No. 244 January Term, 1976, Appeal from the Judgment of the Superior Court of Pennsylvania, at No. 1020 October Term, 1975 which affirmed the Judgment of the Court of Common Pleas of Lycoming County, Civil Action--Law entered March 13, 1975, at No. 73-1914
Campana & Campana, Ambrose R. Campana, Williamsport, for appellant.
C. Edward S. Mitchell, Williamsport, for appellee.
Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Jones, former C. J., did not participate in the consideration or decision of this case. Pomeroy, J., filed a dissenting opinion.
On or about September 24, 1972, appellant's husband applied to appellee Nationwide Life Insurance Company for life insurance in the amount of $10,000.00, with double indemnity for accidental death, plus $22,500.00 level term insurance. Appellee, through its agent, accepted $60.66 from appellant's husband at the time of the application. This amount represented a two-month premium payment on the above described insurance. In exchange for this payment appellee's agent gave appellant's husband a "conditional receipt."
On November 4, 1972, appellant's husband was killed in an automobile accident. At the time of appellant's husband's death Nationwide had neither issued the policy applied for nor had it rejected the application. Nor had appellant's husband taken the medical examination required by the wording of the application. Subsequent to appellant's husband's death, Nationwide denied liability, asserting that certain conditions contained in the application and in the conditional receipt (namely the taking of the medical examination) had not been fulfilled by the applicant.
The case was submitted to the trial court through appellant's complaint, Nationwide's answer, appellant's reply to appellee's answer, and the deposition of appellee's agent. Appellant then filed a motion for summary judgment and appellee filed a cross-motion for summary judgment. Both motions contained affidavits in support thereof. On the basis of these documents, the trial court ruled that a condition precedent to the insurance coverage claimed had not been fulfilled. Accordingly, the trial court denied appellant's motion for summary judgment and granted appellee's. On appeal, the Superior Court affirmed per curiam. Collister Page 583} v. Nationwide Life Insurance Co., 236 Pa. Super. 702, 347 A.2d 487 (1975). Appellant's petition for allowance of appeal was granted, Appellate Court Jurisdiction Act of 1970, Article II, § 204, 17 Pa.C.S.A. § 211.204(a), and this appeal followed.
Appellee contends that no insurance was in force as of November 4, 1972, the date of decedent's death, because the application and the "conditional receipt" each provided that there would be no insurance coverage unless a completed medical examination was received by the insurer. Since no medical examination was obtained by the applicant prior to his death, Nationwide argues that the application was never completed and that completion of the application was an unfulfilled condition precedent to the insurance coverage claimed.
Appellant argues before us, as she did below, that a contract of insurance came into being between appellant's husband and Nationwide at the time Nationwide accepted the application form and the first premium payment. This transaction, urges appellant, created a temporary insurance contract that provided insurance coverage for the period of time extending from acceptance of the premium deposit until Nationwide either rejected the application because of the applicant's uninsurability or accepted the application and issued the policy applied for. For the reasons that follow, we agree with appellant.
At the outset, we note that temporary contracts of insurance affording coverage pending issuance of the formal policy by the insurer are well known in the insurance industry. See 12 Appleman, Insurance Law and Practice, §§ 7221-7233 (1943); 1 Couch on Insurance 2d, §§ 14:26-14:46 (1959). Contracts for interim insurance, such as appellant argues was in effect between Nationwide and her husband at the time of his death, have also been recognized as valid in Pennsylvania. For example, in McAvoy Vitrified Brick Co. v. North American Life Assurance Co., 395 Pa. 75, 149 A.2d 42 (1959), we held that an application for insurance coverage, a deposit premium receipt, and an "interim assurance
certificate," constituted a contract to provide temporary insurance for the period of time between the delivery of the certificate and the subsequent decision of the insurer at its home office of whether to issue the policy applied for or reject the application. Like Nationwide here, the insurer in McAvoy, argued that its liability was subject to a condition precedent; in that case the alleged condition precedent was the insurer's good-faith determination that the applicant was an insurable risk.
