IN THE SUPREME COURT OF THE STATE OF KANSAS1 2
No. 87,279
No. 87,981
NATIONAL INSPECTION AND REPAIR, INC.,
Appellee,
v.
VALLEY FORGE LIFE INSURANCE COMPANY
and CONTINENTAL ASSURANCE COMPANY,
Appellants,
and
EUGENE C. STRAUB,
Appellee.
SYLLABUS BY THE COURT
1. Summary judgment is appropriate where there are no genuine issues as to any material fact and the moving party is entitled to judgment as a matter of law.
2. Where a policy of insurance is issued to an insured in compliance with the requirement of a statute, the pertinent provisions of the statute must be read into the policy, and no provisions of the policy in contravention of the statute can be given effect.
3. A trial court's decision which reaches the right result will be upheld even though the trial court may have relied upon the wrong ground or assigned erroneous reasons for its decision.
4. Under the provisions of K.S.A. 40-451, coverage under an individual life insurance policy becomes effective upon receipt of the application for such policy, together with the initial premium. Such coverage, limited only by the conditional premium receipt and subsection (b), remains in effect until the applicant has been notified in writing of an adverse underwriter decision, as defined in K.S.A. 40-2,111, and any unearned premium is returned.
Appeal from Shawnee district court; JAN W. LEUENBERGER, judge. Opinion filed November 1, 2002. Affirmed.
Scott C. Nehrbass, of Shook, Hardy & Bacon, L.L.P., of Overland Park, argued the cause, and Matthew J. Wiltanger, and Jerrod A. Westfahl, of the same firm, were with him on the briefs for appellants.
Richard F. Hayse, of Morris, Laing, Evans, Brock & Kennedy, Chtd., of Topeka, argued the cause, and Phillip L. Turner, and Dan E. Turner, Topeka, were with him on the brief for appellee National Inspection and Repair, Inc.
Eric A. Van Beber, of Wallace, Saunders, Austin, Brown & Enochs, Chartered, of Overland Park, argued the cause for appellee Eugene C. Straub.
The opinion of the court was delivered by
ALLEGRUCCI, J.: The central issue in this case is whether there was temporary insurance coverage on the life of William Thomas Gaines at the time of his death. Gaines died within the temporary coverage period set by the conditional premium receipt. When National Inspection and Repair, Inc., (NIR) demanded payment of $500,000 in life insurance on Gaines, Valley Forge Life Insurance Company and Continental Assurance Company (collectively known as CNA) denied coverage.
NIR sued CNA and Eugene Straub. Against CNA, NIR alleged breach of contract and, in the alternative, negligence. Against Straub, it alleged negligence or misrepresentation and acting without authority in failing to procure the insurance. CNA filed a cross-claim against Straub for improperly accepting the application and initial premium for Gaines. On cross-motions, the district court granted summary judgment in favor of NIR and against CNA. The district court dismissed CNA's cross-claim against Straub. CNA appeals. The district court's entry of summary judgment in favor of Straub was not appealed.
CNA filed separate notices of appeal from the entry of summary judgment and the dismissal of its cross-claim. Those appeals, 87,279 and 87,981, are consolidated for purposes of argument and decision under case No. 87,279. This court transferred the appeal from the Court of Appeals. K.S.A. 20-3018(c).
On appeal, CNA argues that the trial court erred in granting summary judgment in favor of NIR and in dismissing CNA's cross-claim against Straub.
The district court made findings of fact. On appeal, CNA contends, among other things, that summary judgment is precluded by a genuine issue of material fact whether NIR had notice before Gaines died that his life was not insured by CNA. CNA argues that summary judgment is not precluded because any notice NIR may have had of the lack of coverage on Gaines' life is, as a matter of law, insufficient to terminate temporary coverage. The district court made findings of fact, set out in numbered paragraphs, as follows:
1. The Defendant, Valley Forge Life Insurance Company, is an insurance company licensed to conduct business in the State of Kansas.
2. The Defendant, Continental Assurance Company, is an insurance company licensed to conduct business in the State of Kansas. The two companies are referred to collectively as CNA.
