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District Court of Appeal, Third District, California.


Civ. 5675.

Decided: May 20, 1937

Jerome D. Peters, of Chico, for appellants. J. Oscar Goldstein, P. M. Barceloux, and J. M. McPherson, all of Chico, for respondents.

This appeal arose from an action on an automobile insurance policy brought by Fred Naify, the insured, and W. L. Clark, the injured party, as plaintiffs, in separate causes of action in a complaint against Pacific Indemnity Company, the insurer, Pacific Nash Motors Company, the vendor of the automobile in question under a conditional sales contract to Fred Naify; and Pacific Finance Corporation of California, the assignee of the contract, and the agent of the Pacific Indemnity Company in connection with the insurance of the automobile in question.

The amended complaint sets forth four causes of action, the first three in favor of Naify and the fourth in favor of Clark. The first two causes of action in favor of Naify are substantially the same, being based upon the terms of the insurance policy, and set forth the following facts: On October 15, 1932, Fred Naify bought an automobile from the Pacific Nash Motor Company, herein referred to as the Motor Company, under a conditional sales contract, which called for payments in the sum of $118.75 per month, which included pro rata payments in the sum of $109.10, being the premium on an insurance policy taken out by the Motor Company, which was included in the total purchase price of the automobile. On the same day the Motor Company secured from the Pacific Indemnity Company, herein referred to as the Indemnity Company, a policy of insurance covering fire, theft, collision, property damage to others, and personal liability. Thereafter and on October 24, 1932, the Motor Company assigned the conditional sales contract to defendant Pacific Finance Company and at the same time delivered to the Finance Company the policy of insurance on the automobile. On July 18, 1933, and while this policy, as alleged in the amended complaint, was in full force and effect, Lee Naify, a brother of plaintiff Fred Naify, the assured, while driving the automobile of Fred Naify, with his permission, collided with an automobile driven by plaintiff Clark, which resulted in personal injuries to Clark and damage to his automobile, as well as damage to the automobile of Fred Naify. Clark filed suit against Naify to recover damages sustained by him in this collision. Due notice was given by Fred Naify to the Indemnity Company, both of the accident and of the suit. He was then informed for the first time by the Indemnity Company that the coverages for public liability, property damage, and collision had been canceled December 17, 1932, and therefore they were under no liability whatever to defend the action.

The third cause of action alleged in the amended complaint in favor of Fred Naify and against the Motor Company and the Finance Company is based upon the obligation of these companies to either keep the insurance in force or duly notify the insured of any cancellation thereof so as to give him an opportunity to obtain further insurance.

The fourth cause of action was in favor of Clark and against the Indemnity Company, and is based upon a provision of the policy to the effect that, in case judgment was secured against the assured by the injured person, an action might be brought on the policy by the latter to recover the amount of the judgment.

The defense to this amended complaint was that on December 17, 1932, pursuant to the request of the Indemnity Company, a letter was sent to Fred Naify by the Finance Company notifying him that the policy in question was being canceled as of December 22, 1932, and that by reason of that letter the insurance in question was canceled on December 22, 1932, and was therefore not in force on the day of the collision. The answer further denied the allegations in the complaint relating to the liability of the Finance Company and the Motor Company for failure to keep the insurance in force. The action was tried before the court sitting without a jury, and judgment entered in favor of plaintiff for the amount sued for.

The court found in regard to notice of cancellation that on December 17, 1932, a letter was mailed by the Finance Company to Fred Naify, but he never received the same and had no knowledge whatsoever at any time prior to the collision of the cancellation of the policy. The court also found that Fred Naify tendered to defendants the balance remaining due under the retention provision of the policy, which tender was refused, and further found that prior to the institution of this action Naify paid to defendants Motor Company and Finance Company the balance due on the automobile, including the sum of $109.19, which was the full amount of the premium on the policy, without any reduction for unearned premium for those coverages purported to have been canceled.

This appeal has to do with the legal effect of the purported letter of cancellation of December 17, 1932. The facts as developed by the testimony show that on October 15, 1932, Lee Naify, brother of Fred Naify, acting as agent for his brother, Fred, negotiated with the Motor Company for the purchase of an automobile. The sales manager of the Motor Company told Naify that it was mandatory to take out insurance on any car purchased on installments for the period in which the installment payments were to be made to insure the car against fire, theft, property damage, collision, and public liability.

Thereupon Naify, upon behalf of his brother Fred, signed Fred's name to two blank forms of conditional sales contract for the purchase of the car in question. At that time Lee Naify was residing in Redding, and gave his address as Box 44, Redding, Cal., and gave the address of his brother Fred as Senator Theater, Chico, Cal.

