Indiana Law Review


XI. Insurance

Janet W. Averett
John C. Trimble

A. Issuance and Delivery

1. Conditional Receipt for Temporary Life Insurance. —Tiurin^

the survey period a new twist was added to the law of Indiana with
respect to the duration of the interim life insurance coverage

created by an insurer's giving of a conditional receipt.' In Hornaday
V. Sun Life Insurance Co. of America,^ the plaintiff was the
beneficiary named on an application for life insurance which her hus-
band had submitted to a salesman for the defendant insurance com-

pany. At the time of the application, the decedent had paid a small
premium and had received a conditional receipt. Subsequently, the
company approved the application and issued a policy. However, all
efforts by company salesman to deliver the policy and to collect the
full premium were rebuffed by the plaintiff's decedent and he died
before delivery could be made.^

Plaintiff made a claim against the policy which was denied by
Sun Life on the basis that no delivery had occurred, and that no
premium had been tendered by plaintiff's decedent nor had any
been collected by the company. In the breach of contract action

brought by the plaintiff, the district court ruled that, although the

conditional receipt had created life insurance coverage for the dece-

dent, "it had expired by its own terms 60 days from the date of in-
surance application .... and was not in effect when Hornaday died . .

.

over 100 days after the insurance application date."^

On appeal, Mrs. Hornaday relied upon the Indiana cases of
Kaiser v. National Farmers Union Life Insurance Co.^ and
Monumental Life Insurance Co. v. Hakey,^ which stated "that a tem-
porary insurance contract can be terminated in Indiana only upon (1)

'Indiana follows the general rule that once an insurance company accepts a

premium for life insurance and issues a receipt, a contract arises. Coverage may not be
terminated unless the insurer notifies the applicant and returns the premium during
the applicant's lifetime. See generally Monumental Life Ins. Co. v. Hakey, 354 N.E.2d

333 (Ind. Ct. App. 1976); Kaiser v. National Farmers Union Life Ins. Co., 167 Ind. App.

619, 339 N.E.2d 599 (1976).

^597 F.2d 90 (7th Cir. 1979).

'Id. at 91-92.

'Id. at 92.

n67 Ind. App. 619, 339 N.E.2d 599 (1976).
'354 N.E.2d 333 (Ind. Ct. App. 1976).

379



380 INDIANA LAWREVIEW [Vol. 14:379

notice of such termination by the insurance company to the appli-
cant, and (2) a return of the consideration paid."^

The appellant argued that there were strong social policy
reasons for supporting the rules of Kaiser and Monumental in-
asmuch as Indiana courts have sought to discourage insurance com-
panies from retaining "unearned premiums yet refusing to provide
coverage."* Further, Hornaday contended that the insurer's at-

tempts to deliver the policy after the sixty days had expired con-

stituted a waiver of the company's right to rely on the expiration of

the conditional receipt.^

Although the court recognized and agreed with the policy

reasons for supporting Kaiser and Monumental, it found precedent

for permitting a conditional receipt to expire by its own terms.'" Sun
Life had presented the 100 year old Indiana case of Barr v. In-

surance Co. of North America,^^ a fire insurance case, which had ab-

solved an insurance company of liability where " '[t]he written con-
tract of assurance expired by its own limitation, before the loss oc-
curred . . . .' "'^ The court of appeals agreed with the district court

that there was no cogent reason for distinguishing between fire in-

surance and life insurance because both were contracts.'^ In examin-

ing the language of the conditional receipt at issue,'" the court

adopted the district court's findings, and agreed that the ter-

minology used was "unambiguous and obvious" and was "not a hid-

den phrase filled with legal technicalities buried within the small

print of the contract."'^ The court's most compelling reason for re-

'597 F.2d at 92 (citing Monumental Life Ins. Co. v. Hakey, 354 N.E.2d 333 (Ind.

Ct. App. 1976); Kaiser v. National Farmers Union Life Ins. Co., 167 Ind. App. 619, 339

N.E.2d 599 (1976)). The company did send the plaintiff a check representing the

amount of the temporary premium after receiving notice of the death. However, the

plaintiff refused to accept it, and the court found it had no bearing upon the issue of

the expiration of the conditional receipt. 597 F.2d at 92.

'597 F.2d at 94.

'Id.

"Id. at 92 (citing Barr v. Insurance Co. of N. America, 61 Ind. 488 (1878)).

"61 Ind. 488 (1878).

''597 F.2d at 92 (quoting 61 Ind. at 493).

'^597 F.2d at 92 (quoting district court opinion).

'^The pertinent language of the conditional receipt was as follows:

(A) . . . If the amount received was less than the full first premium, the in-

surance provided will be for (1) a period equal to such proportionate part of

the first premium interval as the cash so paid bears to the full first premium

or (2) a period of 60 days, whichever is longer. . . .

(C) Except as provided in this conditional receipt, any policy issued by the

Company shall not take effect until it is delivered and the full first premium

for it is paid during the lifetime and continued insurability, as stated in the

agreement contained in the application, of the Proposed Insured.

597 F.2d at 91.

"Id. at 94.



1981] SURVEY-INSURANCE 381

jecting the appellant's application of the rules in Kaiser and

Monumental was found in a suggestion by the district court:

The application of plaintiff's interpretation of Monumental

and Kaiser would effectively mean that once a conditional

receipt is executed insurance coverage is in effect ad in-

finitum, regardless of the amount of the consideration

tendered, unless notice of termination is given and the con-

sideration returned. Hence, if the insured successfully avoids

contact with the insurer, insurance coverage is in effect in-

definitely regardless of the amount of the consideration paid.

