of unsuccessful attempts, Marshall finally arranged to visit Smith at his home on the evening of May 17, 1963. He again submitted the proposed policy to Smith and explained the changed provisions. The latter once again refused to execute the amended application or to pay the additional premium. Concluding the conversation Marshall told Smith that the premium he had paid would be refunded. ⁵

On the following morning, May 18, Smith died in an automobile accident. Informed of the death one or two days later, Marshall returned the policy to Westland and requested that the company refund Smith's premium. On May 23, 1963, Westland mailed to the Smith residence its check in the sum of $14.66. On July 29, 1963, plaintiff was appointed administratrix of her husband's estate. On December 20, 1963, she notified Westland of Smith's death and demanded payment of benefits under the form of policy originally applied for. Westland refused to make any payments, asserting that no insurance was in force at the time of Smith's death. This action followed.

The trial court found the facts to be substantially as we have related them above and concluded that the conditional receipt for the first premium delivered to Smith on April 8, 1963, created a provisional contract granting temporary insurance on his life.

In rendering its decision in favor of Westland, the court ruled that as a matter of law a contract of temporary insurance is terminated upon the rejection of the application by the insurance company and the giving of notice thereof to the insured. In so ruling, the court held that a return of the premium paid by Smith was not a condition precedent to the effective termination of his temporary insurance coverage, in spite of the fact that Westland was under a contractual obligation to refund the premium if it declined to issue the desired policy. ⁶ Applying this rule and basic principles of contract law, ⁷ the court further concluded that Westland's issuance of an insurance policy in different form than that described in Smith's application constituted both a rejection of the application and a counteroffer which Smith never accepted. On this basis, the court held that the temporary insurance on Smith's life was effectively terminated prior to his death by Westland's rejection of his application and by its notice of said rejection to Smith through its agents Evans and Marshall. Judgment was entered accordingly. This appeal followed.

Westland concedes before us, as it did in the court below, that under California law, upon Smith's execution of the application for insurance on April 8, 1963, and his contemporaneous payment of the first month's premium, there was immediately created a contract of temporary insurance on his life with coverage as applied for. This contract is based upon the language of the conditional receipt given Smith for the premium payment. ⁸ Under the terms of this receipt, if the applicant paid the premium at the time he applied for insurance, coverage would take effect as of the date of the application or the date of medical examination, whichever was later, provided that the company determined that he was entitled to the insurance on the plan requested. In Ransom v. Penn Mutual Life Ins. Co. (1954), 43 Cal.2d 420, 274 P.2d 633 we held that such a provision in an insurance application 'gives rise to a contract of insurance immediately upon receipt of the application and payment of the premium, and that the proviso that the company shall be satisfied that the insured was acceptable at the date of the application creates only a right to terminate the contract if the company becomes dissatisfied with the risk before a policy is issued.' (Id. at p. 424, 274 P.2d at 635.)

Thus, the sole issue confronting us in the case at bench is whether, prior to Smith's death, Westland effected a termination of the above contract of temporary insurance.

Plaintiff urges that this question must be answered in the negative. She argues that Westland's issuance of an amended policy and the communication of this fact to her husband by Westland's agents in an effort to persuade him to accept the modified form of coverage, unaccompanied by a return of the premium paid, were not sufficient to terminate the temporary contract of insurance prior to her husband's death. She asserts that an insurer does not terminate temporary coverage until the applicant receives both unequivocal notice of rejection and a refund of his premium. As the rejection was not final and as Westland did not refund Smith's premium until after his death, plaintiff contends that the temporary insurance was still in effect when her husband died.

To begin with, we note that the record contains substantial evidence to support the trial court's finding that on the evening before Smith's death, Westland, through its general agent Marshall, informed him that the company refused to issue the policy applied for and promised to refund his pre mium. Therefore, we must assume for purposes of this appeal that before he died Smith received unequivocal notice of the rejection of his application. Our inquiry therefore narrows to this crucial point: whether a contract of temporary insurance can be terminated only by (a) actual rejection of the application for insurance communicated to the insured by appropriate notice thereof and (b) refund of the premium payment.

We intentionally left this question unanswered in Ransom. ⁹ Furthermore, our attention has not been directed to, nor have we found, any reported California decision purporting to authoritatively determine this issue. ¹⁰ Nor do we find substantial guidance in the decisions of our sister states.

We have been referred to decisions of sister states containing language largely dicta supportive of a number of theories, ranging from the view that termination occurs immediately upon the insurer's uncommunicated decision to reject the application ...