The conditional sales contract which was subsequently filled in by the Motor Company shows the purchase of a Nash coupé, calling for the payment of $118.75 on the first day of December, 1932, and a like sum on the first day of each month for eleven months thereafter. On the same day, October 15, 1932, the Motor Company took out insurance on the automobile with the Indemnity Company through the agency of the Finance Company for the benefit of both itself and Fred Naify, and for the protection of their respective interests, the policy being for a term of one year beginning October 15, 1932. The coverages therein were for the items hereinbefore mentioned and called for a total premium of all the insurance coverages for one year of $109.19, which premium was paid by the Motor Company to the Finance Company, and was included in the total amount due to the Motor Company from Naify under the conditional sales contract. Thus, each payment under the conditional sales contract included a pro rata payment to the Motor Company for the insurance on the automobile.

No duplicate copy of this conditional sales contract was sent to or received by either Fred or Lee Naify, nor did either of them see or receive the original or a copy of the insurance policy which was issued at the same time, both instruments being retained by the Motor Company, nor did they receive any statement indicating the amount of the monthly payment on the automobile as distinct from the payments of the insurance and other charges therein, the coupon book which they received merely showing the monthly payments to be $118.75. On October 24, 1932, the contract was assigned by the Motor Company to the Finance Company, which thereafter retained possession of the contract, together with the insurance policy, until the contract was reassigned by the Finance Company to the Motor Company on August 29, 1933.

Differences arose between the Naifys and the Finance Company and the Motor Company in regard to an allowance on a trade–in, and in December both Lee and Fred Naify called upon the Finance Company and the Motor Company concerning this dispute, but nothing was said by the representatives of either company relative to any cancellation of insurance. In January, 1933, Lee Naify again went to San Francisco and had a further discussion with the Finance Company in regard to these differences, and at that time made two payments of $118.75 each on the contract, being for the months of December and January, receiving a receipt therefor. At that time nothing was said to him by any representative of the company concerning the insurance on the automobile. On February 7, 1933, another payment of $118.75 was made to the Finance Company for which a receipt was issued, and at that time, also, nothing was said about insurance. Subsequent payments on the car were handled through Mr. Gottesfeld, as attorney for Mr. Naify.

On July 18, 1933, a collision occurred between the Naify car and the car of Clark. Immediately after the collision a telegram was sent to the Motor Company reporting the accident and inquiring concerning the insurance on the car. The following day Fred Naify received a wire from the Motor Company stating that there was a Pacific Indemnity policy with coverages for property damage and public liability, and giving the number of the policy. The next day Naify went to the local agency of the Indemnity Company in Chico and reported the accident, giving the number of the policy. On July 20, 1933, the local agent of the Indemnity Company wired a report of the accident to San Francisco. In a day or two Naify received a telegram from the Finance Company as follows: “Find the collision coverage cancelled last December. Disregard former wire stating you were covered.”

According to the finding of the court and the testimony of the Naifys that was the first notice of cancellation or of knowledge whatsoever they had received of the cancellation of the insurance. On October 26, 1933, Fred Naify received from the Motor Company a statement showing a credit or refund for insurance. Up to that time he had received no information or knowledge of any kind of credit being given to his account for any insurance refund. In August, 1933, and after the commencement of the action by Clark, Naify went to San Francisco and tendered the balance of the 50 per cent. retention on the collision coverage, which tender was refused. In December, 1933, Naify paid off the full balance on the automobile, including the balance on the insurance. No deduction was made for the amount of the credit for the insurance supposed to have been canceled, and he received a receipt of payment in full together with the pink slip for the automobile, and no refund of any excess amount for the unearned premium on the alleged canceled insurance was made by the Motor Company, and they kept and retained the unearned premium alleged by plaintiff to have been $62.85.

It is claimed by appellants that on December 17, 1932, a letter was mailed to Fred Naify and addressed to him at Redding, Cal., notifying him that the coverages for collision, property damage, and public liability would be canceled as of December 22, 1932, and that subsequently a credit for the unearned premium on these coverages in the sum of $62.85 was placed to his credit, and that a statement showing this credit was mailed to him. Fred Naify testified that he never received either the notice or the statement, and the trial court so found.

The trial court also found that no credit for unearned premium of the canceled insurance was ever given to Fred Naify in accordance with the provisions of the insurance policy relating to cancellation.

Turning now to a consideration of the question of law involved, it is claimed by respondent that the letter of the Finance Company to Naify did not constitute a valid cancellation for the reason that the letter did not conform to the requirements of the provision of the policy relating to cancellation; that it was never received by Fred Naify, and there is no evidence that the letter was actually mailed.

