State Farm Mut. Auto. Ins. Co. v. Khoe

• Decision Date: 16 February 1989
• Docket Number: No. 88-1709,88-1709
• Citation: 884 F.2d 401
• Parties: STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a corporation, Plaintiff-Appellee, v. Nena KHOE, Joseph Khoe, Daniel Khoe, a minor, Michael Khoe, a minor, and Michelle Khoe, a minor, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 401

884 F.2d 401

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, a corporation, Plaintiff-Appellee, v. Nena KHOE, Joseph Khoe, Daniel Khoe, a minor, Michael Khoe a minor, and Michelle Khoe, a minor, Defendants-Appellants.

No. 88-1709.

United States Court of Appeals Ninth Circuit.

Submitted Feb. 16, 1989. ^*

Decided April 24, 1989.

As Amended on Denial of Rehearing and Rehearing En Banc Aug. 16, 1989.

Barbara K. Ratliff, Los Angeles, Cal., for defendants-appellants.

James P. Waggoner and Jeffrey T. Hammerschmidt, McCormick, Barstow, Sheppard, Wayte & Carruth, Fresno, Cal., for plaintiff-appellee.

Before CHOY, SNEED and NOONAN, Circuit Judges.

CHOY, Circuit Judge:

Nena Khoe, Joseph Khoe, Daniel Khoe, Michael Khoe, and Michelle Khoe (collectively referred to as "the Khoes") appeal from the district court's entry of summary judgment in favor of State Farm Mutual Automobile Insurance Company ("State Farm") in State Farm's action for a declaratory judgment. State Farm sought a declaration that no insurance contract was formed between State Farm and the Khoes when Nena Khoe signed an application for insurance which contained a clause saying coverage would not be effective until a policy was issued. Jurisdiction in the district court was based on diversity of citizenship. 28 U.S.C. Sec. 1332(a)(2). We have jurisdiction under 28 U.S.C. Sec. 1291 and we reverse.

FACTS

In April 1986, Joseph Khoe contacted State Farm to inquire about obtaining health insurance. On April 21, 1986, State Farm agent Pamela Moring went to the Khoes's home to complete an application for health insurance for the Khoes. After Joseph Khoe told Mrs. Moring about his medical history, Mrs. Moring suggested that Joseph Khoe's wife Nena should be the primary insured and Joseph Khoe and the children should be on the application as dependents. The completed application listed Nena Khoe as the proposed insured. Joseph Khoe, Daniel Khoe, Michael Khoe, and Michelle Khoe were listed as dependents. Nena Khoe signed the application and gave Mrs. Moring a check for $3,475.86 to pay the first annual premium. State Farm cashed the premium check.

The application for health insurance contained a "conditional receipt" clause which stated that no insurance would be effective unless a policy was issued. The clause also stated that if a policy was issued, coverage would date back to the day the application was signed. Just below the conditional receipt clause were two signature lines, one for the agent and one for the proposed applicant, with a separate typed declaration above each signature line. The declaration above the line signed by Mrs. Moring stated "I have read and explained the Conditional Receipt to the Applicant." The declaration above the line signed by Nena Khoe stated "[t]he agent has read and explained this Conditional Receipt to me. I understand that I will not receive any insurance coverage for my money unless a policy is issued." ¹

The facts are disputed as to whether Mrs. Moring actually did read and explain the conditional receipt clause to Nena Khoe. Nena Khoe contends that she did not read the conditional receipt clause or any other part of the application before she signed the application. ² The Khoes contend that Nena Khoe was not in the kitchen with Joseph Khoe and Mrs. Moring when the application was prepared. Mrs. Moring testified in a deposition that she read and explained the conditional receipt to those persons present in the kitchen at the time the application was taken, and that Joseph Khoe and Nena Khoe were both present in the kitchen at that time.

Joseph Khoe contends that he asked why the premium had to be paid right away and Mrs. Moring responded that if the Khoes paid the premium, they would receive immediate coverage, beginning that day. Mrs. Moring testified that Joseph Khoe attempted to get her to commit that he was fully covered as of the date of the application but she explained to him that there was no coverage at that point unless a policy was later issued and that there would be no coverage at all if a policy was not issued.

Joseph Khoe was hospitalized from June 2, 1986, until July 6, 1986, for injuries he sustained in an accident on May 18, 1986. State Farm alleges that an agent telephoned the Khoes on or about May 12, 1986, and again on May 29, 1986, to inform them that Joseph Khoe's medical history made him noninsurable. On June 23, State Farm sent a letter to Nena Khoe explaining a modified policy offer which would delete coverage for Joseph Khoe and amend coverage for one of the children.