3. On or about September 18, 1998, William T. Gaines and Kenneth Burkhead both filled out applications for key man insurance. The plaintiff, NIR, was the intended beneficiary. Both William T. Gaines and Kenneth Burkhead filled out applications, which were accepted by defendant Straub.
4. On September 18, 1998, NIR issued check number 2409 to CNA in the amount of $653.36 with $211.72 being the amount due for Burkhead and $441.84 due for Gaines for life insurance coverage of $500,000 each, and delivered the check to defendant Straub.
5. Straub accepted the check, which was the premium payment for the first three (3) months for each policy and in return provided two "Conditional Premium Receipts" to NIR.
6. On September 19, 1998, Straub forwarded the applications to Financial Brokerage, Inc., which processed applications on behalf of CNA. Straub then went to China for 1 month.
7. Straub took premium money for the Gaines application although technically he should not have done so because Gaines had answered a question in section 20 of his application in the affirmative.
8. On September 24, 1998, Financial Brokerage, Inc., on behalf of CNA wrote to Straub and acknowledged receipt of the two applications.
9. The premium check from NIR was cashed by CNA on or about October 2, 1998.
10. On October 9, 1998 Financial Brokerage, Inc., wrote to Straub as a "STATUS UPDATE AS OF 10/08/98" and advised: "We may consider $234,500 as maximum for key man insurance. Please verify if the applicant was diagnosed with schizophrenia in August of 98? Thank you for your business."
11. On October 29, 1998, Financial Brokerage, Inc. again corresponded with Straub as a "STATUS UPDATE AS OF 10/28/98" and advised: "I have given the underwriter the medical information regarding schizophrenia and we will continue to underwrite this case. I will contact you as soon as I have a decision. Thank you."
12. NIR's payment was for the first 3 months' premium for each policy. CNA does not dispute this fact, but it denies the payment was for any temporary, conditional or unconditional life insurance contract.
13. Straub did not disclose that this insurance was contingent in any way and in fact stated that upon the acceptance of the check the company would be covered and if the individuals died the next day that the insurance would be in effect. Defendant CNA does not dispute that the statement may have been made but denies it was valid or that Straub had authority to make it or that it would give rise to a temporary insurance contract.
14. Gaines died unexpectedly on November 15, 1998.
15. Straub wrote in a letter to the Kansas Insurance Commissioner on April 22, 1999: "I called Financial Brokerage, Inc., promptly upon notification by phone from Mr. Kenneth Burkhead, Jr. that Mr. Gaines had died during the night." This fact is not disputed by CNA, but it denies that prompt notification has any effect to create temporary, conditional or unconditional coverage.
16. On November 23, 1998, 8 days after Gaines' death, CNA, through its agent Financial Brokerage, Inc., notified Straub by letter that a policy of insurance was being issued for Burkhead with an annual premium payment of $622.50.
17. After Gaines died, NIR contacted CNA on December 30, 1998, and on January 21, 1999, attempting to collect on the insurance policy. NIR, through its counsel, notified CNA of its demand to collect the life insurance proceeds for the policy which insured Gaines in the amount of $500,000 at the time of his death on November 15, 1998.
18. In a letter dated January 8, 1999, CNA attempted to refund the original premium amount by issuing a refund check in the amount of $653.36. The letter states that "any coverage that may have been provided under our Conditional Premium Receipt no longer applies." This letter was date stamped by the post office, January 11, 1999. CNA denies that the letter expressly or impliedly creates temporary, conditional or unconditional insurance coverage.
19. NIR refused to cash the refund check.
20. In a letter to the Kansas Insurance Department, CNA on May 7, 1999, admitted: "Although the money was refunded under the partner file, no notification was sent to Mr. Gaines that coverage did not exist."
21. CNA has refused to pay NIR the $500,000 coverage upon the death of Gaines, and NIR contends that the money is now due and owing under the application and conditional receipt.