The McAvoy court considered the conflicting points of view before arriving at its conclusion that a contract of temporary insurance existed. Quoting from the California Supreme Court's decision in Ransom v. Penn Mutual Life Ins. Co., 43 Cal.2d 420, 274 P.2d 633 (1954), we said,
"'The courts in several jurisdictions have construed clauses similar to the one involved here. A number of decisions have held, in accordance with defendant's view, that no contract of insurance exists until the insurer has been satisfied as to an applicant's acceptability, and that the provisions that the insurance shall be in force from the date of the application means that, if and when the company is satisfied, the contract shall be considered to relate back and take effect as of that date. (Citations omitted.)
On the other hand, a number of courts have held that the provisions to the effect that the insurance shall be in force from the date of the application if the premium is paid gives rise to a contract of insurance immediately upon receipt of the application and payment of the premium, and that the proviso that the company shall be satisfied that the insured was acceptable at the date of the application creates only a right to terminate the contract if the company becomes dissatisfied with the risk before a policy is issued.'" (Citations omitted.)
395 Pa. at 87-88, 149 A.2d at 48.
Similarly, in Stonz v. Equitable Life Assurance Society, 324 Pa. 97, 102, 187 A. 403, 405-406 (1936) we said:
"The cases previously cited indicate a trend in the courts to construe the conditions liberally, and to treat receipts similar in wording to the one before us as binding during the interim regardless of the ultimate action of the carrier on the application. These decisions are based upon the assumption that if the receipt meant anything, no other result could have been intended by the parties, for unless the insured was to be protected against injury or death during the interim period there would be no advantage to him in paying his premium in advance. As was said in Albers v. Security Mutual Life Ins. Co., supra: 'If the company did not intend that there should be insurance effective pending the date of the application and the date of the approval of the risk and the issuance of the policy, then the company would be charging and obtaining the full amount of the premium for one year, while the period of actual insurance would be as many days less than one year as there were days intervening between the date of the application and the approval.' In other words, the insured would be paying for something which he did not receive." (Emphasis in original.)
The courts of several other jurisdictions have also recognized the validity of temporary insurance contracts. See, e. g., Smith v. Westland Life Ins. Co., 15 Cal.3d 111, 123 Cal.Rptr. 649, 539 P.2d 433 (1975); Damm v. National Ins. Co. of America, 200 N.W.2d 616 (N.D.1972); Toevs v. Western Farm Bureau Life Ins. Co., 94 Idaho 151, 483 P.2d 682 (1971); Turner v. Worth Ins. Co., 106 Ariz. 132, 472 P.2d 1 (1970); Simpson v. Prudential Ins. Co., 227 Md. 393, 177 A.2d 417 (1967); Allen v. Metropolitan Life Ins. Co., 44 N.J. 294, 208 A.2d 638 (1965); Ransom v. Penn Mutual Life Ins. Co., 43 Cal.2d 420, 274 P.2d 633 (1954).
The rationale of these cases is succinctly stated in Smith v. Westland Life Ins. Co., supra, 123 Cal.Rptr. at 655, 539 P.2d at 439:
"In establishing for California a rule of temporary insurance, we acknowledged the existence in this country of two distinct but contradictory lines of authority on this
question. (Ransom v. Penn Mutual Life Ins. Co., supra, 43 Cal.2d at pp. 423-424, 274 P.2d 633.) We chose to align California with those jurisdictions recognizing temporary insurance, for a number of reasons: First, we found the language of the conditional receipt to be ambiguous and susceptible of the interpretation that coverage would be provided immediately subject to the insurance company's right to terminate coverage if it did not choose to issue the policy applied for. Resolving this ambiguity against the insurer, we held that coverage arose immediately upon completion of the application and payment of the premium. Second, noting that the insurance company drafted the language of the conditional receipt, we reasoned that if the insurer intended to condition its liability under the policy upon its prior approval of the application, it could have easily used clear and unequivocal language to indicate its intention. Third, we concluded that an ordinary person paying the premium at the time he applied for insurance and receiving in return a receipt which stated that coverage was to be effective as of the date of application, had a reasonable expectation that he would secure the benefit of immediate coverage. Finally, we noted the obvious advantage gained by the insurance company in receiving payment of the premium at the time of application. We therefore concluded that it would be unconscionable to allow the insurer, who had required from the applicant payment of the first premium, to escape the obligation of coverage which the applicant could reasonably assume and expect that the insurer was thereby undertaking."
