Title: FIRST NAT. BANK OF ANSON CTY. v. Nationwide Ins.
Citation: 278 S.E.2d 507
Docket Number: 70
State: north-carolina
Issuer: north-carolina Supreme Court
Date: June 2, 1981

278 S.E.2d 507 (1981) The FIRST NATIONAL BANK OF ANSON COUNTY, Administrator of the Estate of John Gatewood, Deceased, Plaintiff and Bright M. Gatewood, Additional Plaintiff v. NATIONWIDE INSURANCE COMPANY and Hornwood, Inc., Defendants. No. 70. Supreme Court of North Carolina. June 2, 1981. *508 Henry T. Drake, Wadesboro, for plaintiff, Bank. E. A. Hightower, Wadesboro, for additional plaintiff, Gatewood. *509 Taylor &amp; Bower by George C. Bower, Jr., Wadesboro, for defendants. HUSKINS, Justice: The only issue we need address is whether the group insurance policy was in effect as of the date of John Gatewood's death. We have concluded that it was not in effect and the Court of Appeals erred in holding to the contrary. Because the group policy was not in effect, we do not reach the issue whether the widow or the administrator was entitled to the proceeds of the policy. We first examine the facts of the case and the relevant language in the policy and then apply the appropriate rules of law. On 30 April 1971 decedent John Gatewood was employed as a custodian by defendant Hornwood, Inc. which operates a textile plant in Anson County. Hornwood was policyholder of a group insurance policy issued to it by defendant Nationwide for the benefit of Hornwood employees. At the time he applied for the job, decedent enrolled as a certificateholder for life insurance coverage under the group policy and designated his wife, Bright M. Gatewood, as beneficiary on enrollment and register cards. The policy was effective 30 June 1971. Nationwide canceled the original group policy and issued another group insurance policy to Hornwood on 1 June 1972 which remained in effect with Hornwood through the date of Gatewood's death. The new policy was the same as the original except it added dependent coverage. No enrollment or beneficiary card was entered on the new policy by Gatewood. Gatewood and his employer both contributed to the payment of premiums. Gatewood's contribution was deducted from his paycheck. Hornwood, as policyholder, forwarded the premium for all its employees to Nationwide each month and also notified Nationwide each month of the names and changes in status of its employees. Hornwood handled all the paperwork related to the policy while it was in effect. On 13 November 1973, Gatewood suffered an injury by accident arising out of and in the course of his employment. The injury was to his right wrist and so disabling that he could not lift heavy objects thereby precluding his working as a janitor. The accident rendered him totally unable to earn wages. He received worker's compensation benefits from 14 November 1973 until his death on 9 December 1975. He continued to come to work until 30 January 1974 but did not return to work at Hornwood after that date. Decedent's employment with Hornwood was terminated on 7 August 1974. The reason given for the termination was an employment cutback for economic reasons. The separation notice gave "no work available" as the reason for termination. Until Gatewood's termination of employment in August 1974, Hornwood had continued to pay premiums for decedent's coverage under the group insurance policy. Gatewood continued to contribute to the coverage while receiving worker's compensation benefits. The Hornwood personnel manager testified: (Testimony to the same effect by another Hornwood employee in the personnel office was subsequently excluded by the trial court.) No premiums were paid after 1 August 1974. The policy had a provision for waiver of premiums in the event of total disability. The personnel manager, whose office was responsible for preparing the monthly report to Nationwide, was aware of Gatewood's injury and his receipt of worker's compensation benefits. No *510 waiver of premium claim or notice of disability claim was filed with Nationwide. In its monthly status report to Nationwide for August, Hornwood listed Gatewood as terminated rather than disabled. On 9 December 1975, Gatewood died of stab wounds. In January 1976, at the request of decedent's administrator, Hornwood sent Nationwide notice of Gatewood's death and earlier disability. The administrator contended the policy was in full force and effect by operation of the clause in the policy for waiver of premium in the event the certificateholder was disabled. No claim for waiver of premium had been filed with Nationwide until this time. Nationwide refused to pay under the group policy and this suit was instituted. The insurance contract under which Gatewood's widow and the administrator of his estate claim benefits is a group insurance policy. The portions of the policy dealing with payment or waiver of premiums, termination and conversion are the provisions important to this case and therefore the ones which we will examine in detail. There are two documents in group insurance contracts: the policy and the certificate of insurance. The policy was issued by Nationwide (insurer) to Hornwood, Inc. (policyholder) "to insure certain employees of the policyholder and its subsidiaries." The Certificate of Insurance, which was issued to each insured employee (certificateholder), summarizes certain provisions of the master policy. The Certificate of Insurance refers the certificateholder to the "Policy, which alone constitutes the agreement under which payments are made." We, therefore, look first to the master policy. See Smith v. Assurance Society, 205 N.C. 387, 171 S.E. 346 (1933); see generally, 1 Appleman, Insurance