The result could be that in exchange for $12 or $15 an in-

sured is effectively covered for as long a period as he can

avoid contact with the insurer when an actual monthly

premium would be much greater than the amount tendered

if a regular insurance contract were issued.'®

Finally, the court held that Sun Life did not waive the expira-
tion of the interim insurance coverage by diligently continuing to at-

tempt to deliver the policy after the sixty day limit." It noted that

such diligence would be expected of the insurance salesman.

Besides, had the diligence paid off with delivery of the policy after

the sixty day period, no harm would have resulted because coverage
would have been immediately reinstated and would have been in

force upon the insured's death.'*

Under the facts of Hornaday the ruling seems entirely
reasonable and the result not unjust. However, one could ask

whether the court would have reached the same conclusion had the
company been less diligent and the proposed insured less evasive.
Insurance companies may now be expected to more frequently in-
clude automatic expiration clauses in their conditional receipts. Such

theories as waiver and equitable estoppel will have to be employed

by the courts to avoid unjust results where failure to deliver an in-
surance policy within the limited interim coverage period is at-

tributable to the insurance company's lack of diligence and not the

insured's.

2. The Relationship of the Insurance Broker to the Insurance

Company. — It is not uncommon for a person seeking insurance to ac-
quire coverage with a company through an intermediary agent
known as a "broker." Because of the variety of coverage available
and the prospective insured's relative lack of knowledge of the

market, the insurance purchaser may rely largely on the broker's

"/d. (quoting district court opinion).

"597 F.2d at 94.

'«/d.



382 INDIANA LAW REVIEW [Vol. 14:379

advice as to what coverage to obtain and which company to choose.
If the adequacy of coverage is later questioned, the company's

liability will often hinge upon whether the broker who procured the
policy is deemed to be the agent of the company or the agent of the
insured.'^

In Prestige Casualty Co. v. Mashburn,^° the court was called
upon to determine whether an insurance broker was an agent of the
company or an agent of the insured. Prior to the acts which were
the subject of the lawsuit, the insured. Pearl Mashburn, had been

issued an automobile liability policy by Prestige Casualty Company.
The coverage for Mashburn's single automobile had been placed
with the company by an independent insurance agent through an in-
surance broker, the Ott and Keying Insurance Agency.^' At a later
da,te Mashburn purchased a second car and wished to have it added
to her existing policy. Unknown to Mashburn, her insurance agent
instead requested a transfer of coverage. The agent submitted the
request for transfer to Ott and Keying and they in turn wrote
Prestige to secure the change. Prestige immediately returned the

letter to Ott and Keying with an endorsement which signified ap-
proval of the transfer. Kowever, before the endorsement was given
to Mashburn she had an accident in her first automobile.^^

When Mashburn made a claim under her policy for defense of a
wrongful death action brought against her. Prestige denied coverage

on the basis that the automobile was not covered because of the
transfer. ^^ In denying the insurer's request for a declaratory judg-

ment, the trial court ruled that the negligence of the insurer's

agents estopped the insurer from denying coverage.^'' The court of
appeals affirmed the trial court holding but found entirely different

reasons for doing so.^^

Initially, the court looked to the terms of the policy to deter-

mine the conditions needed to effect a transfer of coverage. The

court found that an effective modification required a written en-

dorsement by the company (signifying approval) and issuance of
such approval to the insured.^* The word "issued" in the modification

"For a discussion of the general liabilities of an insurance broker, see Annot., 29

A.L.R.2d 171 (1953).

'"612 F.2d 1048 (7th Cir. 1980).

"Id. at 1049.

''Id.

''Id.

"Id. at 1048-49.

"Id. at 1049.

"'Id. The specific policy language was as follows: "Changes: . . . nor shall the

terms of this policy be waived or changed, except by endorsement issued to form a

part of this policy." Id.



1981] SURVEY-INSURANCE 383

clause was determined to be the only unclear word and was accord-

ingly defined as the "act of sending out, or causing to go forth;

delivery ."^^ Effective issuance was said to require "that the issuance

be to the party not making the endorsement, that is, to the insured

or the insured's agent."^*

It was clear from the facts that the endorsement had not been

"issued" to Mashburn personally. Therefore, the key issue to be
decided was whether Ott and Keying, the broker, was an agent of
the insured or an agent of the insurer "for the purpose of receiving

delivery of the endorsement."^'

Prestige urged the court to adopt the ruling of Automobile

Underwriters, Inc. v. Hitch.^'^ In Hitch the court had found that the

agreement between the intermediate insurance agency and the com-

pany specified that the agency was an independent contractor.'^
Also, the agency in Hitch was shown to represent several insurance
companies and was therefore defined as a "broker."'^ The Hitch
court stated the general rule that

[T]he negligence of a broker as opposed to an agent, is not

imputed to the insurer. "An insurance broker can be con-
sidered an agent only for the purposes of delivering policies

and collecting premiums thereon. The insurer would not be
bound, ordinarily by the mistakes or negligence of a

broker."^'

The Mashburn court, finding the facts to be distinguishable, re-
jected Prestige's reliance upon Hitch. The court placed much weight
upon the Agency Agreement between Prestige and Ott and Keying,
the major part of which read as follows:

[T]he Agency can solicit, receipt, and accept applications and
proposals for insurance, endorsements, modifications, or

other evidences of agreements of insurance; further the
Agency can review, assess, and evaluate prospective risks,
and where such risks are determined to be in the best in-
terest of Prestige submit applications to Prestige Casualty

"Id. (quoting Webster's New Int'l Dictionary of the English Language. (2d ed.
Unabridged, 1948)).

