Simpson v. Prudential Insurance Co. of America

Bruñe, C. J., delivered the opinion of the Court. The plaintiff-appellant, Mrs. Simpson, brought this suit against the defendant-appellee insurance company, Prudential, claiming as the beneficiary of a policy of insurance on the life of her husband, which, she avers, the defendant had contracted to issue. The husband was killed in a motor vehicle accident while his application was pending. The principal question presented is the construction of the husband’s application for insurance and of a “conditional receipt” issued by the insurance company upon payment of the first annual premium.

At the conclusion of the plaintiff’s case the trial court granted the defendant’s motion for a directed verdict. The plaintiff appeals from the judgment for the defendant entered thereon. The material facts as shown by the plaintiff’s evidence are substantially as set forth below. The plaintiff and her husband bought a new house at Brentwood, Maryland, in the summer of 1958.

At the solicitation of an agent for the insurance company, who pointed out the hazardous nature of the husband’s occupation as a truck driver and the wife’s need for protection if anything should happen to him, they decided to take out a policy of insurance on the life of the husband to cover the amount of their mortgage, which was then about $12,000. The basic policy was to be for $3,000 with additional, but diminishing term insurance, initially in the amount of $10,000. The ³⁹⁶ husband executed Part 1 of the application for insurance (the non-medical part) on August 23, 1958, when the insurance agent visited the Simpsons in their home. The agent inquired whether the husband wished to pay the premiums on an annual, semi-annual or quarterly basis, and the husband asked if the agent didn’t want to wait until after the medical examination.

The agent replied: “No. When you give me the check for a payment on this insurance, you are covered. When I receive your check, you are covered as of then.” Mrs. Simpson then drew a check payable to Prudential for $167.69, the amount of the first annual premium of the policy applied for. This check was cashed by Prudential on the next day. On August 31, 1958, a physician selected by the insurance company came to the Simpsons’ house, gave Mr. Simpson a physical examination and completed Part 2 of the application, which Mr. Simpson signed.

The results of the medical examination were apparently satisfactory in all respects but one. That one, as reported by the examining physician, was a “trace” of sugar in the urine. The application form required, in such a case, that a portion of the urine examined be forwarded to the home office of the company. 1 On September 8, 1958, Mr. Simpson was killed in a tractor-trailer accident. On September 19, 1958, a representative of the insurance company visited the plaintiff, offered her a refund of the premium paid, told her that her husband had not passed the physical examination and denied any liability' except for return of the premium.

At this time the insurance company knew of the death of her husband and no policy on his life was ever issued. In Part 1 of the application, the husband specified the ³⁹⁷ kinds and amounts of insurance applied for, named his wife (the plaintiff) as beneficiary, and agreed (among other things) to these provisions: “(2) that no agent has the authority * * * to modify the application, or to bind the Company by making any promise or representation or by giving or receiving any information;” and “(3) that except as may be otherwise provided in the Conditional Receipt Form * * * [issued] for an amount * * * equal to the first full premium on the policy applied for, no insurance shall take effect unless a policy is issued by the Company and delivered to and accepted by the proposed insured * * The Conditional Receipt Form did otherwise provide. It is headed in capitals “TPIE PRUDENTIAL INSURANCE COMPANY OF AMERICA” and in larger capitals “CONDITIONAL RECEIPT”. It is dated August 23, 1958.

It acknowledges receipt from the husband of $167.69 “being payment on account of a policy applied for on the life of Homer E. Simpson (Proposed Insured) in THE PRUDENTIAL INSURANCE COMPANY OF AMERICA.” Then follow four unnumbered and unlettered paragraphs, which (for convenience) we designate as A, B, C and D, respectively. Paragraph A, after reciting certain conditions which were clearly met, continues as follows: “and if the required and completed Part 1 and the required and completed Part 2 of the application and such other information as may be required by the Company are received by the Company at one of its Home Offices and if the Company after the receipt thereof determines to its satisfaction that the proposed insured was insurable on the later of the dates of said Parts 1 and 2 on the plan, for the amounts, for the benefits and at the premium rate applied for, the insurance in accordance with and subject to the terms and conditions of the policy applied for shall take effect as of the later of the dates of the required and completed Parts 1 and Paragraph B provides for the refund of the premium if ³⁹⁸ insurance does not take effect in accordance with Paragraph A, unless the Company issues a policy and the proposed insured accepts it, and further provides that any delay in refunding the amount paid “before or after the demise of the proposed insured shall not be construed to create a contract of insurance or any liability on the Company, except for a return of the above payment.” Paragraph C is almost a verbatim repetition of agreement (3) quoted from the application. It negatives the power of any agent to modify any application or to bind the Company by making any promise or representation or by giving or receiving any information. Paragraph D states that the “receipt is issued on the condition that any check * * * be good and collectable.” The receipt is signed at the foot by the soliciting agent as “Agent,” and the agency is identified as “Wash.

D. C.”' Opposite the signatures is a note requesting that unless the-“proposed owner” receives a policy within six weeks, notice-be given to “The Prudential Insurance Company of America,, giving the amount paid, date of payment, and name of person to whom paid.” The trial judge held that there was no contract of insurance. He granted the defendant’s motion for a. directed verdict on the basis of instructions requested by the-defendant that (i) there was no legally sufficient evidence to-entitle the plaintiff to recover, and (ii) the uncontradicted evidence showed that there was no contract of insurance between, the plaintiff’s husband and the insurance company. The trial judge’s comments to the jury indicate that the motion was. granted because of the lack of power of the soliciting agent under the terms of the application and of the receipt to bind, the insurance company by his statement as to coverage and because “as a matter of law there was not a binding contract of insurance that existed between the deceased and the insurance company.” We agree with the learned trial judge that the agent lacked authority to bind the Company by the statement as to immediate coverage attributed to him by the plaintiff. 2 The ab- - ³⁹⁹ sence of such power was clearly set forth not only in the application, but in the receipt itself, upon which the plaintiff’s claim must stand or fall. These clauses, we think, are effective and binding.

