Vernon v. Provident Life & Acc. Ins. Co., 20172

• Decision Date: 19 February 1976
• Docket Number: No. 20172,20172
• Citation: 222 S.E.2d 501,266 S.C. 208
• Court: South Carolina Supreme Court
• Parties: Margaret VERNON, Administratrix of the Estate of Andrew P. Gary et al., Respondents, v. PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Appellant.

Page 501

222 S.E.2d 501

266 S.C. 208

Margaret VERNON, Administratrix of the Estate of Andrew P.

Gary et al., Respondents, v. PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY, Appellant.

No. 20172.

Supreme Court of South Carolina.

Feb. 19, 1976.

Turner, Padget, Graham & Laney, Columbia, for appellant.

John A. Martin, Winnsboro, and Richard M. Kennedy, Jr., Columbia, for respondents.

LITTLEJOHN, Justice:

Plaintiffs, as beneficiaries, brought this action to recover the proceeds of a life and accident insurance contract, allegedly procured by the decedent, Andrew P. Gary, from defendant Provident Life and Accident Insurance Company (Provident), which denied the existence of the contract and any liability on its part.

Upon trial of the case, the jury returned a verdict for plaintiffs. Provident has appealed, alleging as error the failure of the trial judge to grant its motions for non-suit, directed verdict, judgment n.o.v., and for a new trial. It also alleges error in the admission of certain evidence and in the charge to the jury. After consideration of the record, we overrule Provident's exceptions and affirm the verdict below.

A careful review of the facts is necessary for an understanding of the issues.

On March 14, 1974, decedent executed an application for one hundred twenty-five thousand dollars ($125,000) life and accident insurance with Provident. He was solicited by an independent broker (agent for Provident), who had previously arranged insurance with another company for decedent. Because this previous insurance had lapsed, the broker suggested decedent apply for a policy with Provident, a recommended the plan and amounts for which application was made.

On the date the application was made, decedent paid the first month's premium of $87.85, which is the standard premium for a man his age and size, for which he received a conditional receipt. This receipt was for coverage from March 14, 1974 to April 14, 1974. It read in part as follows:

'BY ACCEPTANCLE OF THIS RECEIPT THE HOLDER AGREES AS FOLLOWS:

'If both of the following conditions precedent are fulfilled:

'(a) if the medical examinations, if any required by the Company are completed; and

'(b) if the Company is satisfied after such investigations and such medical examinations as it may require that the Proposed insured is on the date of the application insurable and qualified under the Company's rules and standards for insurance exactly as applied for in Question 4 of the application which bears the same number as this receipt and at standard premium rates,

then said insurance shall take effect and be in force subject to the provisions of the policy applied for from the date of the application. Unless both of the conditions precedent are fulfilled, no insurance shall be in force under this receipt and the only liability of the Company shall be to return this payment in the form of the Company's check upon surrender of this receipt.'

There is no contest relative to condition (a); Provident rejected the application under condition (b) after the applicant died.

On March 15, 1974, Dr. Harold Miller, a physician selected by Provident, examined the decedent and conducted tests called for in the medical portion of the company's application form. He unreservedly recommended the applicant (decedent) as a first class risk for insurance, with the added notation, 'However, he does have a rapid heart rate.'

On March 18, 1974, decedent's application, medical report, and premium payment were forwarded by mail to Provident's home office in Tennessee. On March 19, 1974 decedent was killed in an automobile accident. The application and allied papers were received at Provident on March 20, which was one day after applicant's death.

Soon after March 20, Provident undertook an investigation to determine whether it should accept the application, and thus be liable immediately for $125,000 on the insurance contract, or reject the application and return the first month's premium in the amount of $87.85. It sent to the Columbia area Conard L. Heath, a former F.B.I. agent, to make an investigation in reference to the decedent, for the purpose of helping the insurance company to process the application. He filed a 12-page report, after which Provident rejected the application, 'in view of the significance of his (decedent's) past health history . . ..' This action ensued.

