Statewide Insurance v. Dewar

— 577 — OPINION HAIRE, Judge. On this appeal from summary judgment entered in favor of the appellee Statewide Insurance Corporation, the primary issue concerns the liability of the insurer where immediate coverage has been extended in consideration of the present payment by check of the entire policy premium, and then the check is dishonored upon timely presentment to the drawee bank. The trial court held that under such circumstances there was no coverage, and entered summary judgment for the insurer. The pertinent facts, uncontroverted for summary judgment purposes, are as follows. On Friday, February 18, 1977, Loren J. Desotell went to the offices of a designated agent for Statewide and applied for a policy of automobile liability insurance. The application was for a two months policy with coverage commencing immediately for the period of February 18,1977 to April 18, 1977. Desotell was not a prior customer or previously known to the insurance agent, and therefore credit was not extended to him. Rather, the consideration required for coverage was the present payment of the entire policy premium, $67. There was no deferred payment or promise by Desotell to pay any amount in the future. Desotell gave the insurance agent his check for $67 at the time the application was completed, and, by the terms of the application, coverage was to commence at that time. Upon receipt by Statewide, the application was promptly processed in accordance with Statewide’s regular business practices. On the following Tuesday, February 22, 1977, the check in purported payment of the premium was included in Statewide’s regular bank deposit. The drawee bank, First National Bank of Arizona refused to honor the check on presentment and returned it to Statewide’s collecting bank stamped “Uncollected Funds”. The dishonored check was then mailed to Statewide, where it was received on Monday, February 28, 1977. On that same day, Statewide mailed a letter to Desotell rejecting his application and advising him that his check was uncollectable and had been returned by the bank, and that it would be impossible for Statewide to issue automobile liability insurance for him. On the following day, March 1, 1977, Desotell was involved in an automobile accident with appellants. For summary judgment purposes it is admitted that Statewide’s letter of February 28, 1977, although mailed before the accident, was not received by Desotell until after the accident. Based upon injuries received in their collision with Desotell, appellants thereafter made a cláim against their own insurer, under the uninsured motorist’s coverage provisions of their own policy, asserting that Desotell was uninsured at the time of the accident. Their insurer subsequently paid them the uninsured motorist’s policy limits of $15,000, which is the same amount of coverage applied for by Desotell in his application to Statewide. Demand was subsequently made upon Statewide to acknowledge coverage of Desotell’s liability resulting from the March 1, 1977, accident. Statewide then commenced this declaratory judgment action, seeking a declaration that because no coverage existed, it had no liability to either Desotell or to appellants. As previously indicated, the trial judge concluded that there was no coverage and granted Statewide’s motion for summary judgment. Appellants have appealed from that judgment. A review of the record in the trial court indicates that the trial court’s judgment in favor of Statewide was entered upon the theory that the liability coverage extended by Statewide to the insured in the application was conditioned upon the insured’s check being paid upon presentment to the drawee bank, and that when the check was dishonored, Statewide was relieved of any liability purportedly extended as the result of the completed application (binder). This conclusion that payment by check represents a conditional payment and that when the check is dishonored there is a failure of consideration, relieving the oth — 578 — er party from liability, does not constitute a novel legal theory as applied to contractual relationships generally, or as applied to insurance contracts specifically. The concept is statutorily recognized in the law of sales. See A.R.S. § 44-2359(C). Likewise, in considering the liability of insurance carriers, it is generally recognized that where advance payment of the premium is required and is made by check, if the check is dishonored, the insurer is relieved of liability for any purported coverage that otherwise would have been in effect. Thus, in 14 J. Appleman, Insurance Law and Practice § 8144 (1944), the principle is stated as follows: “The mere giving or sending of a worthless check to the insurer does not effect the payment of a premium; the result being, if such check is given for the first premium, that coverage never goes into effect____” Again, in Blashfield, Automobile Law and Practice, § 302.49 (3d ed. 1966), the following summarization is set forth: “Payment of a premium by check ordinarily is, in the absence of a statute or agreement to the contrary, conditioned on it being honored on timely presentation for payment, and the insurance company is relieved of liability on the policy when the check turns out to be worthless.” (Footnotes omitted). A generally recognized exception to the above-stated legal principle is that the facts in a particular case might show that a check has been taken in absolute satisfaction of the premium claim, so that if the check is dishonored the insurer is not entitled to declare the policy forfeited for nonpayment, but is relegated to its action on the check. The cases hold that the insured has the burden of proving this exception. Here, no evidence was submitted which would satisfy that burden. A case in point is Hare v. Connecticut Mut. Life Ins. Co., 114 W.Va. 679, 173 S.E. 772 (1934). The court’s syllabus in that case is as follows: “In the absence of a special agreement to the contrary, the acceptance of a check in payment is conditional upon the integrity of the check.” As stated in the court's opinion: “The premium is the price of the insurance and payment of the premium is of the essence of the insurance contract. No payment — no insurance.” 