'«612 F.2d at 1049 (citing American Family Mut. Ins. Co. v. Bach, 471 S.W.2d 474.
479 (Mo. 1971)).

^612 F.2d at 1049.
'°169 Ind. App. 453, 349 N.E.2d 271 (1976).

''Id. at 460, 349 N.E.2d at 276.

''Id. (citing 16 J. Appleman, Insurance Law & Practice § 8730 (1968)).
'^69 Ind. App. at 460, 349 N.E.2d at 276 (quoting 16 J. Appleman, supra note 32,

§ 8730).



384 INDIANA LAWREVIEW [Vol. 14:379

Company for the purposes of the issuance of an insurance
policy.

[T]he Agency can collect, receive, and receipt for premiums
on all policies solicited by the Agency.

[T]he Agency shall comply with Prestige Casualty Company's
rules and regulations governing the Agency's operations,

and the Agency must strictly comply with all instructions
from Prestige, and further the Agency must use those in-
structions only in the interest of Prestige Casualty Com-
pany.

[T]he Agency has binding authority with Prestige Casualty
Company.^''

The obvious authority to bind Prestige to contracts, the right to
collect premiums, and the obligation to act "in the interest of

Prestige," were all factors which led the court to conclude that Ott
and Keying was the "general agent" of Prestige.^^

Further, the court noted that the insurer had specified in the

contract that delivery of an endorsement would be the "controlling

event" necessary to complete a contract modification. Also, the com-

pany was responsible for the means chosen to deliver the endorse-
ment.^^ Because Ott and Keying was the general agent of the insurer
when the endorsement was received, the endorsement was never
"issued" to the insured as specified by the contract. Thus, coverage

on the first automobile had not been effectively transferred to the

second automobile at the time of the accident.'^

The result of Mashbum is that an insurance agency acting as a
"broker" for several companies may be deemed an agent of the in-
sured for one purpose and an agent of a company for another.^* This
rule will render each future case fact-sensitive, with heavy emphasis

upon the terms of the agreement between the broker and the com-

pany.

3. Automatic Coverage for a Newly Acquired Automobile. — Fre-
quently, a person having automobile insurance replaces a car or

^'612 F.2d at 1050.

''Id.

""Id.

''Id.

^*The court in Mashbum made this observation when it distinguishd the rule in
Hitch (that a broker is the agent of the insured): "It [Hitch] decided only that the in-

surance agency's negligence in failing to obtain sufficient liability insurance for the in-

sured was not attributable, on an agency theory, to the insurer. It did not decide that

the insurance agency is not an agent of the insurer for any purpose . . . ." 612 F.2d at

1050.



1981] SURVEY-INSURANCE 385

buys a new one during the term of an existing policy. To avoid a
lapse of coverage between the time the vehicle is acquired and

notification is given to the company, many standard automobile
liability policies contain a provision for temporary automatic

coverage.^' Recently, the Indiana Court of Appeals had its first op-

portunity to construe a provision providing automatic coverage for a

newly acquired automobile/"

In Stockberger v. Meridian Mutual Insurance Co.,*^ the court

was called upon to construe the meaning of "newly acquired" as ap-
plied to an insurance policy provision which required that "notice of

the acquisition [be] given to the Company within 30 days after [the
car's] acquisition . . . ."*^

The plaintiff in Stockberger had purchased a pair of inoperable
unlicensed trucks in October of 1973. One was a 1960 one-ton pickup
and the other was a 1952 pickup. In February of 1974, the plaintiff
renewed coverage with the defendant. Meridian Mutual, for a 1963

pickup truck which he had owned prior to the October of 1973 ac-
quisitions. The renewed coverage was to commence in April of 1974.
Sometime during May of 1974, the plaintiff told his insurance agent
that his 1960 pickup would soon be operable and that he desired to

transfer his coverage from the 1963 pickup to the 1960 pickup. The
conversation concerning the transfer took place during an informal

gathering of businessmen for morning coffee. From that period on,
the facts of the case were in conflict as to what actions were taken

by the plaintiff and his insurance agent to accomplish the transfer.*^

In August of 1974, the 1960 pickup was involved in an accident
while being driven by the plaintiff's wife. When the plaintiff made a
claim for coverage under his policy, Meridian Mutual denied

coverage on the ground that no transfer had occurred and the plain-

tiff brought an unsuccessful lawsuit against his insurance agent and

the company."

The narrowly drawn issue in the action against the company
was whether an automobile had to be operable when acquired in
order to be "newly acquired" for the purpose of giving notice to the

company.*^ The court found that there were two distinct lines of

''See Stockberger v. Meridian Mut. Ins. Co., 395 N.E.2d 1272, 1276 (Ind. Ct. App.

1979) (quoting 12 G. Couch, Cyclopedia of Insurance Law § 45:184 (2d ed. 1964)).
"Stockberger v. Meridian Mut. Ins. Co., 395 N.E.2d 1272 (Ind. Ct. App. 1979).

"Id.

"Id. at 1275 (quoting policy language).

''Id. at 1274.'

"Id. The plaintiff charged both the company and his insurance agent with breach
of contract. In addition, he charged the agent with negligence. Id. See notes 58-68 infra
and accompanying text for the discussion of the agent's liability.

