In this week’s Alabama Law Weekly Update,we present for your consideration an Alabama Supreme Court decision regarding life insurance coverage after completion of the application form, but prior to issuance of the policy.

Alfa Life Insurance Corporation and Brandon Morris v. Kimberly Colza, (CV-11-901278) — So. 3d — (Ala. 2014) (holding that an applicant cannot recover under a life insurance policy where all requirements for coverage described in the application package have not been fulfilled).

Dante Colza applied for a life insurance policy from Alfa Insurance Company (“Alfa”) on September 2, 2010.  He met with Brandon Morris, an Alfa agent.  The application process involved three steps: 1) complete the application agreement, 2) respond to health questions from a medical examiner, and 3) return of the medical examiner’s report to Alfa.  Mr. Morris completed Mr. Colza’s application while talking through the questions with him at their initial meeting, and took a check for $103.70 – the projected first month’s premium.  Mr. Colza’s medical examination took place the next month on October 15th, where he informed the medical examiner of his health conditions and various moving violations, among other items.  The following day, October 16th, Mr. Colza died in an automobile accident.  Two days later, on October 18th, Alfa received the medical examiner’s report.  The next week Alfa notified Mr. Colza’s widow, Kimberly Colza, that no life insurance was available for Mr. Colza’s death because the conditions for coverage had not been fulfilled and no policy had been issued at the time of Mr. Colza’s death.

Several months later, in April 2011, Ms. Colza sued Alfa and Mr. Morris.  Ms. Colza presented several potential avenues for recovery, including 1) Alfa breached the insurance contract by refusing to pay, 2) the “conditional receipt” document in the application packet provided temporary coverage while the application was pending, 3) Mr. Morris, as an Alfa agent, created a verbal contract by stating that Mr. Colza would be “immediately covered” upon filling out the application and paying the first month’s premium, and 4) Mr. Morris was negligent because he filled out the application incorrectly.

A jury trial resulted in a verdict for Ms. Colza and a total award of approximately $540,000.  Alfa and Mr. Morris appealed.  The Supreme Court reversed and entered a judgment as a matter of law in favor of Alfa and Mr. Morris, finding:

  1. The insurance policy never issued because Mr. Colza died before completion of step three of the application process.
  2.  Ms. Colza could not recover a reduced amount under the “conditional receipt” document because Alfa’s underwriting department had not reached a final conclusion on Mr. Colza’s risk rating and price.
  3. Further, Ms. Colza could not recover based on a verbal contract created by Mr. Morris, Alfa’s agent.  The Court noted that even if Mr. Morris verbally stated that Mr. Colza was “immediately covered” after completing the application form and paying the first premium, the document language did not contain such promise and further stated that Mr. Morris did not have authority to bind Alfa or modify any terms.
  4. Finally, the Court noted that even if Mr. Morris was negligent in filling out Mr. Colza’s application, the Colzas were also negligent because they did not sufficiently apprise themselves of the terms in the documents provided to them.  Contributory negligence prevented recovery by the Colzas on a claim that Mr. Morris was negligent in filling out the application.

In explaining why Ms. Colza could not recover, the Court relied very heavily on the language of the documents and quoted significant portions of the insurance application in the written opinion.  The Court engaged in a lengthy discussion of case law from Alabama and other jurisdictions emphasizing the point that a person will be bound by the language in an insurance application which they signed, even if they did not read or understand the document.

A skeptical view of this case could see it as allowing agents to mislead customers.  However, the real take-away is that courts favor the certainty of written documents.  Although verbal contracts are binding as a general matter, proving the content of a verbal contract can be difficult.  Further, written documents often include provisions stating that the written terms trump any outside conversation (often called “integration” or “entire agreement” provisions).  It is important to read any document you sign to make sure that it reflects your understanding of what will take place.