Eureka-Maryland Assurance Corp. v. Samuel, 191 Md. 603, 613 , 62 A. 2d 622 ; Lycoming Fire Ins. Co. v. Langley, 62 Md. 196, 208-211 . On the other hand, the receipt itself clearly undertakes to express some obligations of the insurance company itself. The form is furnished by the company to serve its own purpose of collecting the premium in advance, and the check in payment of the premium (drawn by the plaintiff) was payable to the order of the insurance company and was deposited in its bank account and duly collected.

We do not understand that Prudential contests the authority of the soliciting agent to sign and issue this receipt on its behalf and so to bind it by any obligations therein stated. The crux of the case, we think, is whether the terms of the receipt obligated the defendant insurance company to insure the life of the plaintiff’s husband at the time of his death. Interim or conditional receipts or what are sometimes spoken of as “binders” or “binder receipts” or even as “binding receipts” in connection with life and health insurance policies have given rise to a great amount of litigation. Such terms as “binders,” etc., seem to have been taken over from the fire insurance industry where the connotation of a binding agreement affording immediate coverage is usually (if not invariably) quite appropriate to such receipts.

There they do normally evidence immediate, temporary insurance. Mutual Fire Ins. Co. of Montgomery Co. v. Goldstein, 119 Md. 83 , 86 A. 35 ; 29 Am. Jur., Insurance, § 205, p. 596.

It is true that the fire insurance company (ordinarily at least) has the right to reject the application, and that it has the further protection under such a policy as the New York Standard Fire Insurance Policy (which is in very wide use) to cancel the policy, even after it has been issued, on relatively short notice to the insured. The life insurance industry has adopted forms of interim receipts, variously designated and differing considerably amongst themselves (Carnahan, Conflict of Laws and Life Insurance Contracts, § 36, 220-221, nn. 34 and 35 (2 ed. ⁴⁰⁰ 1958), collects many forms), at least many of which do not afford immediate, unconditional temporary insurance. Such receipts are, however, designed to commit the would-be insured so that if the company is willing to issue the policy for which he has applied, he cannot withdraw. This result may perhaps be a matter of practical effect and not of legal obligation. 3 The company seeks to protect itself against loss through underwriting and medical expenses in cases where the applicant might have a change of mind before the issuance and acceptance of the policy.

Generally, under a life insurance policy, the issuing company has no such broad right of cancellation after the policy is once issued as a fire insurance company has; and a life insurance company obviously has a sound business reason for wishing to be cautious before it fully commits itself by actually issuing a policy which is not readily cancellable. Whether its position differs substantially from that of a fire insurance company with regard to merely temporary insurance, may be open to debate. However that may be, there are (as we have said) many forms of interim receipts issued by life insurance companies which do not afford immediate, unconditional, temporary insurance. The form here involved is one of them.

A glib and sweeping interpretation of the effect of a receipt of this kind such as is ascribed to the insurance company’s soliciting agent here, appears to be by no means novel in the litigated cases. See Comment, Life Insurance Receipts: The Mystery of the NonBinding Binder, 63 Yale L. J. 523, 524. These receipts may easily seem to the would-be insured to afford a greater protection than a close analysis of their literal terms might support. It is said in a note on Gaunt v. John Hancock Mutual Life Ins.

Co., 160 F. 2d 599 (C. C. A. 2nd, 1947), cert. denied 331 U. S. 849 , and on Leube v. Prudential Ins. Co., 72 N. E. 2d 76 (Ohio, 1947), in 60 Harv. L. Rev. 1164 , at 1166: “* * * in all probability, unless a formula is adopted of insuring the applicant as of the date of the receipt if he is then a satisfactory insurable risk, the binding receipt will be ⁴⁰¹ increasingly regarded as either an ineffective vehicle for carrying out intention or, at worst, an instrument for deception. See Starr v. Mutual Life Ins.

Co., 41 Wash. 228, 232 , 83 Pac. 116, 117 (1905). Failure to extend to life insurance the traditional instantaneous coverage long afforded by fire insurance may indicate an unresponsiveness to the type of service the public requires.” This last observation is doubtless a sound social or economic comment, but it does not of itself solve the legal problem of interpretating a particular form of premium receipt, nor (as we read it) does it purport to do so. The effect of so-called “conditional” or “binding” receipts for payment of the first premium on policies of life insurance has been widely litigated. See, for example, cases cited in Annotation. 2 A.L.R. 2d 943 .

The cases have produced conflicting results and a substantial amount of commentary by text and law review writers. See Vance, Insurance (3rd ed. 1951), § 40, pp. 239-41; Carnahan, Conflict of Laws and Life Insurance Contracts, § 36 (2 ed. 1958); Patterson, Essentials of Insurance Law (2 ed. 1957), at 100-101, 470; Comment, Life Insurance Receipts: The Mystery of the Non-Binding Binder, 63 Yale L. J. 523 (1954); Havighurst, Life Insurance Binding Receipts, 33 Ill. L. Rev. 180 (1938); Comment, Operation of Binding Receipts in Life Insurance, 44 Yale L. J. 1223 (1935); Note, 15 U. of Chi. L. Rev. 379 (1948) ; Note, 60 Harv.

L. Rev. 1164 (1947) ; Comment, 7 Stan. R. Rev., 292 (1955). This case, however, is one of first impression in Maryland. Neither party suggests that there is any question with regard to Maryland substantive law being applicable.

Some commentators have classified life insurance advance premium receipts in three general categories: (1) “insurable risk” or “satisfaction” binders in which the