''395 N.E.2d at 1276-78. The issue was raised by the plaintiff's claim that the



386 INDIANA LAW REVIEW [Vol. 14:379

cases on the subject." The first and "prevailing" line of cases was
said to rule "that the test of when an automobile is 'newly acquired'
for purposes of giving the requisite notice of acquisition is not when
the vehicle is rendered operable but instead when it was acquired."*^
The basic rationale for the rule was that interpretation of an
automobile policy as a whole will often indicate that coverage is in-

tended for more than mere highway use." Coverage often extends to
such risks as fire, theft and collision, and to liability arising out of

maintenance. Thus, coverage could reasonably include an inoperable

automobile."

The second line of cases held that the automatic coverage ap-
plied only to operable automobiles.^" Those cases were based on the

rationale that "traveling on highways exposes the vehicle's operator

to liability, and that the risk for the insurance company is limited to
one vehicle at a time, depending upon usage."^'

In adopting the prevailing line of cases, the court found that the

policy in question was intended to cover more than just use on the
highway.^^ The policy covered liability arising out of ownership,
maintenance, and use; losses for collision, fire and theft; and, losses

for collision when the car was parked.^^ Thus, the fact that the plain-
tiff's pickup was inoperable when acquired, did not affect the duty
of notifying the company.^^ On that basis, the plaintiff's alleged
notification in May of 1974 was found to be not timely, and his claim
was barred.^^

The ruling in Stockberger is logical when one considers that
standard automobile insurance is usually more than just liability

automatic coverage provision was ambiguous. Id. at 1277. The court found that it was

not. Id.

'"Id. at 1276.

"Id. (citing Reciprocal Exch. v. Noland, 542 F.2d 462 (8th Cir. 1976); Allstate Ins.

Co. V. Stevens, 445 F.2d 845 (9th Cir. 1971); Williams v. Standard Accident Ins. Co..

158 Cal. App. 2d 506, 322 P.2d 1026 (1958); Illinois Nat. Ins. Co. v. Trainer, 1 111. App.

3d 34, 272 N.E.2d 58 (1971); Brown v. State Farm Mut. Auto. Ins. Co., 306 S.W.2d 836
(Ky. App. 1957); Mahaffey v. State Farm Mut. Auto. Ins. Co., 175 So. 2d 905 (La. App.

1965); Collard v. Globe Indem. Co., 50 So. 2d 838 (La. App. 1951); Providence Wash.

Ins. Co. V. Hawkins, 340 S.W.2d 874 (Tex. Civ. App. I960)).
"395 N.E.2d at 1276 (citing Wisbey v. Nationwide Mut. Ins. Co., 264 Or. 600, 507

P.2d 17 (1973)).

"395 N.E.2d at 1276.

'"Id. at 1276-77 (citing Luke v. American Family Mut. Ins. Co., 476 F.2d 1015 (8th

Cir.), cert, denied, 414 U.S. 856 (1973); Glen Falls Ins. Co. v. Gray, 386 F.2d 520 (5th

Cir. 1967)).

^'395 N.E.2d at 1277.

"'Id. at 1278.

''Id. at 1277-78.

=Vd at 1278.

''Id.



1981] SURVEY-INSURANCE 387

coverage. However, most if not all of the cases involving automatic

coverage have been ones in which the car owner was seeking in-

surance coverage for liability to a third party .^* The contractual

notice requirement seems calculated only to give the insurer the op-

portunity to collect an additional premium when necessary. Is it
realistic to require the owner of an inoperable vehicle to give notice,

when the notice will require a high premium for liability coverage
while his vehicle is inoperable? The immediate answer would be to
have the owner give notice but not require him to pay a premium
for liability coverage during the inoperable period. This answer,

however, does no more than to require the owner to give a second
notice when the vehicle becomes operable.

The court in Stockberger stated that "an automobile is an
automobile."" In the contemplation of most car owners, however, it

may be more realistic to say that an automobile is only an
automobile when it can be used for its designated purpose — to be
driven. Surely, few people feel a need for insurance until a car

becomes operable and the potential of personal liability arises. So

far as liability coverage is concerned, a liability insurer is really not

on the risk until the car is operable. It would seem more reasonable
to require notice for a newly acquired replacement vehicle only

when actual "replacement" occurs.
-4. Liability of an Insurance Agent for Failure to Procure

Coverage. — In addition to considering the question of automatic in-
surance coverage, the court in Stockberger v. Meridian Mutual In-
surance Co.^^ discussed the liability of an insurance agent for failure

to procure coverage. The plaintiff in Stockberger claimed that his in-
surance agent had breached an implied contract to insure plaintiff's

truck. Further, the plaintiff claimed that his agent had been

negligent in failing to procure coverage once a request had been

made.^^

The factual setting for the issue raised is fairly simple. The
plaintiff and his insurance agent discussed the question of insurance

for the plaintiff's truck while having coffee one morning with a
group of businessmen. The plaintiff claimed that he made a request
for a transfer of coverage from one vehicle to another under an ex-
isting policy. However, the plaintiff gave his agent no specific infor-
mation about the truck in question. The agent testified that no re-
quest for transfer was made, and that the parties only discussed

^^See cases cited notes 47 & 50, supra.
"395 N.E.2d at 1276.
^"395 N.E.2d 1272 (Ind. Ct. App. 1979).

"'Id. at 1278.



388 INDIANA LAW REVIEW [Vol. 14:379

generally the need to insure the vehicle once it was put in use.*°
Although the substance of the conversation was in conflict, it was
clear that no further effort was made by either party to consum-
mate the transfer of coverage.