On July 15, 1986, a State Farm agent delivered the modified policy offer to the Khoes. Nena Khoe signed the amendment modifying coverage for one of the children. However, the Khoes refused to sign the amendment deleting Joseph Khoe from coverage unless State Farm would agree to pay for his hospitalization expenses. The State Farm agent left a refund check in the amount of $2,127.10, which represented the portion of the premium for the coverage applied for but not offered in the modified policy offer. The agent explained to the Khoes that if the amendment deleting Joseph Khoe's coverage was not signed, the entire application would be processed as "not taken."

On July 26, State Farm processed the modified policy offer as "not taken." State Farm sent Nena Khoe another refund check for $1,348.76, the remaining balance of the premium originally paid. Joseph Khoe returned both refund checks to State Farm, accompanied by letters dated July 31, 1986, and August 5, 1986. Both letters accused State Farm of fraudulent practices.

On July 18, 1986, Joseph Khoe submitted a claim for approximately $22,000 for costs related to his hospitalization. In July and again in August, Joseph Khoe submitted claims for Michael Khoe, Daniel Khoe, and Nena Khoe for illnesses. State Farm has refused to pay any claims.

On August 26, State Farm sent a letter to Joseph Khoe explaining that neither he nor Nena Khoe ever had a health policy with State Farm and that they did not have any coverage as a result of the April application. State Farm enclosed a new refund check for the total premium amount. On September 9, 1986, State Farm received another letter from Joseph Khoe accusing the company of fraudulent practices and returning the refund check. State Farm made one more attempt to send the refund check to the Khoes but Joseph Khoe returned it to the company in October 1986.

On November 14, 1986, State Farm filed its complaint for declaratory relief and deposited the amount of the refund check with the district court. The Khoes filed a counterclaim alleging breach of contract, breach of statutory duties, fraud, and negligent misrepresentation. The parties then filed cross motions for summary judgment. On February 4, 1988, the district court entered summary judgment for State Farm, holding that no contract of temporary insurance arose under California law because Nena Khoe had signed the conditional receipt which unambiguously stated that coverage would not be effective until a policy was issued. The Khoes filed this timely appeal.

STANDARD OF REVIEW

The district court's grant of summary judgment is reviewed de novo. Bonner v. Lewis, 857 F.2d 559, 561 (9th Cir.1988). Summary judgment is appropriate if, viewing the evidence in the light most favorable to the party opposing the motion, the court finds that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Lundy v. Union Carbide Corp., 695 F.2d 394, 396 (9th Cir.1982), cert. denied, 474 U.S. 848, 106 S.Ct. 143, 88 L.Ed.2d 118 (1985). There is no genuine issue of fact if, on the record taken as a whole, a rational trier of fact could not find in favor of the opponent of the motion. Matsushita Elec. Indus. Co. v. Zenith Radio, 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). In ruling on a summary judgment motion, neither this court nor the district court is permitted to weigh the evidence put forth by the parties or to evaluate the credibility of witnesses. Pepper & Tanner, Inc. v. Shamrock Broadcasting,

Inc., 563 F.2d 391, 393 (9th Cir.1977).

DISCUSSION

California's substantive insurance law governs in this diversity case. James B. Lansing Sound, Inc. v. National Union Fire Ins. Co., 801 F.2d 1560, 1561 (9th Cir.1986). Under California law, a contract of temporary insurance may arise from completion of an application for insurance and payment of the first premium, if the language of the application would lead an ordinary layperson to conclude that coverage was immediate. Smith v. Westland Life Ins. Co., 15 Cal.3d 111, 123 Cal.Rptr. 649, 539 P.2d 433 (1975); Thompson v. Occidental Life Ins. Co., 9 Cal.3d 904, 109 Cal.Rptr. 473, 513 P.2d 353 (1973); Ransom v. Penn Mutual Life Ins. Co., 43 Cal.2d 420, 274 P.2d 633 (1954). In granting summary judgment for State Farm, the district court ruled that the terms of the conditional receipt clause here clearly and unambiguously indicated that there would be no coverage until a policy was issued. The court did not discuss whether Mrs. Moring had read and explained the conditional receipt to Nena Khoe or whether Mrs. Moring had made any oral representation that the Khoes would receive immediate coverage if they paid the premium. We review the district court's interpretation of state law and of the insurance policy provisions de novo. State Farm Fire and Cas. Co. v. Estate of Jenner, 856 F.2d 1359, 1362 (9th Cir.1988); Kemmis v. McGoldrick, 767 F.2d 594, 597 (9th Cir.1985).

I. Existence of a Contract for Temporary Insurance

The California Supreme Court first determined that a contract of insurance arose upon the receipt by the insurance company of a completed application and a premium payment in Ransom v. Penn Mutual Life Ins. Co., 43 Cal.2d 420, 274 P.2d 633, 635 (1954). In that case, the relevant language in the insurance application appeared to give the...