Walker Bank & Trust Co. v. First Sec. Corp.

• Decision Date: 03 August 1959
• Docket Number: No. 8890,8890
• Citation: 341 P.2d 944,9 Utah 2d 215
• Parties: d 215 WALKER BANK & TRUST COMPANY, as Guardian of the Estates of Aurora Margarita Gallagher and Kelly Millicent Gallagher, Minors, Plaintiff and Respondent, v. FIRST SECURITY CORPORATION, a corporation, Defendant and Appellant.
• Court: Utah Supreme Court

Page 944

341 P.2d 944

9 Utah 2d 215

WALKER BANK & TRUST COMPANY, as Guardian of the Estates of Aurora Margarita Gallagher and Kelly Millicent Gallagher, Minors, Plaintiff and Respondent, v. FIRST SECURITY CORPORATION, a corporation, Defendant and Appellant.

No. 8890.

Supreme Court of Utah.

Aug. 3, 1959.

Ray, Quinney & Nebeker, A. U. Miner, Salt Lake City, for appellant.

Gustin, Richards & Mattsson, Salt Lake City, for respondent.

CROCKETT, Chief Justice.

The Commercial Bank of Utah failed to pay premiums on an insurance policy upon the life of Nancy Gallagher in accordance with an authorization furnished it by her. The policy lapsed and after her death Walker Bank & Trust Company as guardian of her children, the beneficiaries, sued and recovered judgment for the amount of the policy. First Security Corporation, successor to Commercial Bank, appeals.

Nancy Gallagher, the insured, took out the policy with American Investors Life Insurance Company of Dallas, Texas, August 19, 1955. She signed a 'Sight Draft Authorization,' which requested and authorized the Commercial Bank at Spanish Fork, Utah, to charge her account with drafts to be drawn by the insurance company for the monthly premiums on the policy. The bank accepted the authorization and paid drafts for the months of September, 1955, through March, 1956. Some time after the March payment the bank mislaid the authorization, which resulted in the drafts for April and May, 1956, being returned to the insurance company with the notation 'Not authorized.' The bank did not notify the insured of the dishonored drafts and no further premiums were paid. The policy became lapsed and was so when the insured died on August 12, 1956. The insurance company refused to pay the policy proceeds to the beneficiaries. This action was brought on the ground that negligence of the bank in failing to honor the April and May drafts resulted in the lapse of the policy and loss of the proceeds to the children.

Defendant claims (1) that it owed no duty to the beneficiaries because there was no privity of contract with them; (2) that it was the insured's own failure to see that the premiums were paid which caused the lapse of the policy; and (3) that a 'hold harmless' provision in the authorization protected it from any liability in connection with its agreement to honor the drafts.

It is often stated that privity of contract is a prerequisite to holding one liable for breach of a duty thereunder. ¹ 1] But it is also recognized that there are duties to others than the immediate parties, where from the nature of the contract, it is plainly evident to the promissor that the contract is for the benefit of third persons and that a failure to discharge his duty would adversely affect them.

In considering the bank's duties to the beneficiaries, it is appropriate to look to the foundations of that relationship. Between the bank and depositor it is that of debtor-creditor to the extent of the customer's balance, ² and it is the bank's duty to pay up to that amount to anyone on the depositor's order and in conformity with his direction, ³ and this is also usually true even where the depositor authorizes another to draw on his account. ⁴ In any event, banks customarily do so because they are competing for business on the basis of the services they offer. It is apparent that this was the reason that the defendant bank agreed to perform this service for the insured. Whether the bank could have refused is not material. The fact is that it did not refuse, but accepted and complied therewith for seven months, permitting the insured to assume that the premiums were being paid.

Under the circumstances here shown it was evident to the bank that the monthly drafts covered insurance premiums and that failure to pay them would result in lapse of the policy and loss of protection thereunder. Having accepted the responsibility, the duty to fulfill it ran both to the depositor and to her beneficiaries for whom she maintained the policy, and the bank was obliged to exercise due care in performing that duty at least until it notified the insured to the contrary. Its failure to do so renders it liable to the beneficiaries who were harmed thereby despite lack of privity between them. ⁵

Defendant attacks as arbitrary and unreasonable the refusal of the trial court to find that the lapse of the policy was caused by the insured's own willful or negligent failure to pay the premiums. It is important to keep in mind that the burden of proof on that issue was upon the defendant: if reasonable minds could remain unconvinced that it was her failure to use reasonable care in regard to this business which caused the loss, the refusal of the court to find that her conduct precluded recovery must stand. ⁶

On this point the defendant's contention is predicated upon the hypothesis that Nancy Gallagher must have become aware that the policy had lapsed. Although the bank concedes that it gave her no notice of its discontinuance of paying the premiums, it claims that she had notice that they were not being paid through her monthly bank statements, absent deductions and cancelled drafts; and also through notice of lapse which was mailed to her in July, 1956, by the insurance company. So far as the latter is concerned, there is no indication in the evidence that she received it. The insurance company sent it to her Laredo, Texas address, but she was residing at the time in Salt Lake City, where she remained until her death. There is, of course, no presumption that a letter, even though mailed in regular course, was received by her when it was not addressed where she was living. ⁷

After she had made the arrangements with the bank to honor the drafts and pay the premiums, it would not be unreasonable for her to repose some confidence in it and assumed that the arrangement was being carried out. Admittedly it is usual for depositors to pay attention to their bank statements. Yet the court in determining the facts may not have regarded it as out of the ordinary for one to fail to make a careful audit of all checks and withdrawals from a bank account each month under the apprehension that the bank was not keeping its promise. We do not regard the evidence as to the bank statements to be such as to compel a finding that she had notice and that the proximate cause of the lapse of the policy was her negligent or wilful faulure to further attend to the payment of premiums.

The 'hold harmless' provision in the 'Sight Draft Authorization' under which defendant claims protection reads thus:

'I understand and agree that your compliance herewith shall constitute a gratuity and courtesy accorded me as your customer, and that you assume or incur no liability whatsoever in the premises, and I further agree to hold you harmless of and from any and all claims arising hereunder.' (Emphasis added)

Assuming that in the absence of some consideration of public policy militating against it, one may contract to protect himself against liability for loss caused by his negligence, it is nevertheless well settled that contracts in which a party attempts to do so are subject to strict construction against him; and further, that he will be afforded no protection unless the preclusion against negligence is clearly and unequivocally stated. ⁸

It will be noted that the language quoted above purports only to protect the bank from liability arising from its compliance with the authorization, indicating that if it did so it would 'incur no liability whatsoever.' The authorization was obviously signed and given to the bank for the sole purpose of getting the premiums paid. The fair deduction is that it was the understanding of both the insured and the bank that they would be paid. It is likewise not unreasonable to assume that what the bank was being protected for was the debiting of the account for the amount drawn; and that the drawer of the drafts might draw for too much money, or too many drafts, or that some other such mistake might occur for which it did not want to be responsible. But there is no provision that it would be protected in the event of entire failure to fulfill the arrangement. If it did so, the depositor would gain very little from this supposed 'service' except an illusory promise from the bank that 'maybe we will and maybe we won't' pay the premiums, creating a situation of uncertainty which would hazard the loss of the policy at any time unless closely checked on by the insured. If she were to be placed in such a vulnerable position it...