In dealing with the question of implied contract, the court found

initially that Indiana law requires agreement on five essential

elements in order for a contract of insurance to exist. Those

elements were, "(1) the subject of the insurance; (2) the risk or peril

insured against; (3) the amount of coverage; (4) the limit and dura-
tion of the risk; and (5) the amount of the premium to be paid."^' On
the basis of these five elements the court found that no "meeting of

the minds" could have occurred and thus, that no contract could ex-

ist.«^

In arriving at its holding, the court noted that past dealing be-

tween the parties could create an implied contract to procure in-

surance.^^ The evidence showed that the plaintiff had relied to some
extent on his agent in the past.®'' However, the court ruled that even

though an agent may have authority to perform most of the essen-
tial tasks to creating the contract, there was "a corresponding duty on
the part of the insured to provide the agent or broker with the in-

formation necessary to implement the policy. An agent or broker is
not liable when the insured's loss is due to the insured's own act or
omission."*^ In this case, the evidence showed that the plaintiff had
been aware through past dealing with his agent of his duty to pro-
vide information for the policy change.^* Because no information had

been provided, no contract existed.®' Further, the court determined

that the plaintiff had not met his burden of proving the existence of
an implied contract arising from an established past practice.®*

After Stockberger, it is apparent that a contract to procure in-

surance will not be easily established. The intent of the parties to
enter into a contract will have to be clearly proven.®' It is arguable,

however, that less proof will be required in a situation where a

"Id. at 1279 (citing Farmers Mut. Ins. Co. v. Wolfe. 142 Ind. App. 206, 233 N.E.2d

690 (1968)).

''395 N.E.2d at 1279-80.

''Id. at 1279 (citing Hamacher v. Tumy, 222 Or. 341, 352 P.2d 493 (1960), and

citing for comparison Western Assur. Co. v. McAlpin, 23 Ind. App. 220, 55 N.E. 119

(1899)).

"395 N.E.2d at 1278-79.

"'Id. at 1279 (citing 3 G. CoucH, supra note 39, § 25:60 and Annot., 72 A.L.R.3d

747 (1976)).

««395 N.E.2d at 1279.

»7d at 1279-80.

««/rf. at 1280.

"Id.



1981] SURVEY-INSURANCE 389

modification of existing coverage is proposed; the amount of infor-

mation needed to change a policy may be less than that needed to
create a new policy.

B. Misrepresentation

1. Rescission of the Policy, a. Requirement of tender of
premiums. — '^hen an insured misrepresents matters in an applica-
tion for insurance, the insurer may, as a general rule, rescind the

policy.'" The purpose of rescission is to restore the parties to their
pre-contract positions." Therefore, to rescind an insurance policy,

the insurer must return any premiums paid by the insured.'^ In

American Standard Insurance Co. v. Durham,''^ however, the Indiana

Court of Appeals held that a tender back of premiums paid is not re-
quired to rescind a policy if the company has previously paid claims
under the policy in excess of the premiums paid by the insured.'^
American Standard issued a policy of automobile insurance to
Durham covering a 1973 Corvette. On the application it was stated
that Durham had been convicted of bank robbery. Actually,
Durham's criminal record was somewhat longer, including convic-
tions for larceny, robbery and leaving the scene of an accident.

Durham maintained that he told American Standard's agent about
his entire criminal record. Despite this knowledge, the agent had

prepared the application form listing only the bank robbery convic-

tion. A single premium of $180 was paid on the policy. A few months
later Durham was involved in a one-car accident. American Standard
paid a claim of $2300 for the damages. Soon thereafter the car was
stolen. The theft was reported to the police and Durham's insurance
agent. American Standard investigated the theft but refused to pay
anything.'^ Durham sued American Standard for breach of contract
seeking compensatory and punitive damages. American Standard set
up the affirmative defense of misrepresentation in the application

and sought to rescind the policy. A jury awarded Durham $16,900.'^
American Standard appealed, claiming error in a jury instruction to
the effect that an insurer must tender premiums paid to rescind a

'"See Prentiss v. Mutual Ben. Health & Accident Ass'n, 109 F.2d 1 (7th Cir.), cert,
denied, 310 U.S. 636 (1940); 45 C.J.S. Insurance § 470 (1946).

"Prudential Ins. Co. v. Smith, 231 Ind. 403, 108 N.E.2d 61 (1952).

''Smeekends v. Bertrand, 262 Ind. 50, 311 N.E.2d 431 (1974); Blaising v. Mills. 374

N.E.2d 1166 (Ind. Ct. App. 1978); Berry-Jefferson Corp. v. Gross, 358 N.E.2d 757 (Ind.

Ct. App. 1977).
''403 N.E.2d 879 (Ind. Ct. App. 1980).

''Id. at 881.

'^d. at 880.

''Id.



390 INDIANA LAW REVIEW [Vol. 14:379

policy. It was American Standard's contention that a tender back of
premiums was unnecessary because American Standard had already
paid a claim which exceeded the amount of premium paid in."

