Unpublished Disposition, 884 F.2d 1396 (9th Cir. 1988)

No. 88-2832.

United States Court of Appeals, Ninth Circuit.

Before WALLACE and NOONAN, Circuit Judges, and RONALD S.W. LEW, District Judge^** .

MEMORANDUM^**

After a jury returned a verdict in favor of defendant-appellee ("State Farm"), plaintiffs ("the Youngs") moved the District Court for Judgment Notwithstanding the Verdict and, in the alternative, a New Trial. The district court denied the motion in its entirety in an order filed May 18, 1988. The Youngs now appeal presenting two separate issues to the Court:

1) Should the trial court have granted the Motion for Judgment Notwithstanding the Verdict ("JNOV") determining as a matter of law that State Farm's acceptance of a premium and issuance of a conditional receipt for health insurance to Paul Young on December 29, 1983, created a contract of temporary insurance which was in effect when Young was injured in an automobile accident on February 7, 1984? and,

2) If the existence of a contract of temporary health insurance covering Paul Young involved a question of fact, and not a question of law, did the trial court improperly instruct the jury on the law applicable to the formation of insurance contracts.

Jurisdiction in the district court was based on diversity of citizenship. 28 U.S.C. § 1332(a) (1). We have jurisdiction under 28 U.S.C. § 1291 and we AFFIRM.

FACTS

On December 9, 1983 appellant Denise Young visited State Farm Insurance Agent Clem Kohl and, with the help of Kohl, completed applications for health and life insurance for her husband, appellant Ronald P. Young.¹  Upon completing the applications Mrs. Young wrote a check to State Farm for $301.00 to cover the initial premiums. It appears that the check was then turned over to Mr. Kohl. The applications, however, were taken home by Mrs. Young in order to allow Mr. Young to review and sign them. There is no evidence that Mr. Young in fact reviewed the applications but they were signed by both Mr. and Mrs. Young and returned to Mr. Kohl the next morning. A "Conditional Receipt" that was appended to the health insurance application was also signed by each of the Youngs. There is no indication in the record that the receipt was in fact detached and given to them.

After the health insurance application was returned to Mr. Kohl it was forwarded to State Farm's home office in Illinois. After initial review of the applications, State Farm requested an Attending Physicians' Statement ("APS") from Mr. Young's personal physician, Dr. Marshall. The initial request was made of Dr. Marshall in January of 1984. In February of 1984 Dr. Marshall examined Mr. Young presumably for the purpose of preparing the APS. The APS was sent to State Farm in late March after several additional State Farm requests.

The APS sent by Dr. Marshall indicated that Mr. Young had a heart murmur involving either the pulmonic or aortic valves. This diagnosis was in direct contradiction to the report of one Dr. McDermott who had examined Mr. Young regarding the application for life insurance. Dr. McDermott had diagnosed Mr. Young's heart murmur as being the result of mitral regurgitation Dr. Scott, the physician who reviewed the reports for State Farm determined, based on the conflicting reports, that the reports were inconclusive and that the health insurance application should be denied. State Farm contends, and the Youngs do not appear to contest, that Dr. Scott's decision was made in accordance with established State Farm policies. After Dr. Scott's decision, the Youngs were sent notice that their application for health insurance had been denied. The pre-paid premiums were applied to other policies the Youngs maintained with State Farm.

On February 7, 1984, a date prior to the receipt by the Youngs of notice that their health insurance application had been denied, Mr. Young was injured in an accident involving a vehicle in which he was a passenger. Mrs. Young notified Mr. Kohl and requested the health insurance policy number so that it could be provided to the hospital. Mr. Kohl told her to use their State Farm automobile policy number and not the health insurance number. Mr. Young was in the hospital for six days and all of the bills relating to the accident were turned over to Mr. Kohl by Mrs. Young. Later, State Farm informed the Young's that the bills would be covered up to the limit of the automobile insurance policy but that there would be no coverage under the health insurance policy because State Farm had never actually issued the policy to the Youngs.

The application contained the following provision immediately preceding the first signature line for the proposed insured:

... (1) no agent has authority to waive the answer to any question in the application, to pass on insurability, to waive any of the Company's rights or requirements or to make or alter any contract and, (2) no insurance will be effective unless a policy has been issued.

