Industrial Indemnity Co. v. Industrial Accident Commission

Petitioner, insurance company, seeks an annulment of an award of respondent commission reforming and

Prior to August 1, 1946, E. C. Cornish and Eoland T. Schultz were partners in a business venture. A policy of workmen’s compensation insurance was issued to the partnership and to the partners jointly but not severally, running from January 22, 1946, to January 22, 1947, covering all of their employees. On the subject of whether relatives were excluded, the policy provided that if a partnership was the insured it would not include partners but nothing was said as to relatives of the partners. With respect to relatives, it provided that if the policy is issued to an “individual” then such individual’s relatives are not covered. Schultz, having sold his interest in the business to Cornish in July, 1946, a new policy was issued by the petitioner dated January 17, 1947, but covering the period August 1, 1946, to August 1, 1947, and presumably the partnership policy was canceled. The new policy ran to Cornish as an individual and the clauses with respect to relatives were the same as in the partnership policy. Thus it could be reasoned that as long as the insured was a partnership, the employees of the partnership would not be excluded even though related to one of the partners, but when an individual was the insured, his relatives are excluded. This presents the question of the extent to which the coverage was intended to be affected by the change of the insured from a partnership to Cornish alone, the individual, when the arrangement was made for the cancellation of the partnership policy to be replaced by an individual-insured policy. That is to say, was it contemplated that the change from a partnership insured to an individual insured would affect only the name in which the policy was to stand, or was it to go farther and bring into operation the clauses that excluded relatives when the insured was an individual rather than a partnership 1

The circumstances surrounding the issuance of the above mentioned policies are as follows: The partnership was dissolved on August 1,1946, and notices of such dissolution were sent to all persons with whom the partners had dealt, including petitioner, and Clarence Haugen. Haugen was an insurance broker who procured the partnership policy for the partnership. While in such capacity he was the agent for the partnership, and later, for Cornish in connection with the procurement of the insurance. There is evidence from which

In the Report of Referee (Report of Record) dated April 22, 1947, we find this statement: “When the witness [Mrs. Cornish] left the broker’s [Haugen’s] office after having left with him for cancellation the old compensation and liability policy on the partnership, and arranging for the issuance of a new policy in their stead, the witness remarked to the broker in substance, ‘I have nothing to show now that we are insured, are we fully cover edV The broker replied in substance, ‘Yes, you are fully covered, don’t worry.’ The broker had said that he would write a new policy as of Aug. 1, 1946. The broker had been introduced to the defendant’s [Cornish’s] son, Arthur, and the decedent as the defendant’s son-in-law on

Haugen, at the time Mrs. Cornish took in the old policy for cancellation, called Furbush, admittedly an agent of the defendant carrier, to ascertain the manner in which the matter should be handled. Petitioner states, in its briefs, that Haugen “may have been” its agent for collection of premiums, and that Haugen “was its agent for collection,” but it is denied that he was an agent for the purpose of effecting or extending coverage, yet it is admitted that the oral agreement, made by Haugen with Mrs. Cornish, to the effect that the policy of insurance would be retroactive from August 1, 1946, is valid. Haugen then sent a letter to petitioner in which he stated that the partnership policy should be canceled as of August 1, 1946, because of “change of entity” of the insured; that the policy should be “rewritten” effective August 1, 1946, naming Cornish as an individual, as insured; and that enclosed were checks, one for $29.75 for the balance of premium due on partnership policy, and one for $54.21, for premiums on the policy to be “rewritten” according to payroll report for August 1, 1946, to October 1, 1946. No word was heard from petitioner until January 17th or 20th, 1947, when the rewritten policy was finally received by Cornish. This was after the accident occurred (Dee. 10, 1946) in which Spidle lost his life. After that accident, there being some doubt about the coverage of the policy, Haugen communicated with petitioner, and, as a result, a rider appeared on the policy when finally received which specifically named Arthur Cornish as covered although a son of Cornish. Petitioner made no offer to return the premium collected on a payroll with Spidle’s name on it either before or after the accident.