22. To help in its business operations, NIR hired Straub as an advisor on business related matters.
23. David Price, President of NIR, also declared Straub to be NIR's insurance representative.
24. In his capacity as an advisor for NIR, Straub suggested to Price that NIR should purchase key man insurance on a couple of its employees.
25. Straub contacted Financial Brokerage, Inc., to solicit key man insurance on behalf of NIR. Financial Brokerage, Inc., responded by sending Straub information on three companies.
26. Price, on behalf of NIR, selected CNA.
27. After CNA was selected, Straub sought solicitor or producer status with CNA in order to receive the commission from the sale of key man insurance to NIR.
28. On or about September 29, 1998, Financial Brokerage, Inc., contacted Bammes, who had been designated by Straub to act for him while he was in China, to inform him that premium money could not be accepted with Gaines' application and to discuss potential remedies. NIR contends that this fact is inadmissible hearsay and should not be considered.
29. Financial Brokerage, Inc., also informed Bammes that, if Gaines were to be covered, he could only be covered for $234,500 due to his salary range. Bammes conveyed this information to Straub, but not to NIR.
30. Bammes told Financial Brokerage, Inc., to apply all the premium to Burkhead's application and to reapply $441.84 to Gaines' file if a policy was issued on his life. NIR contends that this fact is inadmissible hearsay and should not be considered. The district court found that there was not sufficient competent evidence to support a finding that NIR was informed before Gaines' death of the communications between Bammes and Financial Brokerage, Inc.
31. Until receiving CNA's letter of January 8, 1999, NIR had no direct knowledge from CNA of its intent not to insure Gaines.
32. CNA retained the premium and was in possession of it at the time of Gaines' death.
33. Gaines died within the 90-day period for which any coverage was in effect through the conditional premium receipt.
We first consider whether the trial court erred in granting summary judgment in favor of NIR.
The issue, as seen by the district court, is whether a person is insured if that person dies after an application for life insurance has been submitted and an initial premium payment has been exchanged for a receipt, but before the period provided for temporary coverage has expired and before a policy of life insurance has been issued or refused. According to the district court, the general rule governing this circumstance was stated in Service v. Pyramid Life Ins. Co., 201 Kan. 196, Syl. ¶ 7, 440 P.2d 944 (1968):
"The provisions of a binding receipt issued for payment of the first premium upon application for life insurance, in accordance with the facts and conditions more particularly stated in the opinion, are construed as providing temporary insurance protection until such time as the insurer has considered the application and announced its determination to accept or reject the risk, and the insurer cannot terminate the risk so assumed unless the insured is notified in his lifetime that his application was rejected."
In Service, the regional manager for the insurance company met with Zelma and Gerald Service and took an application and a premium check for life insurance on Gerald. The manager told Zelma that Gerald was covered upon payment. In reliance, the Services allowed two other term life insurance polices to expire. Before the insurance company had notified the Services whether it would insure Gerald, he died in an automobile accident. The insurer denied coverage; Zelma Service successfully sued for the full amount of insurance applied for.
With regard to receipts for first premium payments, temporary coverage, and the practices of life insurance companies, the court in Service expressed the following view:
"It is the practice of many life insurance companies to state in their applications that the contract of insurance shall not take effect until the application has been approved by the company, the first premium paid by the applicant, and the policy delivered. Where this is the situation a period intervenes between the signing of the application by the applicant and the delivery of the policy. During this period no money has been advanced to the insurance company, and no insurance is in effect. This interval, of a few days to several weeks, depending upon the time consumed in investigation and physical examination of the applicant, in passing upon his application at the home office, and in the traveling of the application and policy to and from the home office, is undesirable from the point of view of the insurer as well as the applicant. The disadvantage to the applicant consists in the fact he is not covered by insurance during this period, while the disadvantage to the insurer consists in the fact that during this period the applicant possesses the power to revoke the offer made in his application. This disadvantage is a real one as far as the insurer is concerned, because the applicant may decide to exercise his power, either because he chooses not to carry any insurance at all, or because he chooses to purchase it from a rival company. In that event the company suffers to lose what it has expended for the investigation and medical examination of the applicant, aside from the loss of business itself.