The "Conditional Receipt" stated in pertinent part,

It is agreed that no insurance shall be effective unless a policy is issued. However, if the Company is satisfied, after investigation and such examination, if any, as it may require, that the proposed insured and named dependents were insurable in accordance with the Company's rules and practices of selection for the insurance applied for at the time the application was signed, the policy will be dated and effective according to its terms at 12:01 A.M. the day the application was dated. If the application is declined, or if the policy issued is other than as applied for and it is not accepted by the applicant, the Company agrees to refund the above amount to the applicant.

The Conditional Receipt also stated, "The agent has read and explained this Conditional Receipt to me. I understand that I will not receive any insurance coverage for my money unless a policy is issued."

At trial, the Youngs testified that they did not recall reading those provisions but if they had they would have taken them to mean that they were not insured until the insurance company had actually issued a policy to them. Mr. Kohl testified that he could not remember exactly what he told Mrs. Young about the policy but that it was his practice to explain that applicants are not covered unless and until the insurance company acts affirmatively on the application by issuing a policy. The Youngs also testified that Mr. Kohl never said anything that would have led them to believe that the policies became effective upon the filing of the application. However, State Farm did bill the Youngs for health insurance premiums for the months of January, February, and March.

The Youngs filed the instant suit for a determination of their rights under the health insurance contract. After a jury verdict for the defendant, judgment was entered in favor of State Farm. The jury concluded that under the terms of the contract entered into by the Youngs and State Farm, there was no health coverage at the time of Mr. Young's accident. The Youngs appeal from the judgment.

THE JNOV ISSUE

The Court of Appeals reviews the propriety of the denial to grant JNOV under the same standard as applied by the District Court: JNOV is proper when the jury verdict is not supported by substantial evidence. Denial of a JNOV is error when it is clear that the evidence and its inferences cannot reasonably support judgment in favor of the opposing party. Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1014 (9th Cir. 1985). The Court of Appeals reviews the district court's interpretation of state law and of the insurance policy provisions de novo. State Farm Fire and Cas. Co. v. Estate of Jenner, 874 F.2d 604, 606 (9th Cir. 1988).

The issue before the Court is a matter of Arizona law and the Court must look to the Arizona courts for guidance. In this case there is Arizona case law directly on point. In John Hancock Mutual Life Ins. Co. v. McNeill, 27 ArizApp. 502, 556 P.2d 803 (Ariz.Ct.App.1976) the Court stated that there are three types of conditional insurance receipts or "binders." They are:

(1) 'Insurable risk' or 'satisfaction' binders in which the document states that the proposed insurance takes effect at the time of payment or of the physical examination, if it later appears that under objective standards of insurability that [sic] the applicant was insurable at the date in question;

(2) 'Approval' binders in which no insurance comes into effect until the insurance is approved by an authorized official of the insurance company; if it does, however, the effective date is that of the application or the medical examination; and

(3) Unconditional temporary insurance during the pendency of the application or for a stated period (rarely used in life insurance).

McNeill, 556 P.2d at 806 (quoting Simpson v. Prudential Ins. Co. of Am., 227 Md. 393, 177 A.2d 417, 422-423 (1962)). While the difference between the insurable risk type and the approval type is not obvious at first glance, the difference appears to be that insurable risk contracts by their terms take effect immediately but subject to certain conditions. Approval type binders provide coverage only after certain conditions are satisfied. Thus, the person who receives an insurable risk binder may be justified in assuming that a contract for insurance exists--albeit a revocable one--while the person who receives an approval type binder should not assume he or she is covered until informed otherwise.

The legal difference between insurable risk binders and approval binders is very significant in Arizona. There is substantial authority for the proposition that contractual provisions in insurable risk type contracts will not be enforced if coverage is dependent on subjective criteria or standards that are not made clear to the applicant. Corral v. Fidelity Bankers Life Ins. Co., 129 Ariz. 323, 630 P.2d 1055 (Ariz.Ct.App.1981); Cain v. Aetna Life Ins. Co., 135 Ariz. 189, 659 P.2d 1334 (Ariz.Ct.App.1983). Thus, unless the criteria for insurability are clearly defined and understandable, a binder which purports to be effective on the date of application truly binds the insurance company to coverage during the period in which the insurance company considers the application. However, no such rule of law applies to approval binders. If the binder states clearly that no insurance is immediately in effect and none will be effective until action is taken by the insurance company, those terms are enforceable and the insurer will not be bound until the application is approved. Pawelczyk v. Allied Life Ins. Co., 120 Ariz. 48, 583 P.2d 1368 (ArizCt.App.1978); Cain, 659 P.2d at 1340.² 