The provision of the policy relating to cancellation provides that the policy may be canceled at any time by the company by giving to the assured “* * * a five (5) days' written notice of cancellation with or without tender of the excess of paid premium above the pro rata premium for the expired term, which excess, if not tendered shall be refunded on demand. Notice of cancellation shall state that said premium (if not tendered) will be refunded on demand. Notice of cancellation mailed to the address of the assured stated in this policy shall be a sufficient notice. When the term Assured is used in this paragraph, it shall mean the Pacific Finance Corporation of California only during the time the Pacific Finance Corporation of California has any financial interest in the automobile insured hereunder. If the Pacific Finance Corporation of California has no financial interest, then the term Assured, shall mean the purchaser.”

It is undisputed that at the time of the purported cancellation the Finance Company had an interest in the automobile in question, and under the terms of the cancellation clause was entitled to notice thereof, together with a refund of the unearned premium. However, the only notice ever sent to the Finance Company was a request from the Indemnity Company to the Finance Company to recall the policy for cancellation, which could not be construed as a present cancellation. If the cancellation clause meant to include both the Finance Company and the purchaser, Naify, as the “insured,” where both had a financial interest in the automobile, then it was the duty of the Finance Company to send notice of cancellation to both the Finance Company and the purchaser, which admittedly was not done.

The only notice relied upon by appellants as a cancellation under the cancellation clause in the policy is the following letter:

“December 17, 1932

“Mr. Fred Naify

“Box 448––Redding Theatre

“Redding, California

“Re: Pacific Indemnity Company

“Policy No. AFO–37769

“Dear Sir:

“We have been instructed by the Pacific Indemnity Company, as its insurance agent, to cancel the 50% Retention, Public Liability, and Property Damage coverage on your Policy No. AFO–37769 covering your 1932 Nash Coupe.

“In conformity with paragraph No. 5 captioned ‘Cancellation’ on the last page of your policy, you are hereby notified that the above coverages on the above numbered policy are cancelled from and after the 22nd day of December, 1932, at 12:01 Standard time.

“As the legal owner of the above described automobile, and as an assured named in the above numbered policy, we have instructed the Pacific Indemnity Company to remit the unearned insurance premium to us and when it is received, we will credit it against the balance due on your contract, for the reason that the premium for this coverage was fully paid by the Pacific Finance Corporation of California at the time this insurance was placed with the Pacific Indemnity Company, and, of course, the premium was charged back to you and included in your contract.

“Yours very truly,

“Pacific Finance Corporation of California.

“By J. G. Kirkman

“Automobile Insurance Department.”

To effect the cancellation of the policy the insurer must strictly comply with the conditions of the policy providing therefor. Quong Tue Sing v. Anglo–Nevada Assurance Corporation, 86 Cal. 566, 25 P. 58, 10 L.R.A. 144. This letter shows that there was no tender of the excess for unearned premium and no statement as required by the cancellation clause that the excess premium would be refunded on demand. It is true the letter states: “As the legal owner of the above described automobile and as an assured named in the above numbered policy, we (Finance Company) have instructed the Pacific Indemnity Company to remit the unearned insurance premium to us * * *” but it cannot be said that the Finance Company was also acting for respondent Naify. As to him the Finance Company had no authority to accept notice of, or consent to, cancellation. Quong Tue Sing v. Anglo–Nevada Assurance Corporation, supra, and Lauman v. Concordia Insurance Co., 50 Cal.App. 609, 195 P. 951.

Appellants claim the excess premium was, in effect, refunded to Naify by means of a credit to his account on January 5, 1933. However, inasmuch as the letter of cancellation did not state the excess premium would be refunded on demand, it was necessary that the refund be tendered with the notice and not at some later date. The object of the immediate tender is obvious. The insured is entitled to know that the insurance had definitely been canceled and that he is without protection. He is also entitled to the refund or the credit in order that he may, if necessary, use that refund or credit to obtain other protective insurance.

Although it is contended by appellants that the unearned premium was credited to the account of Naify on January 5, 1933, that fact was not supported by the evidence. The conditional sales contract included the insurance premium, and each payment was increased pro rata by that amount. On January 5, 1933, if the policy was canceled, there was an insurance refund credit due in the sum of $62.85. This credit was attempted to be given by deducting this amount from the balance due, and credit was given on the twelfth payment, which, instead of being $118.75, was reduced to $55.90. So although mathematically the total balance was reduced by the amount of the refund being credited to the account of Naify, it was not effectuated until the date of the last payment some months later, and in the meantime Naify was required to pay the original monthly installment of $118.75, which still included the pro rata payments of $109.10 together with pro rata payments of interest on that amount.

