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Burns v. Rockford Life Insurance Co.

July 25, 1984


Appeal from the United States District Court for the Northern District of Indiana, Hammond Division. No. 81 C 206 -- James T. Moody, Judge.

Author: Posner

Before ESCHBACH and POSNER, Circuit Judges, and GRANT, Senior District Judge.*fn*

POSNER, Circuit Judge. This is a diversity suit to recover the proceeds of a life insurance policy on the basis of actions of an insurance agent employed by the insurance company. The company appeals from a judgment (entered on a motion for summary judgment) for $25,000 in favor of the policyowner. The parties agree that Indiana law governs the substantive issues.

In June 1978, Stephen Burns, age 22, purchased a life insurance policy from the defendant, naming his mother as beneficiary. For an extra $2.75 a month he also purchased a "Guaranteed Insurability" rider, which allowed him to buy up to $25,000 more life insurance, without supplying proof of insurability, at certain "Optional Purchase Dates," among them the sixtieth day after he married. The rider begins on page 12 of the policy and consists of a page and a half of normal-sized print, explaining the conditions clearly. The purpose of the 60-day waiting period is to discourage deathbed marriages, and is not unreasonable. When Stephen bought the policy, Rockford's agent, Robert Westgate, explained to Stephen that the "Guaranteed Insurability" rider would allow him to purchase insurance, without proof of insurability, on various occasions including marriage; but according to Mrs. Burns' affidavit in the district court, which is not contradicted, Westgate did not mention the 60-day waiting period. Mrs. Burns was present when Westgate sold her son the policy.

In October 1978, five months after buying the policy, Stephen became ill, and shortly afterward was diagnosed as having acute leukemia. On June 30, 1979, he married. On August 3, while a patient at Billings Hospital in Chicago, Stephen, in the presence of his mother and of agent Westgate, transferred ownership of the policy to her and signed a standard life insurance application form (filled out by Westgate) for an additional $25,000 of life insurance. Either Stephen or Mrs. Burns gave Stephen's marriage certificate to Westgate as proof of marriage; Mrs. Burns gave Westgate a check for $27.95 as payment of the first premium on the additional insurance; and Westgate gave her in exchange a copy of the application form that Stephen had just signed. Neither in the printed parts of the form nor in the parts written in by Westgate is there any reference to its being an application under the "Guaranteed Insurability" rider. Reading it without knowledge of the circumstances, one would think it an application for a new policy; for, rather than waiving proof of insurability, it conditions insurability on the applicant's being "in good health." Stephen died on August 24, 1979, five days before the sixtieth day after his marriage. The company refused to pay Mrs. Burns claim for the extra $25,000 of insurance applied for on August 3, and this suit followed.

The district court held that the agent's failure when he sold the original policy to mention the 60-day waiting period after marriage was not actionable but that the receipt the agent issued on August 3 estopped the company to enforce the conditions of the "Guaranteed Insurability" rider. We agree that there was no actionable omission at the time of the original sale. An insurance company is not "estopped from reliance on the exclusion in the policy because the agent did not specifically explain the exclusion. . . . [T]he failure of an agent to review each provision of the policy does not operate to eliminate those provisions not specified from the policy." State Farm Mutual Automobile Ins. Co. v. Xaphes, 384 F.2d 640, 642 (2d Cir. 1967); see also Hanover Ins. Co. v. Hawkins, 493 F.2d 377, 381-82 (7th Cir. 1974); Farber v. Great American Ins. Co., 406 F.2d 1228, 1233 (7th Cir. 1969).

It is true that courts in Indiana and elsewhere, realizing that many people do not read their insurance policies and, perhaps even more important, do not do so because the policies are unreadable, have held that the agent's oral representations at the time of sale can override the written terms of the policy. See Vernon Fire & Casualty Ins. Co. v. Thatcher, 152 Ind. App. 692, 707-12, 285 N.E.2d 660, 669-72 (1972); Special Jet Services, Inc. v. Federal Ins. Co., 643 F.2d 977, 982 and n. 7 (3d Cir. 1981). If the agent insists to the prospective purchaser that the policy will insure against a hazard, say being eaten by a shark, that the prospect is particularly concerned about, and the hazard materializes, the company may be estopped to plead the terms of the policy because the strength of the agent's oral assurances lulled the prospect into not reading, or reading inattentively, dense and rebarbative policy language. So if when agent Westgate had explained the "Guaranteed Liability" rider Stephen Burns or his mother had asked whether the insurance proceeds would be collectable even if he died the day after the marriage, and Westgate had answered that they would be, Mrs. Burns would have an argument that the agent's misrepresentation had bound the company; and the argument would be hardly weakened if the Burnses, instead of asking, had stated that his was their understanding and the agent had said nothing.

