Court Opinion

ID: 6477504
Source: CourtListenerOpinion
Date Created: 2022-06-26 22:45:08.88692+00
Date Added: 2024-06-11T15:54:01.824370
License: Public Domain

CONTRERAS, Chief Judge,
dissenting:
I dissent. The facts are not disputed, and the parties agree that the issue presented in this appeal is whether Loren Desotell (Desotell), on the date of an automobile collision with Dewars, was insured by Statewide, and whether the trial court erred in granting summary judgment in favor of Statewide in its declaratory action, holding that, as a matter of law, Desotell was not insured. I believe, as a matter of law, that Desotell was insured, and that summary judgment in favor of Statewide was error. I would therefore reverse and remand with instructions to enter summary judgment in favor of appellants Dewar.
The issues presented for review by the parties revolve around two related but distinguishable propositions: first, whether the binder of insurance coverage failed due to an asserted failure of consideration; and second, whether the binder of insurance coverage (issued as part of an application for insurance) terminated upon the company’s rejection of the application.
I believe that any dispute as to whether the one-page document in question is an “application” or a “binder” is insubstantial. It is clear to me that the document, on its face, as completed by Desotell and Reuben B. Frank, an insurance agent for Statewide (referred to by the majority as a designated agent for Statewide) is both an application and a binder. The document as a whole is an application for a two-month policy of automobile liability insurance. However, the lower left-hand portion of the document is clearly a binder. It is specifically identified as such and, as indicated in writing, coverage was bound as of 1:30 p.m. on February 18. See Turner v. Worth Ins. Co., 106 Ariz. 132, 472 P.2d 1 (1970).
CONSIDERATION
Statewide challenges the continued effectiveness of the binder on the ground that there was a failure of consideration, or that binder coverage was “conditional” upon payment of the premium. Statewide concludes that the binder coverage ceased at the moment that Desotell’s check was dishonored, or at least at the time Statewide learned that it had been dishonored.2 The majority accepts this argument but I cannot.
Since the one-page document involved in this controversy is, in my opinion, both an application for insurance and a binder for temporary insurance coverage, it is necessary to consider and discuss its two components.3 First, Desotell offered to purchase a two-month automobile liability insurance policy on the terms stated. Had Statewide accepted the application and issued a policy, the consideration for the coverage would have been Desotell’s payment of $67.4 Statewide’s acceptance of the check *582as payment of the premium was conditional on its being honored on presentation. See Annot., Receipt of Check for Insurance Premium as Preventing Forfeiture for Nonpayment, 50 A.L.R.2d 630, 640-42 (1956). It is undisputed that Statewide could (and did) reject the application when payment was not made on Desotell’s check, and that the two-month policy never went into effect. It is undisputed that Desotell never paid any premium and that Statewide incurred no obligation or liability on the policy itself. This point is made at some length in the majority opinion. I agree, but do not believe that this is the dispositive issue in this appeal.
Second, and subsidiary to the first proposed agreement, Statewide agreed to provide temporary, or binder, coverage, the consideration for which was Desotell’s promise to pay $67, i.e., his promise to buy the policy from Statewide. Statewide could have required immediate payment in cash, but did not do so. Desotell’s promise to complete the application and pay the premium for “permanent” insurance was sufficient consideration to support the contract for temporary or binder coverage. Actual payment was not required. Rutherford v. John O’Lexey’s Boat & Yacht Ins., Ltd., 118 Ariz. 380, 576 P.2d 1380 (Ct.App.1978); 12A Appleman, Insurance Law and Practice § 7228, at 154-55 (1981); see Annot., Temporary Automobile Insurance Pending Issuance of Policy, 12 A.L.R.3d 1304, 1318 (1967): “Payment of the premium is not a prerequisite to a valid automobile insurance binder. An agreement to pay the premium, express or implied, is sufficient consideration....”