Appellants contend that the binder at issue here is a hybrid of the insurable risk and the approval type binders and that the case law which holds conditional provisions in insurable risk type binders to be unenforceable should be applied here. Appellants acknowledge the existence of the approval type provision which states that no insurance is in effect until a policy is issued but argues that the fact that the coverage would be retroactive to the date of the application makes the binder at least partially of the insurable risk type. Appellant is mistaken. Because the receipt at issue here states that there will be no coverage until a policy is issued, the receipt must be characterized as an approval binder. The fact that coverage would be retroactive to the date of application does not alter this conclusion. The definition of approval type binder laid out in McNeill and adopted in several subsequent cases, Pawelczyk v. Allied Life Insurance Company, 583 P.2d 1368, 1371, Corral v. Nationwide Life Ins. Co., 630 P.2d 1055, 1059, and Cain v. Aetna Life Insurance Co., 659 P.2d 1334, 1338, specifically allows for clauses which provide coverage to be retroactive to the date of application. There is simply no authority to support appellants' contention that the binder at issue here was anything other than an "approval" binder.

Approval binders, as described above, are valid in Arizona and may be drafted in such a manner that the insurance company avoids any liability until a policy is issued. As was stated in Cain v. Aetna Life Ins. Co., 659 P.2d 1334, an "approval" type contract is fully enforceable in Arizona if the contract includes "clear and unequivocal language in the conditional stating its intention to condition liability upon subsequent approval of the application for insurance." Id. at 1340; See also Pawelczyk, 583 P.2d at 1371-72. In this case, both the application for insurance and the conditional receipt set forth in absolutely unambiguous and easily understood terms that there would be no insurance coverage unless a policy is issued. Thus, there was substantial evidence upon which a jury could conclude that no coverage became effective unless and until State Farm issued a policy. Thus, the district judge was correct in refusing to enter a JNOV that a contract for insurance existed on February 7, 1984.

THE JURY INSTRUCTION ISSUE

A party is entitled to an instruction concerning his or her theory of the case if it is supported by law and has some foundation in the evidence. Los Angeles Memorial Coliseum Comm. v. National Football League, 726 F.2d 1381, 1398 (9th Cir.) cert. denied, 469 U.S. 990 (1984). Failure to submit a proper jury instruction is a question of law reviewable by the Court of Appeals de novo. 999 v. C.I.T. Corp., 776 F.2d 866, 871 (9th Cir. 1985). An error in instructing the jury in a civil case does not require reversal if it is more probably than not harmless. Courson v. A.H. Robbins Co., Inc., 764 F.2d 1329, 1337 (9th Cir. 1985).

The district court instructed the jurors on "traditional" contract law. The Court instructed, inter alia, (1) that the contract, if it is to be binding, must include a manifestation of mutual assent to the terms and conditions of the contract, and (2) that when a party has an equal opportunity to read and examine a contract it is his duty to do so, and if he fails to do so he will not be permitted to avoid it on the ground that he did not read it, or supposed it was different in it terms from what it really was. The district court judge did not instruct the jury on the possibility that the meaning of the express terms of the contract could be varied by parol evidence.

Appellants contend that this instruction was erroneous because it no longer states the law applicable to insurance contracts in Arizona. Appellant contends that in Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 140 Ariz. 383, 682 P.2d 388 (Ariz.1984), the Arizona Supreme Court adopted a view of standardized insurance contracts which directs courts to look beyond the express terms of the insurance contract and to attempt to discern the reasonable expectations of the non-drafting party, generally the insured. Here, appellant contends that the jury should have been allowed to determine whether the Youngs reasonably believed that insurance coverage was being provided to them, and if the jury determined that appellants reasonably held such a belief, application and receipt would have to be interpreted so as to provide such coverage.