There is some analogy to the renewal eases in the policy expressed by section 304 of the Insurance Code. Where an insured requests an existing but expiring policy to be renewed, no change may be made in the terms of the renewal policy without notice to the insured. (Connecticut Fire Ins. Co. v. Oakley Improved Bldg. & L. Co., 80 F.2d 717 ; Ouachita Parish Police Jury v. Northern Ins. Co. (La.App.), 176 S. 639.) As above seen, the policy may be interpreted to mean that a change in the name of the insured would result in a change of the employees covered. That is not true in the renewal cases, but here we have more. The petitioner-insurer should have anticipated that Cornish would believe that his relatives would not be excluded by his purchase of the partnership. Haugen was the agent for the insurer in the collection of premiums and it may be said that by that process he became aware of the presence of Spidle’s name on the payroll, inasmuch as the premiums are based on the payroll. He knew Spidle was a relative. The premiums which were based on the payroll containing Spidle’s name were paid to and retained by petitioner. This has some significance even though such premium would not be enough to cover Spidle as a relative of Cornish, when we consider that Spidle’s pay should not form any part of the basis for the premium if the policy did not cover him at all because of his relationship to Cornish, and, further, that petitioner did not even deliver a policy until about three months after it was applied for, and some time after Spidle’s fatal accident.

Petitioner relies upon such cases as Westerfeld v. New York Life Ins. Co., 129 Cal. 68 [ 58 P. 92 , 61 P. 667 ]; Sharman v. Continental Ins. Co., 167 Cal. 117 [ 138 P. 708 , 52 L.R.A.N.S.

In the only case dealing expressly with the coverage of a contract continued under section 304, Ocean A. & G. Corp. v. Industrial Acc. Com., 104 Cal.App. 34 [ 285 P. 707 ], the continuation-of-partnership-contraet interpretation, was adopted by the court and resulted in restriction of the insurer’s liability. The court was confronted with a dissolved partnership and a claim by one Avho was formerly a partner but only an employee of his expartner when injured. The policy issued to the partners, which remained unchanged after dissolution of the partnership, provided that “this policy shall not apply to any member of such partnership . . . ’ ’ The court held that the injured expartner employee was not covered by the policy even after the change in the partnership. He was not covered when the contract was made, and the policy issued to the partnership continued without change under section 304. Spidle’s ease is simply the converse situation. Since he was covered when the contract was made, he was covered during the period of its continuance under section 304.

The controlling question therefore is whether that policy ' was cancelled before the injury resulting in Spidle’s death. It is my opinion that the submission of the policy to the company did not result in cancellation, for cancellation was conditional on the continued existence of insurance protecting the employer.

Haugen telephoned the insurance company and inquired about the proper procedure to follow in changing the business entity on the policy. He was instructed to send in the old policy for cancellation and was told that a new policy would then be issued, to be effective retroactively. It is unquestioned that both parties intended the employer to have the benefit of insurance during the interim the new policy was in preparation. Since Cornish was protected by section 304 under the original policy, cancellation would have been for the sole benefit of the insurer as well as at its direction. I cannot believe that either party contemplated cancellation apart from the effective creation of a new contract of insurance.

After noting that contract negotiation must be judged objectively by the manifestations of the parties, the dissenting opinion relies on the legal conclusion of Haugen’s secretary

Please cancell [Sic] policy effective 8-1-46 as there has been a change of entity. . . .

Please rewrite this policy effective 8-1-46 as follows:

R. C. Cornish, an individual, DBA R. C. Cornish Crane Service. . . .

Enclosed find cheek of net to cover payroll audit on R. C. Cornish from 8-1-46 to 10-1-46. . . .’ ”

This letter does indicate an intent to cancel. But in addition, it manifests the request of the cancelling party for insurance that would be effective on August 1, 1946. The objective theory of contracts properly limits our inquiry to the manifestations by the parties of their intent, but does not preclude consideration of the acts and words of the principals in the light of their obvious purposes. In that light, it is clear that Cornish’s consent to cancellation and Haugen’s authority to cancel were granted on condition that a contract of insurance would be in existence at the moment the old coverage ceased. (K. C. Working C. Co. v. Eureka-Security F. & M. Ins. Co., 82 Cal.App.2d 120 [ 185 P.2d 832 ]; Poor v. Hudson Ins. Co., 2 F. 432 ; Holden v. Putnam F. Ins. Co., 46 N.Y. 1 [ 7 Am.Rep. 287 ]; Aetna Ins. Co. v. Rosenberg, 62 Ark. 507 [ 36 S.W. 908 ].)