As we said in McAvoy, supra, 395 Pa. at 80-81, 149 A.2d at 44-45.
"The problem is not a new one. A substantial volume of litigation has come before the courts arising out of situations in which one who has applied for life insurance and paid a premium has died or suffered a change of physical condition before the issuance of the policy. We are all familiar with the usual practice of insurance agents to
accept initial premium payments with applications for the issuance of policies which cannot, in the very nature of the business, be made available until some time later. The policy itself, when issued, embodies the contract. But in the meantime, between the initial payment of premium and the issuance of the policy, what is the contractual relationship, if any?"
See also Smith v. Westland Life Ins. Co., supra, 123 Cal.Rptr. at 656, 539 P.2d at 440.
In Toevs v. Western Farm Bureau Life Ins. Co., 94 Idaho 151, 483 P.2d 682 (1971), the court noted:
"Three documents, all unilaterally prepared by the insurance company, are involved, viz., the application, conditional premium receipt, and the specimen policy. The three share the common characteristics of employing confusing and complicated language which is susceptible of various interpretations and meanings. The specific ambiguity involves the date upon which insurance coverage is to begin. Each of these documents when read alone is confusing; when all three are taken together the task becomes three times as difficult. Thus the provisions of the contract existing between the Western Farm Bureau Life Insurance Company and Adelle R. Toevs were confusing and ambiguous. It has long been the rule of this Court that a contract should be construed most strongly against the party preparing it." (Footnote omitted.) Id. 94 Idaho at 153, 483 P.2d at 684.
Furthermore, we recently stated in Brakeman v. Potomac Ins. Co., 472 Pa. 66, 72, 371 A.2d 193, 196 (1977).
"The rationale underlying the strict contractual approach [in cases involving insurance contracts] reflected in our past decisions is that courts should not presume to interfere with the freedom of private contracts and redraft insurance policy provisions where the intent of the parties is expressed by clear and unambiguous language. We are of the opinion, however, that this argument, based on the view that insurance policies are private contracts in the traditional sense, is no longer persuasive. Such a
position fails to recognize the true nature of the relationship between insurance companies and their insureds. An insurance contract is not a negotiated agreement; rather its conditions are by and large dictated by the insurance company to the insured."
To accept the insurer's argument that its liability is contingent on a condition precedent permits the insurer to hold itself immune from liability while it considers whether to accept or reject the risk, as in McAvoy, or, as in the instant case, during the period between receipt of the application and premium deposit and the date of the medical examination, while at the same time enjoying the benefits that flow from immediate collection of the premium. See, Turner v. Worth Ins. Co., 106 Ariz. 132, 472 P.2d 1 (1970). Viewing insurance contracts (including contracts for temporary insurance) as contracts of adhesion, the courts have accordingly imposed more stringent requirements upon the insurer. For example, some courts have ruled that because of the adhesionary nature of insurance documents (including conditional receipts similar to that at issue here) an insurer who wishes to avoid liability must not only use clear and unequivocal language evidencing its intent to limit temporary coverage, but it must also call such limiting conditions to the attention of the applicant. Absent proof of such disclosure, coverage will be deemed to be that which would be expected by the ordinary layperson, namely, complete and immediate coverage upon payment of the premium. In Smith v. Westland Life Ins. Co., supra, 15 Cal.3d 111, 123 Cal.Rptr. 649, 539 P.2d 433 (1975), the court stated:
"[T]he applicant [in Young v. Metropolitan Life Ins. Co., 272 Cal.App.2d 453, 77 Cal.Rptr. 382] applied for life insurance under a plan providing double indemnity in the event of accidental death. He paid the premium at the time of application and received a conditional receipt which expressly and unambiguously stated that if the applicant died before the company had approved the policy, the company would pay the benefits provided by the policy, not including accidental death benefits. Young
died before his application was approved. The insurer claimed that its liability under the policy was limited by ...