The majority opinion purports to accept the general proposition that a promise to pay the premium is sufficient consideration for binder coverage, but rejects the specific proposition that Desotell’s promise to pay upon dishonor was sufficient. The majority apparently concedes that had Statewide, through its designated agent Reuben B. Frank, “extended credit”, i.e., given Desotell until March 2 to pay the $67, there would have been binder coverage, but then reasons that although Desotell’s promise was still effective on March 2, binder coverage had already lapsed. I am not persuaded. Desotell’s promise to pay — the consideration for the binder — remained in effect after his check was dishonored. Part of his promise to pay was his promise, as drawer, to pay the amount of the draft upon dishonor and notice of dishonor. A.R.S. § 44-2550(B) (U.C.C. § 3-413(2)). Since Desotell’s promise to pay continued after the dishonor of his check (and could have been enforced had Statewide so chosen), and since that promise was the consideration for' the binder, there was no failure of consideration. Dishonor of the check did not, in and of itself, terminate the binder coverage.5
NOTICE OF REJECTION
Appellants Dewar also contend that the notice of rejection was not effective until received by Desotell. I agree. The majority does not address this second issue, finding the failure of consideration sufficient grounds to affirm. Since I conclude that there was no failure of consideration, I shall proceed to consider and discuss this second issue.
*5831. Applicability of ten-day notice provisions
The parties have argued the applicability of both statutory and contractual “cancellation” provisions, but I believe that those provisions are not controlling here. A.R.S. § 20-1632 provides:
§ 20-1632. Notices to insured
A. A notice by the insurer to the policyholder of non-renewal, cancellation or reduction in the limits of liability or coverage shall be mailed to the named insured by certified mail or United States post office certificate of mailing at least ten days prior to the effective date of such non-renewal, cancellation or reduction in limits of liability or coverage.
B. Failure of the insurer to comply with subsection A shall invalidate any cancellation, non-renewal or reduction in limits of liability or coverage, except a cancellation or non-renewal for nonpayment of premium.6
Since Statewide never accepted Desotell’s application for a two-month policy, I believe that there was no “policy” to “cancel,” and A.R.S. § 20-1632 cannot be directly applicable.7
Alternatively, appellants argue that A.R.S. § 20-1632 is “indirectly” applicable. In compliance with the statutory ten-day notice requirement, the policy for which Desotell applied, and which Statewide intended to issue, contained the following term:
24. Concelation____ This policy may be canceled by the company by mailing to the named insured at the address shown in this policy written notice stating when not less than ten days thereafter such cancelation shall be effective.
Appellants argue that the binder incorporated the ten-day notice of cancellation term contained in the policy for which Desotell applied, by virtue of the following statute:
§ 20-1120. Binders
A. Binders or other contracts for temporary insurance may be made orally or in writing, and shall be deemed to include all the usual terms of the policy as to which the binder was given together with such applicable endorsements as are designated in the binder, except as superseded by the clear and express terms of the binder.
This court has held that the incorporated terms include, “at the least ... the subject matter, the risk, the duration and amount of coverage, the amount of the premium, and the identity of the parties.” Saggau v. State Farm Mut. Ins. Co., 16 Ariz.App. 361, 363, 493 P.2d 528, 530 (1972). There is merit to Statewide’s claim that incorporation of all terms of the policy which it originally intended to issue, including the notice of cancellation requirement, would “fly in the face of reason and logic,” and I do not read Turner or Saggau to require incorporation of the cancellation term. It has been stated that the provisions of the contemplated policy do not govern the manner in which the binder may be cancelled. *5847 Blashfield, Automobile Law and Practice § 291.8, at 179 (3d ed. 1966).8