There was no new contract at the time of Spidle’s death because there was no agreement about the extent of coverage. Cornish had only four employees. He never agreed or authorized Haugen to agree to coverage of only half of his work force. The dissenting opinion states: “In the absence of fraud, one who accepts an instrument which on its face is a contract, is deemed to assent to all of its terms, and he cannot escape liability upon the ground that he has not read it.” But Cornish did not receive the instrument that purported to represent his contract with the insurer until weeks after the fatal accident. The dissent also points to the original policy issued to the partnership. “There was ample opportunity for Cornish to examine the limitation in the first policy, which was the same standard form used in specifying the new coverage.” But Cornish could not have been certain on October

It is difficult to ascertain what intent the insurer manifested concerning the issuance of a new policy. Once it is assumed that Haugen was not the insurer’s agent, the only link to the insurance company is found in the telephone conversation that Haugen had with Mr. Furbush, presumably an agent of the company. No testimony of any agent capable of binding the company appears in the record. Because we have only the fragmentary report of the conversation by Mrs. Cornish, it would be unreasonable to assume that the insurance company had done anything but consent to its customary contract of insurance with an individual, under which relatives of the insured are excluded.

Since the parties never agreed on the coverage of the insurance, no new contract existed at the time of Spidle’s death. The condition for cancellation was therefore not fulfilled. (K. C. Working C. Co. v. Eureka-Security F. & M. Ins. Co., 82 Cal.App.2d 120 [ 185 P.2d 832 ]; Tarleton v. DeVeuve, 113 F.2d 290 [ 32 A.L.R. 343 ] (Cal.App. 9th).) Since the partnership policy, which covered Spidle and was continued under section 304, was not cancelled at the time of his death, the award must be affirmed.

In affirming the award, it must be recognized that the Industrial Accident Commission ordered the reformation of a contract to which the parties never agreed. The problem is academic, however, since the company is liable under the partnership policy for the amount of the award. The company was not prejudiced by the award of reformation because the new policy as issued on January 17, 1947, did cover the only surviving employee-relative. In any event, the policy that the commission erroneously attempted to reform has expired.

Spence, J., concurred.

I cannot agree that section 304 of the Insurance Code “continued the coverage [of the policy originally written by the insurer] and rendered it effective at the time the liability for compensation arose.” That policy, it appears without conflict, was delivered to the insurer for cancellation before the accident to Spidle occurred. The evidence also shows the acceptance by the insurer of coverage to replace that of the cancelled policy, the new insurance being written as ordered by the agent of the insured.

According to the majority opinion, “Haugen was an insurance broker who procured the partnership policy for the partnership. While in such capacity he was the agent for the partnership, and later, for Cornish in connection with the procurement of the insurance.” Schultz sold his interest in the business to Cornish in July and the partnership was dissolved on August 1st. Evidently nothing was done about the insurance until October when Mrs. Cornish and Haugen discussed the policy which was then in effect. He telephoned Purbush of the insurance company for instructions. Purbush stated that it would be necessary to cancel the old policy and write a new one.

The telephone call was made in Mrs. Cornish’s presence, and she left the policy written for the partnership with Haugen for cancellation. Anne Kodak, secretary to Haugen, testified that “We cancelled Mrs. Cornish’s old insurance policy . . . and I mailed in the old policy with the check for the new premium and payroll report at that time.”

A letter identified as having been written by Haugen immediately after the interview with Mrs. Cornish fully corroborates the testimony as to the cancellation of the partnership policy. The letter, directed to the insurer, reads:

“Re: jf:546-07595-R.C. Cornish & Schultz DBA Cornish & Schultz, Crane Co.

Please cancel policy effective 8-1-46 as there has been a change of entity. . . . and . . . rewrite this policy effective 8-1-46 as follows:

R. C. Cornish, an individual, DBA R. C. Cornish Crane Service. . . .

Enclosed find cheek of net to cover payroll audit on R. C. Cornish from 8-1-46 to 10-1-46. ...”

