Thompson v. Occidental Life Ins. Co.

Decision Date27 August 1973
Docket NumberS.F. 22951
Citation9 Cal.3d 904,513 P.2d 353,109 Cal.Rptr. 473
CourtCalifornia Supreme Court
Parties, 513 P.2d 353 Ruth M. THOMPSON, Plaintiff and Respondent, v. OCCIDENTAL LIFE INSURANCE COMPANY OF CALIFORNIA, Defendant and Appellant.

Sullivan, Roche & Johnson, Theodore A. Kolb, Gerald J. O'Connor, and Ronald H. Kahn, San Francisco, for defendant and appellant.

Bennett, Van De Poel, Campbell & Ginder, Bryant M. Bennett, Oakland, and Joan Mendelson Sautter, San Francisco, for plaintiff and respondent.

BURKE, Justice.

We are asked to decide whether, under the particular facts of this case, a contract of life insurance existed between plaintiff's deceased spouse and defendant insurance company, and if so, whether decedent's alleged misrepresentations regarding the state of his health and past medical history rendered that contract void and unenforceable. The trial court, aided by an advisory jury, found in plaintiff's favor and awarded her $200,000, plus interest. Defendant appeals. We have concluded that the judgment should be affirmed.

Donald L. Thompson, husband of plaintiff Ruth M. Thompson, was insured by defendant Occidental Life Insurance Company of California ('Occidental') under a $15,000 life insurance policy which provided for double indemnity for accidental death. Concerned about the adequacy of his medical and life insurance, Thompson contacted John Kelly, the Oakland manager of Occidental, for the purpose of increasing his insurance coverage. Kelly then met with Thompson's accountant to determine what type of policy Thompson should purchase and decided upon a five-year convertible term policy for $100,000 with double indemnity for accidental death. On August 5, 1964, Thompson signed an application for the recommended policy and on August 11 submitted to a medical examination.

Two days after the medical examination, Kelly went to Thompson's office and requested payment of the first premium on the policy. Although his testimony was somewhat imprecise, perhaps because of the passage of time, Kelly recalled explaining to Thompson that if he failed to pay the first premium, he would not be covered in the meantime even if he were ultimately found insurable. However, Kelly was not able to recall whether he actually told Thompson that a premium payment would not assure interim coverage should Thompson prove uninsurable. At one point in his deposition testimony, read into the record at trial, Kelly stated that 'I was thinking in terms of suppose this guy goes and completes his application, everything is done, and he wouldn't have been insured. Here he has no coverage because he hasn't any premium paid, and that was all that was in my mind. I wasn't thinking in terms of all the technical stuff in here now . . ..' Thompson paid the requested premium to Kelly the next day.

Thompson's application was received by Occidental's underwriters on August 17. The underwriters decided to require an additional medical examination. On August 24, before he was informed of this decision, Thompson sustained an accident (falling into his bathtub and nearly suffocating) which resulted in his death four days later. Occidental determined that Thomp son's death was accidental and paid plaintiff, as beneficiary, $30,000 as double indemnity under the $15,000 life insurance policy. However, Occidental notified plaintiff on September 4 that it would neither issue nor make payment under the $100,000 life insurance policy because the additional medical examination had not been completed. Thereafter, Occidental returned to plaintiff the first premium by a check drawn on its own account. Plaintiff retained the check and sued to recover $200,000 as double indemnity under the $100,000 policy and, as indicated above, judgment was entered awarding plaintiff $200,000 and $82,108.60 as interest. Defendant appeals.

1. Formation of Insurance Contract

Defendant's first contention is that no insurance contract ever came into existence, since no policy was ever delivered to Thompson, since he had not completed the second medical examination required by Occidental, and since Thompson was ultimately found to be uninsurable by Occidental. To support its contention, defendant relies on the language of its own standard form application executed by Thompson. 1 This court, however, in Ransom v. Penn. Mutual Life Ins. Co., 43 Cal.2d 420, 274 P.2d 633, considered similar contract language 2 in an almost identical factual setting 3 3 and resolved the issue in favor of the insured. In Ransom (p. 423 274 P.2d p. 634), this court had to 'determine whether a contract of insurance arose immediately upon receipt by defendant of the completed application with the premium payment, subject to the right of defendant to terminate the agreement if it subsequently concluded that Ransom was not acceptable, or whether . . . (defendant's) satisfaction as to Ransom's acceptability for insurance was a condition precedent to the existence of any contract.'

