A man met with an insurance agent to apply for a life insurance policy in the amount of $150,000. The application process consisted of three parts: the applicant's completion of an application agreement, the applicant's answering various health questions before a medical examiner, and the medical examiner's report. The agent testified that he asked the man the questions in the application agreement and then typed the answers on the application form on his laptop computer. Although the evidence is disputed as to whether the agent asked the man question 16(g)—whether he had had a moving traffic violation, a driver's license suspended, or an accident in the prior three years—it is undisputed that the agent entered a checkmark in the “No” box by that question. The man named his wife as the beneficiary under the policy. Disputed evidence was presented as to whether the man himself signed the application agreement.
The agent printed out the man’s life insurance application which included the following clause: Unless the policy becomes effective at an earlier date due to full and complete fulfillment of the conditions in the Conditional Receipt, any insurance issued by the Company will not become effective until this Application has been approved and accepted by the Underwriting Department of the Company, and the policy issued has been delivered to the owner of the policy personally and payment to the Company of the full first premium during the lifetime and continued insurability of the Proposed Insured has been made.
At the close of the meeting, the wife wrote a check payable to the insurer for $103.70, the monthly premium rate. The wife testified at trial that the agent informed them that her husband would be covered as soon as they gave him the check. The agent submitted the man's application to the insurer the following day.
About six weeks later, the man was examined by the medical examiner. During the examination, the man informed the medical examiner that his family had a history of heart disease and that he had had moving traffic violations within the past five years. The day after he had his medical examination, the man was killed in an accident.
Two days later, the insurer received the medical examiner's report, which indicated that the man's family had a history of heart disease, that his cholesterol was above 255, and that he had had moving traffic violations in the past five years. In light of the man's high cholesterol level and his family history of heart disease, the insurer’s underwriters determined that he was not eligible for the premium rate for which he had applied. Rather, the proper classification would have had a higher premium. Additionally, in light of the man's moving-vehicle violations, the man was a greater risk to insure and a “rate-up” of $2.50 per $1,000 worth of coverage was required. The testimony at trial indicated that the new rate for the premium and the rate-up would have resulted in a monthly premium of $182.55 per month. Ten days after the man’s medical exam, the insurer notified the wife by letter that no life-insurance coverage was available for his death “because no policy was issued and the conditions of coverage under the conditional receipt were not met.”
The wife sued the insurer seeking to recover under the terms of the conditional receipt. She alleged, among other claims, that the insurer had breached the contract and had acted in bad faith when it refused to pay life-insurance benefits on the her husband’s death. She also sued the agent, alleging, among other claims, that he had negligently failed to procure insurance coverage for her husband. After a trial, the jury found that the insurer had breached the contract and had in bad faith refused to pay the insurance benefits due pursuant to that contract and that the agent had negligently failed to procure insurance for the husband. The Jefferson Circuit Court entered a judgment in the amount of $440,674.94 against the insurer and in the amount of $100,000 against the agent. The insurer and the agent submitted motions for judgments as a matter of law at the close of the evidence and after the entry of the judgment. The trial court denied the motions.
The Supreme Court of Alabama reversed the judgment and rendered a judgment in favor of the insurer and the insurance agent. The court held that the applicant's failure to satisfy the conditional receipt's conditions precluded coverage under the conditional receipt, the agent lacked actual or apparent authority to bind the insurer, the lack of a written or oral contract between the insurer and the applicant precluded the widow from prevailing against the insurer on the bad-faith claim, and the doctrine of contributory negligence barred the claim that the agent negligently failed to procure life insurance.
The applicant's failure to satisfy the conditional receipt's conditions precluded coverage under the conditional receipt. The applicant’s failure to satisfy the conditional receipt's conditions that all factors affecting insurability were as stated in the application and that the insurer's underwriting department was satisfied that the applicant was insurable at a risk acceptable to the insurer precluded coverage under the conditional receipt. The application did not indicate that the man had moving traffic violations within the prior three years, and the underwriters determined that the man was not insurable at the amount applied for without modifications.
The agent lacked actual or apparent authority to bind the insurer. The agent's statement that the man would be “immediately covered” upon payment of the premium did not establish an oral contract that bound the insurer. The conditional receipt provided that no agent was authorized by the insurer to waive or modify in any way any of the conditions or provisions contained in the conditional receipt. The application agreement stated that only the insurer's underwriters had authority to accept or approve the application or to pass upon insurability.
The lack of a written or oral contract between the insurer and the applicant precluded the widow from prevailing against the insurer on the bad-faith claim. Proof of the existence of an insurance contract between the parties is a threshold requirement in a bad faith claim. With regard to her husband’s life insurance, the wife had no contract with the insurer or the agent.
The doctrine of contributory negligence barred the claim that the agent negligently failed to procure life insurance. Documents clearly apprised the man and his wife that he was not guaranteed immediate coverage upon submitting his application to the agent. They took a risk and put themselves in danger's way by not reading the documents. Because they put themselves in danger's way and had a conscious appreciation of the danger of suffering a monetary loss in the event that the man died before the conditions for immediate coverage were met, any negligent-procurement claim was barred by the doctrine of contributory negligence.
The Supreme Court of Alabama reversed the trial court’s judgment and rendered a judgment in favor of the insurer and the insurance agent.
See: Alfa Life Ins. Corp. v. Colza, 2014 WL 1874703 (Ala., May 9, 2014) (not designated for publication).