In the life insurance business, there are in use various forms of binding receipts which at least conditionally afford an applicant interim coverage between the date of the application and the actual issuance and delivery of the policy. Such binding receipts have been the source of a great deal of litigation. In determining whether interim coverage is afforded by a particular receipt, the specific language of the receipt must be taken into account. Liability of the insurer, if any, is dependent upon the language of the receipt, the facts of the particular case and the intention of the parties.

An interesting discussion on the subject is to be found in 43 Am.Jur. (2d) Insurance § 220 Et seq. Also see 2 A.L.R.2d 936, and Brown v. Equitable Life Ins. Co. of Iowa, 60 Wis.2d 620, 211 N.W.2d 431 (1973).

The practice of some companies in providing in their applications that the contract of insurance shall not take effect until the application has been approved by the company, the first premium paid by the applicant, and the policy delivered, has substantial advantage. It eliminates misunderstandings and law suits. On the other hand, there are advantages to both the insurance company and the applicant in providing coverage from the moment the application is signed and the initial premium paid to the company's agent. The applicant has the advantage of immediate insurance coverage. He normally feels that he is obliged to accept the policy upon delivery and pay the premiums required thereafter. The advantage to the insurance company is in the fact that the applicant is not likely to shop around for other coverage and renege on his contract.

The law of averages dictates that occasionally persons will die after the application and before the issuance of the policy. Human nature dictates that the insurance company will pursue every facet of the 'binding receipt' and protect its rights to the fullest.

It is plaintiff's basic contention that decedent complied with the conditions precedent for insurance from the date of the application and that Provident arbitrarily and unreasonably rejected the application after it learned of the death.

Provident basically contends that the decedent made false representations to the physician who completed the medical portion of the application, thus influencing his recommendation. It further argues that decedent was not insurable at standard rates on the date of the application according to the company's rules and standards.

While alleging, in its answer, that the decedent gave false answers in the application and made false representations relied upon by the physician in making his report, it does not contend that it may avoid the contract solely because of such answers and representations. The answer of Provident alleges that the decedent 'on the date of the application, was not insurable and qualified under the Company's rules and standards for insurance exactly as applied for in Question 4 of the application at the standard premium rates.' Question 4 and its answer set out the plan of insurance and the amounts.

The receipt upon its face appears to lodge with Provident an almost arbitrary power to decide whether the decedent was on March 14, 1974, insurable under its 'rules and standards for insurance.' Parties may contract to leave such a decision to one of the parties, but the law requires that in making the decision the party who is vested with the power of decision must act fairly, honestly and reasonably, and that the other party will not be bound by that decision when it is shown that the power of decision has been exercised arbitrarily, capriciously and unreasonably. In such a case, not involving matters of personal taste and convenience, neither party has the arbitrary right to decide the existence of a particular fact upon which the obligation of the contract depends.

The judge, in his charge, set out the real issue before the court:

'The issue for your determination in this case is whether or not the action of the insurance company, Provident, in rejecting this particular application under the terms of this particular receipt which is binding upon the parties, was exercised arbitrarily, capriciously, and unreasonably. If so, the Plaintiffs are entitled to recover. If not, the Defendant is entitled to a verdict.'

It is contention of Provident that the judge should have held as a matter of law that it did not act arbitrarily, capriciously or unreasonably, and should have granted the motions for a nonsuit, a directed verdict and for judgment notwithstanding the verdict.

It should be noted that the receipt prepared by Provident provided that the company must be 'satisfied . . . that the Proposed insured is on the date of the application insurable and qualified Under the Company's rules and standards for insurance.' (emphasis aded.) In order to determine whether Provident acted fairly and reasonably, one needs to refer to those rules and standards. Rejection or acceptance of an application under one set of rules and standards might be fair and reasonable, but might be unfair under another set of rules and standards. Provident is in the uncomfortable position of having no identifiable rules and standards, even though the receipt refers to 'the Company's rules and standards.' In the trial of the case, Mr. Owen C. Lesslie, Jr., Assistant Vice President of Provident's Life Department, admitted that the company had no rules and standards of its own. He said that his company used standards of Lincoln National Life, of Connecticut Life General, and of ...