We found in Ranson (p. 425, 274 P.2d p. 635) 'that a contract of insurance arose upon defendant's receipt of the completed application and the premium payment' and held that the 'understanding of an ordinary person is the standard which must be used in construing the contract . . ..' We also found that an ordinary person reading the application could reasonably believe that 'he would secure the benefit of immediate coverage by paying the premium in advance of delivery of the policy.'

We do not believe that the language of the application in Ransom reasonably can be distinguished from the language of the application and receipt in the present case. 4 As the United States Court of Appeals, Ninth Circuit, observed in Metropolitan Life Insurance Company v. Grant, 286 F.2d 307, 309, the California courts make 'no attempt . . . to draw fine distinctions from the various phraseology used in the numerous policies . . ..' Of course, an insurance company is not precluded from imposing conditions precedent to the effectiveness of insurance coverage despite the advance payment of the first premium. However, as Ransom explains, any such condition must be stated in conspicuous, unambiguous and unequivocal language which an ordinary layman can understand. As the insurer is responsible for drafting the application, it is appropriate that he be required to choose plain and unequivocal terms. (See also Slobojan v. Western Travelers Life Ins. Co., 70 Cal.2d 432, 74 Cal.Rptr. 895, 450 P.2d 271; Young v. Metropolitan Life Ins. Co., 272 Cal.App.2d 453, 77 Cal.Rptr. 382, 78 Cal.Rptr. 568; Koorstad v. Washington Nat. Ins. Co., 257 Cal.App.2d 399, 64 Cal.Rptr. 882; Wernecke v. Pacific Fidelity Life Ins. Co., 238 Cal.App.2d 884, 48 Cal.Rptr. 251; Brunt v. Occidental Life Ins. Co., 223 Cal.App.2d 179, 35 Cal.Rptr. 492; Metropolitan Life Insurance Company v. Wood (9th Cir.) 302 F.2d 802; Metropolitan Life Insurance Company v. Grant, Supra.)

Applying the test of the foregoing cases, we conclude that the trial court properly could find that a contract of insurance arose upon Thompson's payment of the first premium following his completion of the application and initial medical examination. Neither the language in the application and receipt nor the 'explanation' given by Kelly was clear and unambiguous, and an ordinary man in Thompson's position might well assume that payment would bring immediate protection, at least until the insurer had notified him that he was uninsurable. (See Wernecke v. Pacific Fidelity Life Ins. Co., Supra, 238 Cal.App.2d 884, 887, 48 Cal.Rptr. 251.) In Kelly's words, it is probable that 'the technical stuff' set forth in the application and receipt was never effectively brought to Thompson's attention. Of course, nothing would have prevented Occidental from rescinding its contract with Thompson During his life, upon determining that he was uninsurable. But, under Ransom, that right to rescind must be held to have terminated upon Thompson's death, at least in the absence of a material misrepresentation on Thompson's part.

In a further attempt to support its contention that no contract of insurance ever came into existence, Occidental asserts that Kelly did not have authority to act on its behalf and waive the application's requirement that a policy be delivered before coveraege would commence. Occidental again relies on the language of its own standard form contract which provided that 'No waiver or modification shall be binding upon the Company unless in writing and signed by the President or a Vice President and the Secretary or an Assistant Secretary.' Upon payment of the first premium by Thompson, Kelly modified the completed contract form by changing the 'mode of premium payment' from 'annual' to 'monthly,' scratching out 'C.O.D.' (which evidently meant 'collect premium on delivery of policy') and substituting $205' as 'payment with application.' Occidental contends that these 'unauthorized' modifications were not binding upon the company because of the above quoted language, which assertedly put Thompson on notice that Kelly had no authority to modify the standard language of the policy application.

We cannot accept Occidental's position, for to do so would place undue burdens upon the applicant for insurance to inquire of soliciting agents regarding their authority and to verify the facts by independent inquiry with the company involved. Certainly the language of the application did not expressly deny Kelly's authority to make the modifications at issue, for Kelly might have been one of the designated officers. (Compare Iverson v. Metropolitan Life etc. Co., 151 Cal. 746, 750--751, 91 P. 609.) Furthermore, the particular 'modifications' are minor in nature, and relate only to payment of the premium in advance and in installments, common practices which an insured could reasonably conclude were entirely within the discretion of the agent to accept. The...

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