Law § 46. The insurance became effective for what the policy defines as an "Eligible Person" on the latest of the following dates: The policy defines "Eligible Person" as "any person who (1) on the effective date of this Policy, is regularly employed by the Policyholder; or (2) subsequent to the effective date of this Policy, has been regularly employed by the Policyholder not less than 2 months." The policy contains the following provision concerning the termination of insurance for an individual certificateholder: The policy provides a conversion privilege in the event of termination. The policy clause on this matter reads as follows: Premium payments are governed by the following two clauses in the policy: The policy also contains a clause entitled "WAIVER OF PREMIUM IN THE EVENT OF TOTAL DISABILITY" which reads: The policy in the definitions section states: Finally, the policy contains the following relevant provision for keeping records: The Certificate of Insurance issued to Gatewood was introduced into evidence at trial. It contains verbatim the effective date, definition, termination, conversion and waiver of premium clauses quoted above. It does not contain the payment of premium and records and reports clauses quoted above. The insured is charged with notice of the provisions in the certificate of insurance. Rivers v. Insurance Co., 245 N.C. 461, 96 S.E.2d 431 (1957). The policy specifies the contract is governed by the laws of North Carolina. The policy also specifies that "any provision ... which ... is in conflict with the statutes of the state ... is hereby amended to conform to the minimum requirements of those statutes." Some of the legislation applicable to Group Life Insurance was amended in 1977, since the time the policy in question was issued and since Gatewood's death. 1977 N.C.Sess.Laws c. 192 §§ 1-4, c. 835. This discussion is limited to the statutes as they existed before amendment. Group life insurance policies are allowed in this State subject to the approval of the Commissioner of Insurance. G.S. § 58-30.2. The type of group life insurance involved in this case is defined in G.S. § 58-210(1). Standard provisions for group life insurance are contained in G.S. 58-211. The standard provisions relevant to this suit are those dealing with termination of group life insurance, conversion to individual life insurance and payment of premiums. Those provisions within G.S. § 58-211 read as follows: On review, the policy comports with all these statutory provisions. The case law in this jurisdiction clearly establishes that the employer-master policyholder is not ordinarily the agent of *515 the insurer. Rather, he is the agent of the employee-certificateholder. Rivers v. Insurance Co., 245 N.C. 461, 96 S.E.2d 431 (1957); Haneline v. Casket Co., 238 N.C. 127, 76 S.E.2d 372 (1953); Dewease v. Insurance Co., 208 N.C. 732, 182 S.E. 447 (1935); Ammons v. Assurance Society, 205 N.C. 23, 169 S.E. 807 (1933). There is contrary authority in other jurisdictions. See 1 Appleman, Insurance Law § 43; 19 Couch on Insurance 2d § 82:55. The rationale behind our rule, that the employer in a group insurance policy is not ordinarily the agent of the insurance company, is best summarized in Boseman v. Insurance Co., 301 U.S. 196, 57 S. Ct. 686, 81 L. Ed. 1036 (1937), which has been quoted in several of our cases: 301 U.S. at 204-05, 57 S. Ct. at 690, 81 L. Ed. at 1041. A corollary of this rule is that notice to the employer of a disability is not notice to the insurer. Dewease v. Insurance Co., supra. The defendant insurer argues this rule of agency exempts it from liability. Nationwide had no notice of disability or claim of premiums waiver filed with it until after Gatewood's death. Premiums were paid in behalf of Gatewood through 1 August 1974. The Change Report filed by Hornwood for the month of August reported to Nationwide that employee Gatewood was terminated on 1 August 1974. The Change Report has an adjustment code which provides the following codes: Gatewood was given a 2B adjustment code. Nationwide's only information on Gatewood was (1) that he was a covered employee whose premiums had been paid through 1 August 1974 and (2) he was no longer a covered employee after 1 August 1974 because his employment had been terminated. Its only notice came in January 1976 after the death of Gatewood. There is merit in the insurer's defense, and we do not choose to overrule our case law on the agency relationship of the employer-master policyholder. However, there is a more fundamental flaw in the right of any beneficiary of Gatewood to recover under this group insurance policy. Both the trial court and the Court of Appeals resolved this case by examining only the waiver of premium clause. They determined the clause was ambiguous because it did not explicitly state whether the employee or the employer was to notify the insurer of the disability which Gatewood had and which would result in a waiver of premium payments. The Court of Appeals relied on the principle of law that when there is an ambiguity and the policy provisions are susceptible to two interpretations, one of which imposes liability on the company and the other does not, the provisions will be construed in favor of coverage and against the insurer. See, e. g., Williams v. Insurance Co., 269 N.C. 235, 152 S.E.2d 102 (1967). This principle is applicable, however, only when there is an ambiguity. The problem in this case is that the ambiguity arises only when the waiver clause is read out of context. It must be read and interpreted in context and in conjunction with the termination clause and the conversion privilege clause. When