The court of appeals reversed and remanded the case for a new
trial.'* The court recognized an exception in Indiana to the rule re-
quiring prompt tender of premiums; when the insurer has paid a
claim which is greater in amount than the premiums, the insurer
need not tender the premiums before rescinding the policy.'^ There
remains a problem, however, which the court neither dealt with nor

apparently recognized. While an insured is bound by his own mis-
representations, when an agent, in filling out an application, makes
mistakes or misrepresentations, the insured is not bound unless the
insured participates in making the misrepresentations.*" Instead, the
insurer is bound by the agent's misrepresentations.*' In the present

case, Durham told the agent about his criminal record, but the agent
omitted parts of it on the application. The court apparently accepted
the assertion as true, but it did not hold the insurer liable for the

agent's mistake. American Standard, not Durham, should be bound
by these omissions. The insured should not lose the protection pur-
chased merely because the agent failed to convey what he had been
told.

b. When tender is timely. — In Gary National Bank v. Crown
Life Insurance Co.,^^ the court dealt with another problem concern-

ing when premiums must be tendered. Warren Pike obtained a
$50,000 insurance policy on his own life from Crown Life. Gary Na-
tional Bank was made trust beneficiary of the proceeds. When Pike
died five months later, it became apparent that he had made misrep-
resentations on the application with respect to his medical history.

Gary National Bank filed for the death benefits on July 17, 1974. On
September 6, 1974 Crown Life refused to pay based on the misrepre-
sentations, and sent a check for the premiums to Gary National
Bank. The bank, while still in possession of the check, filed suit on
January 28, 1975. The check was returned to Crown Life on June 17,
1975, On May 25, 1976, less than a month before trial, Crown Life
tendered a check for the premiums into court.*^ The trial court held
for Crown Life.*'' On appeal, the only issue decided was whether

"M at 880-81.
"M at 882.
"M at 881. See Great E. Cas. Co. v. Collins, 73 Ind. App. 207. 126 N.E. 86 (1920).
'"n J. Appleman. supra note 32. § 9409; G. CoucH, supra note 39, § 26:170.

*'17 J. Appleman. supra note 32, § 9409; G. Couch, supra note 39, § 26:170.

'^392 N.E.2d 1180 (Ind. Ct. App. 1979).

''Id. at 1180-81.

"M at 1181.



1981] SURVEY-INSURANCE 391

Crown Life's tender of the premiums into court was timely.*''
The court of appeals found that the tender was timely and af-

firmed/^ When the beneficiary refuses a tender of premiums, the in-
surer must pay the money into court or the fraud upon which the
rescission is based is waived.*^ When the check was returned to
Crown Life on June 17, 1975, Crown Life had a duty to tender the
premiums into court. The purpose of paying the money into court is
to determine who is entitled to it.** By the time Crown Life finally
paid the premiums into the court, neither party claimed any right to

it. The court noted that both parties could have been more diligent

in tendering the premium check, but as long as the court was in
possession of the funds before a trial on the merits. Crown Life's
tender was timely.*' In Prudential Insurance Co. of America v.
Smith,^° a case factually similar to the present case, the Indiana

Supreme Court held that failure of the insurance company to tender
premiums into court after the beneficiary had refused them con-
stituted a waiver of a fraud defense on the policy .'' In that case the

insurer never paid the premiums into court, whereas Crown Life
tendered the premium just prior to trial. The court did not decide
exactly when a tender of premiums to a beneficiary would have to
be made to be timely. The decision does indicate, however, that once
a beneficiary refuses the tender of premiums, an insurance company
can wait until just prior to trial to pay the premiums into court. Not
only does the insurance company not have to pay any proceeds on
the policy, but it has use of the premiums until trial.

c. Duty of insurer to investigate application. — The extent to
which an insurer must make inquiry into representations on an ap-
plication was decided in State Farm Mutual Automobile Insurance
Co. V. Price.^^ On the application for an automobile liability in-
surance policy John Price answered "no" to the question whether
the applicant or any member of his household had been convicted of
or forfeited bail for any traffic violation. Price's son, John Ray Price,
however, had been convicted of three traffic offenses.'^ State Farm
did not investigate the driving records of Price or his family but

relied on the answers on the application. John Ray was involved in
an accident while driving an insured automobile. State Farm

''Id.

"'Id. at 1182.

"Prudential Ins. Co. v. Smith, 231 Ind. 403, 108 N.E.2d 61 (1952).
**392 N.E.2d at 1182.

''Id.

'"231 Ind. 403, 108 N.E.2d 61 (1952).

"Id. at 413-14, 108 N.E.2d at 65.
'^396 N.E.2d 134 (Ind. Ct. App. 1979).

"M at 135-36.



392 INDIANA LAW REVIEW [Vol. 14:379

discovered the misrepresentations in the application and filed an ac-
tion to rescind the policy.®^

The trial court found that Price had materially misrepresented
the driving records of Price and his son and that State Farm had
relied on these statements. Although State Farm was not put on
notice of any misrepresentations, the trial court determined that
State Farm had a duty to investigate an applicant's insurability
within a short time after issuance of the policy; State Farm had failed
to conduct an investigation and therefore had waived its right to
rescind the policy.'^

The court of appeals reversed the trial court's decision.^* The
court noted that, as a general rule, an insurance company may rely
on matters asserted in a policy application." When an insurance
company is placed on "inquiry notice" it has a duty to investigate
and failure to do so waives the company's right to rescind the

policy. Such notice arises when the company or its agent has
knowledge that would lead a prudent man to inquire about the mat-
ter;^* but when the company has no reason to doubt a statement in
an application, it may rely on that statement without inquiry.^' The
trial court found State Farm had no notice of the misrepresentations
of John Ray Price's driving record; therefore no duty to investigate
arose, and State Farm was not precluded from rescinding the
policy.'""