"To alleviate this situation insurance companies have seized upon the idea of issuing binding receipts to the applicant upon the payment of the first premium. These binding receipts, or conditional receipts, as they are sometimes called, usually contain a provision to the effect that the insurance shall be considered as in force from the date of the receipt, or the date of the medical examination, provided the application is approved and accepted at the home office of the insurer.
. . . .
"The issuance of these binding receipts effectively does away with the disadvantage threatening the insurer. The applicant to whom the binding receipt is issued feels contractually obligated to perform, and it serves to give the insurer the use of premium money at the earliest date possible. It further offers a selling point of which no agent fails to make the utmost in his talks with prospective customers." 210 Kan. at 209-10.
With regard to courts' handling of the binding receipts, the court observed:
"There is a great confusion of authority as to the effect to be given such receipts. Because of the similarity of wording usually found in them, attempts have been made to generalize their operation. If these apparently conflicting authorities are examined, however, it becomes clear that these receipts are not capable of general treatment, but must be individually interpreted to give them the effect which the parties intended them to have in each case. The fundamental question is: What was their intention?" 201 Kan. at 211.
Thus, the issue was whether the receipt given to Zelma Service in exchange for her initial premium payment indicated "an intention to create temporary insurance coverage for the time during which the approval of the application was pending?" 201 Kan. at 212.
The receipt given to Zelma Service stated:
"'It is understood and agreed that the payment referred to on the reverse side of this receipt is made and accepted subject to the following conditions:
'1. That if the Company at its Home Office after investigation shall be satisfied that on the date hereof, or on the date of the medical examination for such insurance, whichever is later, each person proposed for insurance 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 corresponding to the age of each person proposed for insurance, the insurance protection applied for shall by reason of such payment [except as otherwise provided in item (16) of the application] take effect from the date hereof or from the date of such medical examination, whichever is later. In any event, the amount of insurance becoming effective under the terms of this receipt is limited to the extent that in the event of the death of the Proposed Insured, the total liability of the Company shall not exceed $250,000 inclusive of life insurance and accidental death benefit in force with the Company on the date of the application. If less than the full first premium has been paid, such insurance protection shall nevertheless become effective on said date but shall be deemed temporary only and to expire at the end of the period for which the amount tendered hereunder would provide such insurance on a pro rata basis.
'2. That if any check, draft or money order given in payment of the premium is not paid on presentation, this receipt shall be void.
'3. That if said application is not approved and accepted by the Company within sixty (60) days from the date hereof, then insurance applied for shall not become effective, and the amount tendered shall be returned. Any delay in the return of the amount tendered shall not be construed as approval of the application.' (Emphasis added.)" 201 Kan. at 211.
The court concluded that the insurance company "accepted the liability for insurance created by the preliminary agreement in the form of a binding receipt of which it had not been divested by rejection of the application." 201 Kan. at 216. Stating that it was giving effect to the intention of the parties, the court held that temporary insurance was in force on the life of Gerald Service at the time of his accidental death. 201 Kan. at 215-16.
Despite it being apparent that Service was the basis for the district court's decision in the present case, CNA does not mention Service in its opening brief and contends that the district court applied Tripp v. The Reliable Life Insurance Co., 210 Kan. 33, 499 P. 2d 1155 (1972). CNA attacks the district court's ruling on the ground that Tripp was expressly overturned in Thomas v. Thomas, 250 Kan. 235, 824 P.2d 971 (1992). CNA's argument borders on the disingenuous and is without merit.
In Tripp, as in Service, the application for insurance included a provision for a certain number of days in which the company could issue or decline to issue a policy. In Tripp, unlike in Service, the stated period was over before the applicant died. In Tripp, the application provided:
"'. . . (2) The Company shall have sixty (60) days from the date of receipt of the application at its Home Office in Webster Groves, Missouri (which is agreed to be a reasonable period) to determine the insurability of Proposed Insured on the basis on which application is made or on another basis. If the policy is not received by the undersigned(s) within that period the application will be deemed to have been declined by the Company. . . .'" 210 Kan. at 34.