State Farm contends first that Darner and its progeny must be distinguished from this case. Appellee argues in response that the Darner cases all assume the existence of a contract and concern only the interpretation of terms within that contract. Appellee notes that here no contract of insurance ever arose. Appellee then argues that even if the law stated in those cases were to apply here, the provisions in the "contract" at issue are so clear that the Darner cases simply do not permit the Court to look behind the express terms. Specifically State Farm contends that Darner line of cases direct the court to disregard the express provisions of a contract only when:

(1) ... the contract terms, although not ambiguous to the court, cannot be understood by the reasonably intelligent consumer who might check on his or her rights;

(2) ... the insured did not receive full and adequate notice of the term in question and the provision is either unusual or unexpected, or one that emasculates apparent coverage;

(3) ... some activity which can be reasonably attributed to the insurer would create an objective impression of coverage in the mind of a reasonable insured;

(4) ... some activity reasonably attributable to the insurer has induced a particular insured reasonably to believe that he has coverage, although such coverage is expressly and unambiguously denied by the policy.

Gordinier v. Aetna Casualty and Surety Co., 154 Ariz. 262, 742 P.2d 277, 283-84 (Ct.App.1986) (citations omitted). State Farm contends that the uncontested facts of this case are that the contractual provisions at issue were absolutely unambiguous, common, easily understood, and the State Farm did absolutely nothing to induce the Youngs to believe they were covered. Thus, State Farm contends that no Darner instructions could properly have been given to the jury.

State Farm is correct in its interpretation of Darner and the other reasonable expectations cases. First, the Darner line of cases apply to situations in which a contract for insurance has been established and the terms of the contract are at issue. Here, the issue was the very existence of a contract of insurance. Second, and more importantly, Darner and its progeny allow Courts to look beyond the express terms of insurance contracts only in situations where the terms of the contract are ambiguous or difficult to understand or when the insurer has behaved in such a manner that the insured is led to believe mistakenly that his or her interests are adequately protected. For example, in Darner the insurance agent made direct misrepresentations to the plaintiff concerning the amount of coverage provided by the voluminous insurance contracts. The Court stated "... where an insurer or its agent misrepresents, even though innocently, the coverage of an insurance contract [sic] or the exclusions therefrom, before or at the inception of a contract, and the insured reasonably relies thereupon to his ultimate detriment, the insurer is estopped to deny coverage after a loss on a risk or from a peril actually not covered by the terms of the policy." Darner, 682 P.2d at 400 n. 10 (quoting Harr v. Allstate Insurance Co., 54 N.J. 287, 306-07, 255 A.2d 208, 219 (1969)).

In this case, the language at issue is unambiguous and clearly understood by a person of average intelligence. Further, there is no indication that State Farm did anything to lead the Youngs to believe that the express terms of the contract did not accurately state the terms of the contract.³  There is, in short, nothing in the record that would support a jury verdict based on Darner and thus appellants were not entitled to an instruction based on Darner.

ATTORNEYS FEES

Each side has requested attorney's fees pursuant to Ariz.Rev.Stat. Sec. 12-341.01. That provision allows the Court, in its discretion, to award attorney's fees to the prevailing party in actions that arise from a contract. As State Farm has prevailed on this appeal only State Farm's request is tenable. However, that request was denied. As stated in the District Court order filed May 18, 1988, the Arizona Supreme Court has listed several factors which must be considered determining the propriety of an award of fees under Sec. 12-341.01. Courts should consider 1) The merits of the defense or claim presented by the unsuccessful party; 2) Whether assessing fees against the unsuccessful party would cause an extreme hardship; 3) The novelty of the legal question presented, and whether such claim or defense has previously been adjudicated; and 4) Whether the award in any particular case would discourage other parties with tenable claims or defenses from litigating or defending legitimate contract issues for fear of incurring liability for substantial amounts of attorney's fees. Associated Indem. Corp. v. Warner, 143 Ariz. 567, 694 P.2d 1181, 1184 (Ariz.1985). After consideration of these factors the Court has determined that an award of attorney's fees is inappropriate. First, the District Court's order filed May 18, 1988 indicates that an award of attorney's fees will likely cause substantial hardship. Second, plaintiffs sought to establish the proposition that under Arizona law a contract of insurance automatically arises when an individual applies for insurance, pays a premium, and receives a conditional receipt stating that coverage is effective as of the date of the application if the insurer grants coverage. While plaintiffs were unsuccessful in this case, this proposition represents a reasonable extension of general contract principles that has been adopted by other states and may as yet be adopted by the Arizona Courts. See State Farm Mut. Auto. Ins. Co. v. Khoe, 872 F.2d 1427 (9th Cir. 1989). Plaintiff should not be discouraged for attempting to have this Court move Arizona law forward in this area.

AFFIRMED.