2. Misrepresentation by the Insurer's Agent. — In AAA Wreck-
ing Co. V. Barton, Curie & McLaren, Inc. ,'"' the court of appeals held
that where "a party with knowledge of the facts, makes a represen-
tation of a material fact with the knowledge . . . that another party

will rely upon it, and where the representation does induce reliance

by the other party, the party making such representation will be

estopped from denying its truth . . . ."'"^ AAA Wrecking entered a
contract to destroy a building in downtown Indianapolis owned by
Thomas. Thomas requested that AAA carry collapse insurance.
Thomas agreed to adjust the contract price upwards to reflect the
cost of this insurance. It was also agreed that the cost of this extra

insurance would be worked out between the insurance agent, Bar-

'*Id. at 136.

''Id.

''Id. at 137.

"M
''Id.

"Id.

""Id.

""395 N.E.2d 343 (Ind. Ct. App. 1979).

""Id. at 346-47.



1981] SURVEY-INSURANCE 393

ton, Curie and McLaren (BC & M), and Thomas.'"^ An agreement was
reached and BC & M did provide the extra coverage. BC & M re-
quested that AAA pay $4,198 as the premium for the additional
coverage. AAA maintained, however, that the figure given to
Thomas was only $1,871 and that since this was the figure by which
the contract price was adjusted, AAA had relied to its detriment on
the representation of BC & M. Therefore, AAA argued that BC & M
was estopped to recover the excess premium.'"^

The trial court held that AAA had not carried its burden of proof
on the issue of whether the lesser figure was supplied in such a way
as to amount to an equitable estoppel. The court of appeals,
however, reversed the trial court's decision as contrary to the

evidence.'"^ Testimony indicated that BC & M had quoted the $1,871
figure to Thomas and that this figure had been incorporated into the
contract. BC & M did not contradict this testimony. The court of ap-
peals found that BC & M knew or should have known that AAA
would rely on the figure to its detriment.'"^ Therefore BC & M was
estopped to recover any more than $1,871 as premium for providing
the requested coverage. ^"^

C. Uninsured Motorist Coverage

1. Stacking of Benefits.
—

'ReaeniXy , the court of appeals ad-

dressed the subject of intra-policy stacking of benefits under unin-

sured motorist coverage in Indiana. Liddy v. Companion Insurance
Co.^°^ and Indiana Insurance Co. v. Ivers^"^ dealt with very similar

fact settings and virtually identical issues."" Ivers, the most recent

of the two cases, will be the focus of discussion in this section.
In Ivers, the plaintiffs' decedents were killed when the

automobile in which they were riding collided with a vehicle driven
by an uninsured motorist.'" At the time of the collision there was an
insurance policy in effect through the defendant, Indiana Insurance

Company, which extended to the plaintiffs' decedents."^ The policy

""Id. at 344.

'"'Id.

""Id. at 347.

""Id. at 346.

""Id.

•"^egO N.E.2d 1022 (Ind. Ct. App. 1979).
109€"395 N.E.2d 820 (Ind. Ct. App. 1979).
""Besides the question of stacking, Liddy also dealt with the issue of what con-

stitutes a proper subject of arbitration. See text accompanying notes 219-24 supra.
"'395 N.E.2d at 821. The negligence of the uninsured driver was stipulated to be

the proximate cause of the accident. Id.

"^The plaintiffs were the administrators of the decedents' estates. One plaintiff,



394 INDIANA LAW REVIEW [Vol. 14:379

in question covered three automobiles and required individual

premiums for each automobile. A separate premium for uninsured
motorist coverage was also required on each automobile. The limits

of liability stated for uninsured motorist coverage were $15,000 for

each person and $30,000 for two or more persons for injuries arising
out of one accident.'"

The plaintiff's claim for wrongful death against the company
was $90,000. This amount represented the combined maximum unin-
sured motorist coverage for each of the three automobiles. The
plaintiffs reasoned that they should be able to "stack" the maximum
benefits of $30,000 for each automobile because the policy listed

each automobile separately and because a separate uninsured

motorist premium was assigned and collected for each vehicle."^ The
crux of the plaintiffs' position was that the "limits of liability" provi-
sion"^ of the policy conflicted with the "separability clause" of the

policy,"* thereby creating an ambiguity which the plaintiffs argued

had to be construed against the company and in favor of extended
coverage."' The plaintiffs also asserted that the company's collection
of a separate uninsured motorist premium for each automobile raised
an implication that a separate contract existed for each

automobile."*

The precedent for the plaintiffs' ambiguity argument came from
the 1974 Indiana Court of Appeals decision in Jeffries v. Stewart.^^^

In Jeffries, the court had compared a limits of liability clause and a
separability clause much like the ones facing the Ivers court. In ad-

Bobby W. Ivers, was the owner of the vehicle involved in the accident and the named

insured on the automobile insurance policy. Id.

"7d. at 822. The limits of liability were identical to the minimum amounts re-

quired by IND. Code §§ 27-7-5-1, 9-2-1-15 (1976). 395 N.E.2d at 822.
"'395 N.E.2d at 822.

'"^The "Limits of Liability" provision read as follows:

The limit of liability for family protection coverage [uninsured motorist

coverage] stated in the declarations as applicable to "each person" is the

limit of the company's liability for all damages, including damages for care or

loss of services, because of bodily injuries sustained by one person as a

result of any one accident and, subject to the above provision respecting each

person, the limit of liability stated in the declarations as applicable to "each

accident" is the total limit of the company's liability for all damages, in-

cluding damages for care or loss of services, because of bodily injuries sus-

tained by two or more persons as a result of any one accident.

Id.

""The "separability clause" stated: "4. Two or more automobiles — Parts I, U,
and III. When two or more automobiles are insured hereunder, the terms of this policy

shall apply separately to each . . . ." Id.

'"Id. at 823.