Unquestionably the insurer accepted these instructions from Haugen and changed its coverage accordingly. As stated in the majority opinion, “presumably [the original policy] was

Mrs. Cornish, as the agent for her husband, manifested her consent to the terms of the new policy by authorizing Haugen to request the insurer to cancel the then existing insurance and rewrite the policy effective as of August 1st in the name of R. C. Cornish, an individual, doing business as R. C. Cornish Crane Service. She was present during Haugen’s telephone conversation with the insurer, and made no objection to having the new insurance issued to her husband as an individual.

Her state of mind is immaterial (Zurich etc. Assur. Co. v. Industrial Acc. Com., 132 Cal.App. 101 , 104 [ 22 P.2d 572 ]). Objectively, both the insured and the insurer manifested consent to the issuance of the new policy. The insured cannot be excused upon the ground that the terms of the policy were not read. There was ample opportunity for Cornish to examine the limitation in the first policy, which was the same standard form used in specifying the new coverage. In the absence of fraud, one who accepts an instrument which on its face is a contract, is deemed to assent to all of its terms, and he cannot escape liability upon the ground that he has not read it (Greve v. Taft Realty Co., 101 Cal.App. 343 , 352 [ 281 P. 641 ]). There would be no point whatsoever in stating the terms of an insurance policy if its conditions and limitation may be vitiated, as suggested in the majority opinion, by the insured’s inquiry: “Are we fully covered?” If that were the law, an affirmative answer to such a question might subject the insurer to liability for fire, theft, burglary or other hazards in a policy the terms of which included no such coverage.

Although the majority opinion does not expressly state that Haugen was the agent of the insurer with general powers and to such an extent as to make his knowledge imputable to the company, the decision is impliedly placed upon that ground. As a basis for affirming the award it is said: “There is evidence from which it may be inferred that he was petitioner’s agent for the collection of premiums on policies inasmuch as the invoices or bills for premiums from petitioner stated that Cornish should pay the premiums to ‘your agent’ Haugen.” But until this time it would seem to have been settled that an agent for collection of premiums is not an agent for coverage or other purposes. (Detroit T. Co. v.

Under these circumstances there is no factual basis whatever for affirming the ay?ard upon the ground that section 304 of the Insurance Code governs the rights of the parties. The statute is inapplicable where, as here, the initial insurance policy is replaced by a subsequent one. The background and basic purpose of the code section clearly demonstrate that it was never intended to continue an insurance agreement in effect when the original coverage is replaced by a subsequent contract.

A basic rule in the insurance field is that an insurance contract is “. . . considered to be personalized in its risks, involving the moral hazard of possible destruction by the insured, risks of carelessness or neglect, and the courts are reluctant to require the companies to assume dangers not contemplated, and to require them to protect persons with whom no contract was ever made. Being such a personal contract, it is avoided by a sale of the insured property.” (4 Appleman,

Section 304 reads: “Transfer i>y partner. In the case of partners, joint owners, or owners in common, who are jointly insured, a transfer of interest by one to another thereof does not avoid insurance, even though it has been agreed that the insurance shall cease upon an alienation of the subject insured. ’ ’ By another statute, insurance is defined as ‘ ‘. . . . a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” (Ins. Code, §22.) Applying this definition to section 304, it reads: “In the case of partners . . . who are jointly insured, a transfer of interest by one to another thereof does not avoid [the contract of] insurance, even though it has been agreed that the [contract undertaking the indemnification] . . . shall cease upon an alienation of the subject insured.” Its principal purpose is to prevent the avoidance of insurance upon alienation of the subject matter in the case of dissolution of a partnership. The section was not intended to abolish the familiar contract rule that a contract is rendered ineffective by mutual consent when it is replaced by a subsequent contract dealing with the same subject matter and containing terms inconsistent with those of the original agreement. The new policy expressly excluded Spidle from its coverage by providing: “If this policy is issued to an individual ... it is agreed that; anything in this policy to the contrary notwithstanding, this policy does not insure: As respects injuries (or death resulting therefrom) sustained by any of the following relatives of the employer, i. e., . . . son-in-law . . . unless such relative is specifically named in item (III) of the Declarations or specifically insured by Endorse-

For these reasons, in my opinion, the award should be annulled.

Petitioner’s application for a rehearing was denied December 29,1949. Edmonds, J., voted for a rehearing.