SMITH v. WESTLAND LIFE INSURANCE COMPANY (1974)

Delores J. Smith brought this action to recover $10,000 as beneficiary of a policy of life insurance which she alleged to have been in force, covering her husband, at the time of his accidental death. A nonjury trial resulted in judgment for the defendant insurance company; the present appeal followed.

On April 8, 1963, decedent (hereinafter ‘Smith’) executed an application for insurance prepared for him by respondent's agent. The application requested basic life insurance in the amount of $3,000, accidental death benefits in an additional amount of $3,000, and a provision for waiver of premium in the event of total disability; the premium was to be $14.66 per month. Smith paid the first premium, and received in return a conditional receipt (sometimes referred to as a ‘binder’).

The conditional receipt stated that the insurance applied for would take effect if the insurer was satisfied that the applicant ‘was insurable and entitled under the company's rules and standards to insurance on the plan and for the amount applied for at the Company's published rates. . . .’ The conditional receipt also provided that if the application was not approved within 60 days from the date of the application, the insurance applied for would not become effective and the first premium would be returned to the applicant.

Smith submitted to a medical examination. The insurer also obtained an investigative report about Smith's employment, finances, and living habits. Primarily because the report indicated that Smith's employment was somewhat hazardous, the insurer decided that Smith was not eligible for the rate and coverage which the salesman had proposed. A new policy was prepared by the insurer; it differed from the original proposal in that it did not provide accidental death benefits or a waiver of premium in the event of disability, and it required a higher premium. The policy was issued on April 24, 1963, to become effective only if Smith paid the additional premium and signed an amended application.

After the insurance policy was issued, the soliciting agent took it and the amended application to Smith. The agent explained that the insurer would not issue the policy that Smith had applied for, but instead had issued another subject to Smith's approval. Smith refused to sign the amended application or to pay the additional premium. The agent took the policy away and arranged for the insurer's general agent to visit Smith, explain the rejection of the first proposal, and again ask Smith to sign the amended application. Smith again refused; closing the conversation, the agent told Smith that the premium would be refunded.

Smith died in an automobile accident the next day. Respondent refunded the premium payment a few days later, without having been made aware of Smith's death. When appellant demanded the benefits under the policy applied for by Smith, respondent refused to pay, contending that no insurance was in effect at the time of Smith's death.

Where an insurance application states that the policy shall be in effect from the date of application if the premium is paid, contract for temporary insurance is created immediately upon receipt of the premium. Any statement in the application that the policy shall not be in effect unless the insurance company is satisfied that the applicant is insurable ‘creates only a right to terminate the contract if the company becomes dissatisfied with the risk before a policy is issued.’ (Ransom v. Penn Mutual Life Ins. Co. (1954) 43 Cal.2d 420, 424, 274 P.2d 633, 635; see Thompson v. Occidental Life Ins. Co. (1973) 9 Cal.3d 904, 910–912, 109 Cal.Rptr. 473, 513 P.2d 353.)

The insurer accordingly concedes that Smith was temporarily insured effective April 8, 1963. (See Turner v. Investors Syndicate Life Ins. & Annuity Co. (1973) 33 Cal.App.3d 424, 108 Cal.Rptr. 47 [similar terms in conditional receipt].) The trial court concluded that the temporary insurance created by the conditional receipt was terminated prior to Smith's death by respondent's rejection of Smith's application and the notice of rejection given to Smith by respondent's agents. On appeal from the judgment against her, the widow contends that the temporary insurance provided by the conditional receipt was still in effect when Smith died.

The evidence supports the trial court's finding that respondent had informed Smith that his application had been rejected. The sole substantial question on appeal is whether respondent's acts were sufficient to terminate, prior to Smith's death, the temporary insurance created by the conditional receipt. This question, whether a temporary insurance contract ‘can be terminated only by actual rejection of the application and return of the premium payment,’ was expressly left unanswered in Ransom v. Penn Mutual Life Ins. Co., supra, 43 Cal.2d at p. 425, 274 P.2d at p. 636.

The holding in Ransom followed from the court's application of the rule that requires resolving ambiguities in insurance contracts against the insurer. (Ransom v. Penn Mutual Life Ins. Co., supra, 43 Cal.2d at pp. 424–425, 274 P.2d 633; see Thompson v. Occidental Life Ins. Co., supra, 9 Cal.3d at p. 912, 109 Cal.Rptr. 473, 513 P.2d 353.) But underlying the court's application of the rule was a concern for honoring the reasonable expectations of the applicant for insurance. (See Keeton, Insurance Law Rights at Variance with Policy Provisions (1970) 83 Harv.L.Rev. 961, 966, 969–972; Comment, ‘Binding Receipts' in California (1955) 7 Stan.L.Rev. 292, 296–299.) The court said: ‘The understanding of an ordinary person is the standard which must be used in construing the contract, and such a person upon reading the application would believe that he would secure the benefit of immediate coverage by paying the premium in advance of delivery of the policy. There is an obvious advantage to the company in obtaining payment of the premium when the application is made, and it would be unconscionable to permit the company, after using language to induce payment of the premium at that time, to escape the obligation which an ordinary applicant would reasonable believe had been undertaken by the insurer.’ (Ransom v. Penn Mutual Life Ins. Co., supra, 43 Cal.2d at p. 425, 274 P.2d at p. 636.)