The receipt given for the initial premium stated:
"'. . . The insurance under the policy for which application is made shall be effective on date of this receipt or the date of completion of the medical examination (if, and when required by the Company), whichever is the later date, if in the opinion of the authorized Officers of the Company at its Home Office in Webster Groves, Missouri, the Proposed Insured is insurable and acceptable for insurance under the rules and practices on the plan of insurance. . . .
'Company shall have 60 days from date of application to consider and act upon the application. Failure of the Company to offer a policy within such 60 days shall be deemed a declination.'" 210 Kan. at 34.
Refusing to distinguish Service on the ground that Service died within 60 days of application but Tripp died 45 days after the 60 days had passed, the court stated that the "reasoning in Service, supporting the theory of temporary insurance, is consistent with an extension of the doctrine of temporary insurance until the company acts upon the application." 210 Kan. at 38. The court held:
"The only reason for failure to return the premium at the end of the sixty days would be that the company was still contemplating issuing the policy. We cannot support a rule which would permit an insurance company to make a decision on an application after the insured's death. We conclude under the facts disclosed in this record that when an application for life insurance is made and the company receives the initial premium and issues a receipt therefor, a policy of temporary insurance is created and said policy of temporary insurance continues in effect until the insurance company declines the application, notifies the insured, and returns the premium, notwithstanding the provisions of the application and the receipt to the contrary." 210 Kan. at 38.
In Thomas, as in Tripp, an applicant for life insurance died after the consideration period had expired. The Thomas court, 250 Kan. at 244, expressly overruled Tripp and announced this new rule:
"When a conditional receipt for life insurance states clearly and unequivocally that if no insurance policy is issued to the applicant within a specified period the application shall be deemed to have been denied by the company and there is no insurance beyond the specified period, the contract expires by its own terms." 250 Kan. 235, Syl. ¶ 1.
The receipt given to Richard Thomas when he applied for life insurance and paid the initial monthly premium stated that if within 45 days from issuance of the receipt a policy has not been issued to the applicant, the application would be deemed to have been declined by the insurance company. 250 Kan. at 236-37. When Thomas died nearly 6 months after applying, the insurance company had not issued a policy. Applying the new rule, the court determined that Thomas was not insured at the time of his death.
The court distinguished Tripp from Service:
"In Service, the insured died during the conditional receipt period, making it completely distinguishable from Tripp. From our consideration of all the cases, we conclude Tripp should be overruled. The conditional receipts in Tripp and in this case state clearly and unequivocally that if no insurance policy is delivered to the applicant within a specified period, there is no insurance. Thus, the contract expired by its own terms. Such does not represent a new principle of law. Most contracts have termination dates. We are mindful of the rule that contracts drafted by one of the parties should be strictly construed against the party who drafted it. [The insurance company] drafted this contract, but because it is clear and unambiguous it requires no construction by this court. Fast v. Kahan, 206 Kan. 682, Syl. ¶ 2, 481 P.2d 958 (1971). Thus, the strict construction rule is inapplicable.
"It is a cardinal rule of construction that courts will not rewrite a contract by construction if it is clear and unambiguous. See Havens v. Safeway Stores, 235 Kan. 226, 231, 678 P.2d 625 (1984). This contract falls into that category. Richard applied for a policy of life insurance. He was issued 45 days of coverage by the conditional receipt. His premium paid for the coverage. If [the insurance company] desired to terminate the temporary coverage before the 45 days expired, it was required to notify him and return his premium. If, however, it did not so notify him, he received 45 days of insurance, but no more, with his premium used for that coverage. In this case the insured died after the coverage under the conditional receipt expired and, therefore, [the insurance company] is not liable. We hereby overrule Tripp v. The Reliable Life Insurance Co., 210 Kan. 33, 499 P.2d 1155 (1972)." 250 Kan. at 244.