this is done, there is no ambiguity in the policy. The policy termination provision applicable to Gatewood provided his benefits terminated upon *516 his termination of membership in the classes eligible for coverage under that benefit provision, but membership in the classes eligible for coverage under any benefit provision set forth in the Schedule of Maximum Continuation Periods below will not be deemed to terminate solely because of the Certificateholder's disability until contributions for his coverage are discontinued or until expiration of the applicable Maximum Continuation Period set forth in that Schedule, whichever is earlier. Quite simply, Gatewood's coverage under the group policy ended on 7 August 1974, the date he was discharged from employment. That was the date of "his termination of membership in the classes eligible for coverage." And even if we look to the continuation period, his coverage was terminated on 7 August 1974. Even though Gatewood was disabled and even if we assume error in not reporting disability which was imputable to Nationwide, the coverage remained in effect until the earlier of (1) "until contributions for his coverage are discontinued" or (2) "until expiration of the applicable Maximum Continuation Period" which was "[u]ntil terminated by Policyholder." If the policyholder had notified Nationwide of the certificateholder's disability, upon termination of the certificateholder, the group policy coverage for the disabled certificateholder would have ended in any event. Hornwood, the master-policyholder, terminated Gatewood on 7 August 1974. Gatewood's group insurance coverage ended that day. Group insurance coverage lasts only as long as membership in the group is maintained or as long as extended once membership in the group ends. Group coverage must then be timely converted to individual coverage. By the terms of the policy, which is in compliance with G.S. 58-211(8), Gatewood had thirty-one days from and after 7 August 1974 to convert his group life insurance coverage to single life coverage. Gatewood never exercised this conversion privilege. Thus, when he died on 5 December 1975, the coverage under the group policy had long ago terminated and the conversion privilege had never been timely exercised. See generally, 1 Appleman, Insurance Law § 125; 19 Couch on Insurance 2d § 82:29. This reasoning is consistent with that applied in Love v. Assurance Co., 251 N.C. 85, 110 S.E.2d 603 (1959). In that case, the beneficiary under a group life insurance policy instituted an action to recover death benefits under a policy which had been issued by the defendant. John H. Love, Sr. was a member of a musician's association which had a noncontributory group life insurance policy with the defendant. Love was a certificateholder under the policy. Love's membership in the musician's association terminated on 15 August 1956. Plaintiff introduced evidence that Love was disabled as early as 24 April 1956. No notice of this disability was given to defendant insurer until after Love's death on 15 January 1957. The group policy did contain a conversion privilege which was not exercised. The Court affirmed judgment of nonsuit for the defendant insurer. The Court held that upon termination of the insured's membership in the association holding the group policy, the insured's coverage terminates unless he avails himself of *517 the conversion privilege in the policy or his termination from membership is shown to be wrongful or fraudulent. 251 N.C. at 87, 110 S.E.2d at 605. See also Pearson v. Assurance Society, 212 N.C. 731, 194 S.E. 661 (1938). The insurance policy in the Love case also contained a waiver of premiums upon disability provision. The Court rejected an argument that this waiver clause extended the life of the group policy. The Court said: 251 N.C. at 87, 110 S.E.2d at 605. In light of the termination and conversion clause, the waiver of premium clause in the present case is not ambiguous. Premiums are waived for a totally disabled certificateholder. After 7 August 1974, Gatewood was no longer a certificateholder. The waiver clause makes reference to the conversion privilege and the consequence of its exercise: The trial court award was only against the insurer. The trial court did find the employer-master policyholder negligently failed to keep records and make reports as it was required to do under the terms of the policy, and it negligently reported Gatewood as terminated when it should have reported him disabled. The trial court entered no judgment against the employer. This negligence is, however, of no consequence. Even if disability notice had been given to Nationwide, the policy coverage by waiver of premiums ended with the termination of Gatewood's employment. Evidence in the record indicates Gatewood and his employer continued to pay the premiums until Gatewood's discharge from employment. No waiver of premium was sought while the policy was in effect. If this constituted negligence, the negligence was superseded and insulated by Gatewood's failure to convert his coverage. Accordingly, we hold that when group life insurance coverage is terminated and there is no conversion of that coverage to single life insurance, the beneficiaries of the group policy have no claim for benefits from the insurer. The Court of Appeals opinion affirming the trial court's determination that the group insurance policy was in effect by operation of the waiver of premium clause at Gatewood's death is reversed. The case is remanded to the Court of Appeals for further remand to the trial court for entry of judgment in favor of both defendants. REVERSED AND REMANDED.