No California decision has authoritatively determined whether temporary insurance afforded to an applicant under the Ransom rule is terminated by notice of rejection unaccompanied by refund of the premium. However, numerous decisions from California and other jurisdictions contain dicta suggesting that temporary insurance is not terminated until the applicant receives both notice of rejection and refund of the premium. (Smith v. Minnesota Mut. Life Ins. Co. (1948) 86 Cal.App.2d 581, 584, 195 P.2d 457; Stark v. Pioneer Casualty Co. (1934) 139 Cal.App. 577, 580, 34 P.2d 731; Combined American Insurance Company v. Parker (Tex.Civ.App.1964) 377 S.W.2d 213, 215; Douglass v. Mutual Ben. Health & Accident Ass'n (N.Mex.1937) 42 N.M. 190, 76 P.2d 453, 459; Reck v. Prudential Ins. Co. of America (N.J.Ct. of Errors & App.1936) 116 N.J.L. 444, 184 A. 777, 778; Reynolds v. Northwestern Mut. Life Ins. Co. (1920), 189 Iowa 76, 176 N.W. 207, 209.)

Factors similar to the ones underlying the holding in Ransom lead us to hold that an insurer does not terminate temporary insurance until it has given notice of the rejection and returned the premium to the applicant.¹ Insurance agents have greater selling power if they are holding a customer's money (see Fortunato, Conditional Receipts: Should the Uninsurable Have Insurance (April 1966) 1 Forum 5); this is one factor encouraging the use of conditional receipts (Note, Life Insurance Receipts: The Mystery of the Non-Binding Binder (1954) 63 Yale 523, 524; Note, 2 A.L.R.2d 943, 946). In this case, it is likely that respondent retained the premium partly to assist the agents' attempts to convince Smith that he should accept the new policy. Just as holding premiums without providing insurance is unconscionable (Ryman v. American Nat. Ins. Co. (1971) 5 Cal.3d 620, 634, 96 Cal. Rptr. 728, 488 P.2d 32; Turner v. Investors Syndicate Life Ins. & Annuity Co. (1973), supra, 33 Cal.App.3d, at p. 427, 108 Cal.Rptr. 47), holding a premium after rejecting an application, partly in order to help sell a different policy, is unconscionable. (See Comment, ‘Binding Receipts' in California, supra, 7 Stan.L.Rev. at p. 299.)

When an insurer gives notice of the rejection of an application but retains the premium, it acts ambiguously. The notice of rejection manifests one intention while the retention of the premium suggests a willingness to provide insurance. (See Rest. 2d, Agency, § 99, p. 256; Douglass v. Mutual Ben. Health & Accident conduct is to be resolved against an insurer, because the insurer has superior ability to control the mode of its negotiations with the insured. (Koorstad v. Washington Nat. Ins. Co. (1967) 257 Cal.App.2d 399, 405, 64 Cal.Rptr. 882.) Here, there was evidence that Smith understood, at some point during his conversation with the general agent, that respondent considered the temporary insurance to be terminated. But Smith's testimony is forever lost; moreover, it is likely that conduct similar to respondent's would confuse many applicants for insurance. By requiring an insurer to give notice of a rejection and to refund the premium, the danger of this ambiguity's arising is eliminated. (Cf. Keeton, Insurance Law Rights at Variance with Policy Provisions, supra, 83 Harv.L.Rev. at p. 974.)

All the parties to insurance transactions will benefit from clear-cut rules that define expected conduct. (Fortunato, Conditional Receipts: Should the Uninsurable Have Insurance, supra, 1 Forum at p. 5.) Extension of the Ransom rule, to require that a notice of rejection be accompanied by a return of the premium in order to terminate temporary insurance, will reduce uncertainty and avoid useless litigation.

The judgment is reversed, with directions to make new findings resposive to the views expressed herein and thereupon to enter a new judgment.

FOOTNOTES

1.  This result leaves open the question of whether compliance is effective with deposit in the mail of a notice of rejection and a refunding of the premium or upon receipt by the applicant. (See Palo Alto Town & Country Village, Inc. v. BBTC Company (1974) 11 Cal.3d 494, 113 Cal.Rptr. 705, 521 P.2d 1097.)

CHRISTIAN, Associate Justice.

CALDECOTT, P. J., and RATTIGAN, J., concur.