However, I do not believe that a resolution of the issue of the applicability, either direct or indirect, of the ten-day notice requirement, is required here. Rather, the dispositive question is: at what time was the application effectively rejected by Statewide, thereby terminating the temporary coverage provided by the binder.9
2. When notice is effective
Statewide virtually assumes that its rejection of Desotell’s application was effective on February 28, 1977, when it mailed the letter to Desotell. Appellants Dewar argue that the rejection was effective only when received by Desotell — apparently on March 2 or 3, 1977 — but in any event after the collision on March 1, 1977.10
While the question is one of first impression in this state, and while there is limited authority from other jurisdictions, the general rule is that a rejection of an application for insurance of any type is effective, and binder coverage thereby terminated, only when notice is received by the applicant. Appleman § 7227, at 145-51; 43 Am. Jur.2d Insurance § 218, at 278-79 (1969).
In the context of automobile liability insurance, the rule has been stated thus:
A binder, by its nature, effects temporary insurance until the company can investigate the applicant’s insurability and issue a policy or reject the risk. Coverage is not terminated until the applicant receives notice of such rejection, and a notice sent before, but not received until after, an accident is insufficient to avoid responsibility on the part of the insurer.
Notice of termination of coverage given to an insurance agent, but not communicated to an applicant for insurance, does not effect a cancellation of the binder____
Annot., Temporary Automobile Insurance, 12 A.L.R.3d at-1327, 1328. The use of the mails was the choice of Statewide; other more immediate methods of communication were available. Based upon the foregoing authorities and although the notice was mailed before the collision, in my opinion, the notice of rejection was not effective until received by Desotell. See also State Farm Mut. Auto. Ins. Co. v. Collins, 75 Ga.App. 335, 43 S.E.2d 277 (1947).
Similarly, in the context of fire or similar casualty insurance, a rejection of the risk by the insurer does not terminate the temporary contract if it is not communicated to the insured. Annot., Temporary Fire, Wind, or Hail Insurance Pending Issuance of Policy, 14 A.L.R.3d 568, 603-605 (1967). The same rule has been applied to life insurance. Appleman, § 7241, at 236; Smith v. Westland Life Ins. Co., 15 Cal.3d 111, 123 Cal.Rptr. 649, 539 P.2d 433 (1975); Dunford v. United of Omaha, 95 Idaho 282, 506 P.2d 1355 (1973).11
*585Regardless of the type of insurance, the purpose and effect of a binder is to provide the applicant with coverage from the date of his application. The applicant, having tendered his premium payment, justifiably relies on such coverage. Smith v. West-land Life Ins. Co. There is nothing in the record to indicate that, at the time he tendered the check to Statewide, Desotell knew or had reason to know that his check would not be paid upon presentation. Without receipt of notice that his application has been rejected, an applicant has no opportunity or incentive to seek insurance coverage elsewhere. Dunford; Rommel v. New Brunswick Fire Ins. Co., 214 Minn. 251, 8 N.W.2d 28 (1943). In this case, without receipt of notice of rejection, Desotell had no opportunity or incentive to make “other arrangements” with Statewide (i.e., pay the dishonored check), to purchase a policy from another insurer, or to make an informed decision to drive without automobile liability insurance.
CONCLUSION
Since I conclude that (1) dishonor of Desotell's check did not constitute a “failure of consideration” and (2) Statewide's rejection of the application was not communicated to Desotell prior to the collision, I further conclude that Desotell was insured under the binder and under the terms set forth on the application at the time of the collision. Therefore, I would reverse the summary judgment in favor of appellee Statewide and remand the matter to the trial court with instructions to enter summary judgment in favor of appellants Dewar.