In B. & B. Trucking, Inc., v. Home Fire & Marine Ins. Co. of California, 125 Misc. 312, 209 N.Y.S. 511, 513, affirmed 216 App. Div. 744, 214 N.Y.S. 812, affirmed 243 N.Y. 558, 154 N.E. 604, a policy containing an identical cancellation clause was before the court. It is there said: “It is argued for defendant that the notice of cancellation should be considered entirely sufficient to cancel the policy, though it does not comply with the requirement that ‘notice of cancellation shall state––excess premium (if not tendered) will be refunded on demand.’ * * * The provision quoted was not complied with. Defendant's position, as stated in the notice of cancellation, was not simply that the excess premium would be refunded on demand. Its position was that it would not refund without surrender of the policy. My view is that a notice of cancellation must comply with the requirements of the cancellation clause if such notice is, of itself and without the assistance of any elements of waiver or estoppel, to have effect of canceling the insurance. * * * Defendant would separate the cancellation clause into two parts, one providing for cancellation and the other for the return of unearned premium. * * * The policy provides that the insurance may be canceled by a notice which may be mailed. It provides in terms that the notice ‘shall state that––excess premium (if not tendered) will be refunded on demand.’ By their contract the parties have stipulated that defendant can cancel the contract if it complies with this requirement. The company is not left free to say it will cancel without such compliance. Nor is the court free to say that this or any other stipulation of the contract consistent with its main purpose may be disregarded, because to the court it appears to be of no great moment. Plaintiff is entitled to insist on conformity with a condition to cancellation stipulated for in unmistakable terms. * * * I do not consider a notice of cancellation to be sufficient which does not comply with the provision that the notice shall ‘state that excess premium (if not tendered), will be refunded on demand.’ This is an express requirement and one with which defendant did not comply. It cannot be avoided by regarding the cancellation clause, as defendant would have us regard it, as providing separately for cancellation and for the return of unearned premium, for the statement required as to the return of unearned premium is expressly made a condition of cancellation by notice sent through the mails.”

From the foregoing it would appear that the letter of December 17, 1932, could not be considered a valid cancellation in accordance with the provisions of the policy, even if it be assumed the letter was actually mailed and received. It will be recalled also that the premiums on the policy were paid in full to the Indemnity Company by the Motor Company at the time of the issuance of the policy, and therefore, so far as the Indemnity Company was concerned, the premium was fully paid. It would therefore rest upon the Indemnity Company to pay in cash the unearned premium which should have been paid directly to the assured regardless of any indebtedness which may have existed between Naify and the Finance Company.

In Phoenix Assurance Company v. Munger, etc., Manufacturing Co., 92 Tex. 297, 49 S.W. 222, 225, an analogous situation existed. The court there said: “Upon the issue of cancellation, the evidence showed that the assured had paid a portion of the premium, and had given his notes to the agent for the balance, and the agent had paid the entire premium to the company, holding the notes of the assured as his individual property. When the notice of desire to cancel was given, just before the fire, there was no tender made to the assured of the unearned premiums, and we are therefore of the opinion that the cancellation was not effectual.”

To the same effect is the case of Krause v. Equitable Life Assur. Soc., 99 Mich. 461, 58 N.W. 496.

The court found in accordance with the undisputed evidence that this letter in question was never received by Fred Naify. The rule in regard to cancellation under an insurance policy is stated in Farnum v. Phoenix Ins. Co., 83 Cal. 246, 23 P. 869, 872, 17 Am.St.Rep. 233, as follows: “If the notice is sent by mail, and not received, as in this case, the cancellation for non–payment of premium is ineffective. Mullen v. Dorchester Mutual F. Ins. Co., 121 Mass. 171. Notice of cancellation to the agent who negotiated the policy will not bind the assured; * * * nor to any other person than the one obligated to pay the premium.”

This rule is followed in American Building Maintenance Co. v. Indemnity Ins. Co., 214 Cal. 608, 7 P.(2d) 305, 307, in which the insurance policy under consideration provided that “notice of cancellation mailed to the address of the assured herein shall be sufficient notice.”

Respondents raised some question as to the sufficiency of the evidence to support the finding of the trial court that the letter in question was actually mailed, the testimony being that a clerk in the insurance department of the Finance Company placed the letters in the mail basket, which was then taken up by another employee, whose duty it was to place these letters in the mail pouch. There were many letters written and mailed during the course of the day, and none of those who handled the letter could identify or recall the particular communication in question.

Also the term “mailed” implies the deposit of the letter in the United States post office or in the custody of a United States mail collector, but here there is no affirmative proof that this was ever done. We do not believe that we need to consider that matter, however, in view of the direct finding of the court that the letter was, as a matter of fact, never received by the insured.

For the foregoing reasons, the judgment from which this appeal is taken is hereby affirmed.

Mr. Presiding Justice PULLEN delivered the opinion of the court.

We concur: THOMPSON, J.; PLUMMER, J.