The district court found in the present case that Gaines died within the 90-day period for which any coverage was in effect through the conditional premium receipt. In that narrow respect, the present case falls within the factual pattern of Service rather than Thomas. On the whole, the principles announced and applied in both Service and Thomas guide the court's consideration of the question of temporary insurance coverage in the present case.
CNA asserts that, unlike the Services who expected temporary and permanent coverage on Gerald's life and relied on the assurances of an authorized agent that he was and would be insured, NIR had no expectation that Gaines would be insurable and did not rely on his being insured. With this argument, CNA attempts to transform a contract action into an equitable matter. Although there is discussion in Service of the equitable concerns for expectations and reliance, at bottom it is a contract case and the language of the application form and the receipt, read according to applicable rules of construction and in the context of the insurance industry's practice of taking an initial premium with the application, govern. The district court read Service too broadly in concluding that the rule of that case alleviates the need for a contractual analysis of the application and receipt.
Not mentioned in the parties' submissions on the motions for summary judgment or in the district court's memorandum decision and order is K.S.A. 40-451. The Thomas opinion was filed on January 17, 1992. During the 1992 legislative session, an act relating to life insurance and declination of it was passed, and it appears in the statute book as K.S.A. 40-451. The statute provides:
"(a) When an application for an individual life insurance policy and an initial premium therefor has been received by an insurance company or agent acting on behalf of such company, the coverage for which application is made shall, subject to the limitations in subsection (b), be deemed to be temporarily in effect until the insurance company or agent has, in the event of an adverse underwriting decision, as defined in K.S.A. 40-2,111 and amendments thereto, notified in writing the applicant of such adverse underwriting decision and returned any unearned premium in accordance with K.S.A. 40-2,112 and amendments thereto.
"(b) When an application for an individual life insurance policy and an initial premium therefor has been received, the receipt for the premium shall be in writing and may:
(1) Exclude coverage if the proposed insured commits suicide;
(2) void coverage if the application contains material misrepresentation or is fraudulently completed;
(3) limit the coverage otherwise provided by subsection (a) by specifying for each proposed insured the amount and type of temporary coverage granted; and
(4) void coverage if a check or draft received in payment of the premium is not honored for payment when presented.
"(c) When an application for an individual life insurance policy and an initial premium therefor has been received, the receipt for the premium shall be in writing and provide for a refund of any unearned premium pursuant to K.S.A. 40-2,112 and amendments thereto."
CNA argues that K.S.A. 40-451, which on its face covers applications for individual life insurance, does not apply to the key man insurance policies that NIR attempted to purchase on the lives of two of its employees. CNA's contention seems to be that the beneficiary of a life insurance policy must be an individual rather than a corporation in order for the policy to be for "individual life insurance" within the meaning of the statute. The insurer cites no authority for its position. Nor does it offer any instances of insurance policies carrying labels that reflect the beneficiary rather than the insured. The legislature used the term "individual life insurance" to distinguish individual policies from group life insurance policies, in which insurance is offered to members of a group, such as the employees of a business, under a master policy between the insurer and the employer. See K.S.A. 40-433.
K.S.A. 40-451 has not yet been considered by a Kansas appellate court. The statute was construed and applied by a federal district court in Stauffer v. Jackson Nat. Life Ins. Co., 75 F. Supp. 2d 1271 (D. Kan. 1999). Darrell Stauffer applied to purchase a $250,000 life insurance policy and delivered a check for the quoted premium by December 6, 1993. On December 27, 1993, the defendant informed Stauffer that it could not issue the policy applied for except at a greater premium than quoted by its agent. On December 30, 1993, Stauffer paid the additional premium and the insurance company delivered a policy to him. The policy states that both the policy date and the issue date are December 28, 1993. By the terms of the policy, if the insured died as a result of suicide "within two years of the issue date, the amount payable by defendant will be equal to the premiums paid" rather than $250,000. 75 F. Supp. 2d at 1273. The insured died by suicide on December 13, 1995. The federal district court stated that the issue before it was "when the suicide and contestability provisions of the policy began to runat the time Darrell Stauffer completed his application (December 6, 1993), or at the 'issue da