173 S.E. at 773. The Hare decision emphasizes that under the facts of that case the agent extended no credit to the insured and dealt solely on the supposition that the present payment by check was good. This entire question is extensively treated in an annotation in 50 A.L.R.2d 630, entitled “Receipt of Check for Insurance Premium as Preventing Forfeiture for Nonpayment.” The dissent in this case apparently does not dispute the validity of the foregoing authorities. Rather, the dissent recognizes that if there was a failure of consideration, Statewide’s obligation to provide temporary coverage was discharged, without any necessity of a showing that Desotell received notice prior to the accident. Such a concession is tantamount to recognizing that the trial court correctly granted summary judgment for the insurer in this case and that the judgment should be affirmed. In order to avoid such an affirmance, however, the dissent sidesteps the actual contractual facts presented by the record in this case and creates a “promise” as consideration to support a rather ingenuous legal theory relating to some imagined “special” law pertaining to insurance binder contracts. There is no such “special” law.1 In their opening brief in this appeal, the appellants recognize that the validity of an insurance “binder” is dependent upon the same basic legal elements as any other contract. See Employers’ Liability Assurance Corp. v. Frost, 48 Ariz. — 579 — 402, 62 P.2d 320 (1936); Roscoe v. Bankers Life Insurance Co., 22 Ariz.App. 282, 526 P.2d 1080 (1974); Saggau v. State Farm Mutual Insurance Co., 16 Ariz.App. 361, 493 P.2d 528 (1972). As stated by the Arizona Supreme Court in Turner v. Worth Insurance Co., 106 Ariz. 132, 133, 472 P.2d 1, 2 (1970): “By whatever name it may be known, a ‘binder’ for temporary insurance is a contract.” Our courts have not hesitated to apply ordinary contract principles in determining whether liability exists under purported binder coverage. See Rutherford v. John O’Lexey’s Boat & Yacht Insurance, Ltd., 118 Ariz. 380, 576 P.2d 1380 (App.1978). Here, the dissent makes a basic legal error in an attempt to avoid the “failure of consideration” consequences of the bank’s dishonor of Desotell’s check. Thus, the dissent states that “Statewide agreed to provide temporary, or binder, coverage, the consideration for which was Desotell’s promise to pay $67.00, i.e., his promise to buy the policy from Statewide.” Having asserted, without reference to the parties’ agreement, that the consideration for the issuance of binder coverage was Desotell’s promise to pay, the dissent then cites various authorities to the effect that actual payment of the premium is not required, that “payment of the premium is not a prerequisite to a valid automobile insurance binder,” and “agreement to.pay the premium, express or implied, is sufficient consideration.” For the foregoing proposition the dissent cites Rutherford v. John O’Lexey’s Boat & Yacht Insurance, Ltd., supra; 12A J. Appleman, Insurance Law and Practice § 7228, at 154-55 (1981); and an A.L.R. Annotation, 12 A.L.R.3d 1304, at 1318. The majority has no quarrel with these legal authorities cited by the dissent, nor with the application of the stated principle to the facts of the Rutherford decision or to any of the cases cited in the referenced portion of the Appleman citation and in the referenced A.L.R. annotation. Clearly, in cases involving binder contracts, as in any other contractual setting, if a party has bargained for the other party’s promise to pay, then that promise constitutes sufficient consideration to support the binder contract. All of these authorities merely stand for the proposition that if the insurer, as a part of the binder agreement, has not required present payment of the premium, then the actual or implied promise by the insured to pay in the future constitutes sufficient consideration to support the extension of binder coverage, and actual payment is not required. In all of the authorities cited in the dissent (including all cases cited in support of Appleman and the referenced A.L.R. Annotation), the facts show an actual or implied extension of credit by the insurer’s agent to the insured. No case is cited in which liability was imposed where, as in this case, the insurer required the actual present payment of the premium as consideration for the extension of binder coverage rather than relying on a promise to pay at some future time. As we have indicated previously in this opinion, under such circumstances the authorities hold that if the required present payment fails because the insured’s check for the initially required advance payment of premium is dishonored, then the insurer has no liability under the purported binder coverage. The dissent, however, somehow finds that the consideration for Statewide’s agreement to provide temporary, or binder, coverage was Desotell’s promise which was bargained for in exchange for the other party’s promise or performance. See