. Statewide’s "rejection” argument is not really critical here. If there was a complete failure of consideration, Statewide’s obligation to provide temporary coverage was discharged, without necessity of any notice to Desotell. I do not believe that there was such a complete failure of consideration.

. I do not believe that this distinction is ever fully recognized in the majority opinion, which treats the document as simply an application for . an insurance policy. The "binder" in the lower left corner, which is specifically identified as such, is effectively and completely ignored by the majority.

. Conversely, had Statewide rejected the application, e.g., as an unacceptable risk, it would have been obligated to refund the premium payment to the applicant. See, e.g., Smith v. Westland Life Ins. Co., 15 Cal.3d 111, 123 Cal.Rptr. 649, 539 P.2d 433 (1975). However, under such circumstances, the applicant, though he had actually "paid" nothing, would still be protected *582by the binder coverage until he received notice of rejection. See discussion below and Annot., Temporary Automobile Insurance Pending Issuance of Policy, 12 A.L.R.3d 1304 (1967).

. Had Statewide desired a contrary result, it could have so provided, as by the following term:
That if any check, draft or money order given in payment of the premium is not paid on presentation, this receipt [binder] shall be void.
See Smith v. Westland Life Ins. Co., 15 Cal.3d at 113, 123 Cal.Rptr. at 651, 539 P.2d at 435, n. 3. Statewide drafted the language of the application, including the binder, and had it intended to condition its liability under the binder as well as that under the policy itself, upon actual payment of $67, "it could have easily used clear and unequivocal language to indicate its intention.” 15 Cal.3d at 117, 123 Cal.Rptr. at 655, 539 P.2d at 439. Statewide could have imposed a condition subsequent, Rutherford, but failed to do so.

. A.R.S. § 20-1631, which, inter alia, limits the grounds for cancellation, is explicitly inapplicable to policies in effect for less than 60 days. A.R.S. 20-1632, which requires notice to the policyholder, contains no such 60-day exclusion. Consequently, A.R.S. § 20-1632 is not rendered inapplicable simply because the binder was in effect for only some 10-12 days. Cf. Miney v. Baum, 170 NJ.Super. 282, 406 A.2d 234 (1979), holding that where a binder had been in effect more than 60 days, cancellation must comply with statutory notice requirements.

. But see Terry v. Mongin Ins. Agency, 105 Wis.2d 575, 314 N.W.2d 349 (1982), holding that a binder is a "policy" within the statutory definition and therefore the ten-day notice requirement is applicable.
I think it both unnecessary and unwarranted to adopt the reasoning of Terry. Despite the broad Arizona statutory definition of "policy,”
§ 20-1102. “Policy” defined
"Policy” means contract of or agreement for or effecting insurance, or the certificate thereof, by whatever name called, and includes all clauses, riders, endorsements and papers attached thereto and a part thereof.
I conclude that the legislature intended to distinguish a "binder” from a "policy.” See A.R.S. § 20-1120(A). A binder is separate from, and subsidiary to, a policy under the Arizona statutory scheme.

. But see, as holding that a binder incorporated the cancellation term of the policy, State Automobile Mut. Ins. Co. v. Lloyd, 54 Tenn.App. 587, 393 S.W.2d 17, cert. denied (Tenn.1965).

. Statewide phrases the issue presented thus: IS A BINDER OF COVERAGE, ISSUED AS PART OF AN APPLICATION FOR INSURANCE, TERMINATED UPON THE COMPANY'S REJECTION OF THAT APPLICATION?
I have no qualms about answering that question in the affirmative, Continental Life & Acc. Co. v. Songer, 124 Ariz. 294, 603 P.2d 921 (Ct.App. 1979) (dicta), but I do not think it dispositive.

. Since I have concluded that the temporary coverage did not terminate when Desotell’s check was dishonored, Statewide’s “consideration” argument is not really critical here. The effective date of a notice of rejection, is, I believe, independent of the grounds for rejection. Thus, the situation would be no different had Desotell's application been rejected for some other reason, e.g., an unacceptable risk.
I will assume, without deciding, that the letter to Desotell was an effective rejection, at some disputed time. For a somewhat more strict view of what is necessary to constitute an effective rejection, see Smith v. Westland Life Ins. Co.

. In both Smith and Dunford, the validity of the binder ab initio was not disputed. In Smith, the California Supreme Court held that termination of a life insurance binder required (1) actual rejection of the application communicated to the insured by appropriate notice thereof, and (2) refund of the premium payment. 539 P.2d at 438-39. In Smith, it was assumed, in both the majority opinion and the dissent, that the *585first element (notice) was required; the second element (refund) is, of course, not at issue here.
In Arizona, "life or disability insurances" are expressly excluded from the statutory authorization for oral or written binders. A.R.S. § 20-1120; Continental Life & Acc. Co. v. Songer.