But that is not what happened. The agent communicated the gist of the "Guranteed Insurability" rider, merely omitting details unlikely to be material to the purchaser. Stephen Burns was at the time a young man in good health who the agent would not have reason to assume would be concerned that should he get married he might die within the 60 days following the marriage. So even if we assume that any material omission by an agent imposes liability on the insurance company regardless of the actual terms of the policy (but see, e.g., Travelers Ins. Co. v. Morrow, 645 F.2d 41, 44 (10th Cir. 1981)), the company would not be liable here because the omission was not material. And the assumption may be untenable in the circumstances of this case. The "Guaranteed Insurability" rider is short and refreshingly lucid, and even a cursory reading could not fail to reveal the 60-day waiting period. Cf. Storms v. United States Fidelity & Guaranty Co., 118 N.H. 427, 430-31, 388 A.2d 578, 581 (1978). There is, incidentally, no evidence that Stephen did not read the policy; and if he did read it he could not have been misled by the agent's failure to mention the waiting period, even if the period had been material to him.

The rule urged by the plaintiff is that any time an insurance agent says anything about the contents of the policy he must recite all the conditions in it; otherwise they will not be enforceable. This would not be a reasonable burden to place on insurance companies, and it would go beyond what is necessary to protect the buyer of an insurance policy from being misled about the policy's contents by an overzealous insurance agent.

We come then to the receipt of August 3. It was, of course, the wrong receipt. But it is inconceivable that any of the recitals in it were what induced Mrs. Burns to part with her $27.95. She knew that Stephen was dying of leukemia; the signature on the application is that of a dying, or at any rate a gravely ill, man. She must have known he was insurable, if at all, only under the "Guranteed Insurability" rider -- there was no other conceivable reason for giving Stephen's marriage certificate to agent Westgate. Certainly nothing on the face of the receipt suggests that it might reduce the 60-day period. On the contrary, with mordant irony in the circumstances, the form requires that the applicant be in good health. There can be no basis for any inference, which would be fantastic, that Westgate had either actual or apparent authority, or intended, to waive the 60-day requirement. The company of course had no interest in selling life insurance to Stephen; nor did Westgate, even if he, though an employee of the company rather than an independent agent, gets a cut of the premium income he generates. The sale of the additional insurance to Stephen was unlikely to generate any premium beyond the first. The company would not congratulate Westgate for closing a deal on which the company would lose $24,972.05.

The Burnses could not have thought that the company was waiving the 60-day requirement. Rather, they hoped Stephen would live to the sixtieth day, knowing that if he did the company would have to pay Mrs. Burns the additional $25,000. He came very close to doing so. But the Burnses could not have thought that if he failed to comply with the conditions of the "Guaranteed Insurability" rider the company would nevertheless be obligated to pay up as if he had complied. Consistently with the view that the transaction was the purchase in effect of an option, the company offered to return the premium payment to Mrs. Burns when Stephen's death before the sixtieth day made the rider inoperative.

Nor were there any misrepresentatives that might estop the company to assert its rights under the original policy. If Westgate had told the Burnses that he was waiving the 60-day survival period or (fantastically) that the company considered Stephen a good risk for a new life insurance policy, we might, conceivably, be presented with a different case. There is no contention that Westgate said anything of the sort.

We disagree with the district court's suggestion that since the standard application form contains conditions (for example, that the insured be in good health) nor contained in the "Guaranteed Insurability" rider, the insurance company by tendering the form was attempting to modify the rider unilaterally by imposing additional (and unfulfillable) conditions. Even if this had been Westgate's or his employer's nefarious design (of which there is no hint in the record), it could not have harmed the Burnses in the circumstances of this case. The application was rejected because a condition in the rider was not satisfied, rather than because a condition (such as good health) appearing on the form was not satisfied. The agent's use of the standard form as a receipt for the Burnses' application under the rider, a use that misled no one, provides no reason for refusing to enforce a perfectly valid condition in the rider. Not to enforce it would be unfair to the defendant and the defendant's other policy holders, whose rates are geared to its loss experience.

Finally, since the standard form was used to activate the rider rather than to apply for a new insurance policy, the Indiana "temporary insurance" cases, such as Kaiser v. National Farmers Union Life Ins. Co., 167 Ind. App. 619, 339 N.E.2d 599 (1976), are not in point. Those cases bind the insurance company after receipt of the first premium and until it notifies the insured that he has failed to meet one of the conditions of insurability. The rationale is that if the company had no such interim obligation the applicant would have received nothing in exchange for his premium, when he thought that by paying the premium before receiving the policy he was obtaining immediate, through temporary, insurance. See 2 Couch on Insurance 2d ยง 14.42, at pp. 88-92 (rev. ed. 1984). The Burnses were not buying temporary insurance with ...

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