Restatement (Second) of Contracts § 71 (1981). Here, the parties’ agreement clearly shows that the consideration bargained for by Statewide in exchange for all of its obligations pursuant to the application, including the immediate extension of binder coverage, was the required present payment by Desotell of the entire premium for two months coverage. Statewide bargained for that immediate performance, not for some imagined promise by Desotell to pay in the future. Unlike the cases relied upon in the dissent, there is no showing that Statewide was willing either to provide immediate coverage based upon a mere — 580 — promise by Desotell to pay or to extend any credit at all to him. In fact, the parties’ agreement negates any such showing. The dissent additionally attempts to find support for its analysis in the fact that after the check had been dishonored, Desotell became secondarily liable and subject to suit thereon in accordance with the obligations imposed upon the drawer of a check pursuant to A.R.S. § 44-2550(B). This obligation on Desotell’s part was not separate consideration exacted by Statewide for binder coverage, but rather was merely a legal incident flowing from the consideration bargained for by Statewide— the present payment by check of the entire premium by Desotell. In setting forth this alleged secondary promise to pay (by applying negotiable instruments law) the dissent appears to be urging that the parties’ agreement went along these lines: “And by the way, I’ll [Desotell] promise to pay my check after it bounces, if in exchange for that promise, you'll agree to give me immediate binder coverage.” It is clear that the parties here did not make any such bargain. The insurer here was not accepting as consideration for the extension of immediate coverage the secondary legal obligation which the insured had under negotiable instruments law to pay this $67 check in the event that it was dishonored by the bank. Even if the dissent’s analysis could conceivably be applicable, there was no showing here that the parties intended any apportionment or “splitting” of the consideration so as to make a specific portion thereof allocable to the insurer’s extension of immediate coverage. The dissent cites Smith v. Westland Life Insurance Co., 15 Cal.3d 111, 539 P.2d 433, 123 Cal.Rptr. 649 (1975) stating that had Statewide desired a contrary result, it could have inserted a specific provision to the effect that upon the dishonor of any check, draft or money order, the binder contract would be void. Although the contract quoted in the Smith opinion did contain such specific provision, the provision was neither pertinent nor material to any issue raised in that case, nor was it even discussed in the court’s opinion. To require an insurer or any other contracting party to set forth in a contract all governing general principles of law which regularly come into play upon the other party’s breach of that contract is not a realistic assessment of the practicalities involved in commercial transactions. In summary, the basis for reversal relied upon by the dissent has no legal or factual foundation in the record presented in the trial court. Additionally, the legal analysis cannot withstand careful scrutiny, and no authority cited provides any support for the result reached by the dissent. As a final word on the “equities” which might be perceived in Desotell’s favor here, we note that there is conspicuously absent from the record any affidavit by Desotell that he did not know at the time he drew the check that because of uncollected funds it would be dishonored when presented for payment. Likewise, Desotell has presented no affidavit to the effect that the check would have been subsequently honored if it had again been presented for payment. Although an affidavit of a bank officer has been filed relating to general practices concerning checks dishonored for uncollected funds, there is likewise an absence of any affidavit from the drawee First National Bank as to whether the out-of-state funds supposedly on deposit in Desotell’s account were ever actually collected, and specifically whether the status of the account, considering other checks presented at the time, was such as to support a conclusion that Desotell's check would have been honored if it had been again presented for payment. Simply stated, Desotell gave a bad check in payment of a premium. The check was dishonored upon presentment. As previously stated by this court in Rutherford v. John O’Lexey’s Boat & Yacht Insurance, Ltd., supra: “There are sound economic reasons for an insurance company to require more than a mere promise to apply for permanent insurance in return for assuming a risk of temporary coverage. Absent overriding public policy considerations, — 581 — the parties are free to contract for such conditions.” 118 Ariz. at 382, 576 P.2d at 1382 (emphasis added). Here, the insurer was not willing to accept Desotell’s promise to pay as consideration for extending temporary coverage, but rather required the present payment of the entire policy premium. That consideration failed when the check was dishonored. The trial court correctly granted summary judgment for the insurer. That judgment is affirmed. OGG, J., concurs. Footnotes [1] A possible exception exists in California, involving the creation by court decision of binder coverage in claims involving life insurance policies. See, e.g., Smith v. Westland Life Insurance Co., 15 Cal.3d 111, 539 P.2d 433, 123 Cal.Rptr. 649 (1975) (criticized by this court in John Hancock Mutual Life Insurance Co. v. McNeill, 27 Ariz.App. 502, 556 P.2d 803 (1976)).