"Yd. at 822.

"'159 Ind. App. 701, 309 N.E.2d 448 (1974).



1981] SURVEY-INSURANCE 395

dressing the issue of ambiguity, the court in Jeffries had stated:

Ambiguity arises because of conflict between the "two or

more automobiles" clause and the "limits of liability" clause.
The "two or more automobiles" clause, or separability clause
as it is also known, effectuates a contract of insurance

separately as to each car insured, and binds each policy with

all of the provisions and conditions of the single policy. Each
of the three policies then contains a promise to pay the in-

sured damages . . . .'^"

The Jeffries court then found that the separability clause expressly
applied to the uninsured motorist provision and held that a separate

contract of insurance existed for each of the three automobiles.'^'

Stacking of benefits was therefore allowed. '^^

The Ivers court found Jeffries to be distinguishable because the
separability clause in the Indiana Insurance Co. policy did not apply

to the uninsured motorist provision. '^^ Thus, no ambiguity was found
to exist and the court refused to allow stacking of benefits. '^^

To fully dispose of the question of stacking, the Ivers court lastly
addressed the plaintiffs' argument that the separate uninsured
motorist premiums charged obligated the insurer to provide multi-
ple coverage.'^* The court rejected the argument, stating, "We find
that the insurer gave consideration in the form of accepting increased

risk for the extra premium charged per automobile; therefore, we do
not find that the separate premiums require 'stacking.'"'^* This
holding was based on the premise that the company would have
more than one risk of loss if all the insured vehicles were on the
highway at one time.'^^

After Ivers, it is probable that the issue of stacking may not be
raised again in Indiana. As one author remarked following Jeffries,
the ambiguity issue raised in stacking cases can be avoided by "proper

""Id. at 707, 309 N.E.2d at 452.

'"Id.

'''Id. at 709, 309 N.E.2d at 453.
'^^395 N.E.2d at 823.

'^Vd. The Ivers court found its ruling to be consistent with other Indiana cases

having similar facts. Id. (citing Trinity Universal Ins. Co. v. Capps, 506 F.2d 16 (7th

Cir. 1974) (wherein the separability clause did not include uninsured motorist

coverage); Miller v. Hartford Accident & Indem. Co., 506 F.2d 11 (7th Cir. 1974)
(wherein the insurance policy contained no separability clause); & Liddy v. Companion
Ins. Co., 390 N.E.2d 1022 (Ind. Ct. App. 1979) (wherein the separability clause exemp-

ted uninsured motorist coverage)).

'^^395 N.E.2d at 823-24.

'''Id. at 824.

"Ud. The holding was found to be consistent with numerous other authorities. See

cases cited, id. at 824-25.



396 INDIANA LAW REVIEW [Vol. 14:379

draftsmanship."^^® The contract language in Indiana stacking
cases since Jeffries^^^ has avoided any problematic ambiguity,

leading to the suggestion that insurance contract drafters may have
taken heed of the Jeffries lesson.

2. The Effect Upon Uninsured Motorist Coverage of Prior Set-
tlement with Tortfeasor. — In Spears v. Jackson^^" the court of ap-
peals upheld an insurance policy provision which voided uninsured

motorist coverage if the insured entered into settlement with a tort-

feasor without the consent of the company.^''

The plaintiff in Spears was injured in a three car collision. Of
the two tortfeasors, one was insured and the other was not. Without
the permission of the insurance company. Spears settled with the in-

sured tortfeasor. Spears' subsequent claim for uninsured motorist

coverage was denied for violation of the aforementioned provision."^

In upholding the validity of the provision, the court found that

the consent-to-settle requirement did not contravene public policy as

an improper restriction on a person's right to redress injuries in a

court of law.'^^ Further, the court rejected the plaintiff's argument

"that the provision was intended to void coverage only in the con-
text of settlements with uninsured motorists."^^^ The policy language
was found to be clear and unambiguous; the court therefore refused
to strictly construe the contract against the insurer.*^^

The most important aspect of Spears was the court's express re-
jection of the Michigan rule of insurance policy construction which

always gives "a construction which is most favorable to the

insured.""® The court stated that Indiana law allows such a construc-
tion only where the policy language is ambiguous."' Otherwise,

'^'Frandsen, Insurance, 197U Survey of Recent Developments in Indiana Law, 8

IND. L. Rev. 217, 224 (1974).

'^See cases cited note 124 supra.

""398 N.E.2d 718 (Ind. Ct. App. 1980).

"'The relevant provision in the Prestige Casualty policy was as follows:

This [uninsured motorist] endorsement does not apply:

a) to bodily injury to an insured with respect to which such insured, his

legal representative or any person entitled to payment under this endorse-

ment shall, without written consent of the company, make any settlement

with any person or organization who may be legally liable therefor.

Id. at 719.

"'Id.

""Id.

''*Id.

'""Id. at 720.

'"/A at 719 (rejecting Michigan Mut. Liab. Co. v. Karsten, 13 Mich. App. 46, 163

N.W.2d 670 (1968)).
"'398 N.E.2d at 719.



1981] SURVEY-INSURANCE 397

"[w]here the policy language is clear and unambiguous, it must be

taken in its plain, ordinary and popular sense."^^*

D. Subrogation—Builder's Risk Insurance

During the previous survey period, the decision in Morsches

Lumber, Inc. v. Probst^^^ introduced into the law of Indiana the con-

cept that "an agreement to provide insurance constitutes an agree-

ment to limit the recourse of the party acquiring the policy solely to
its proceeds even though the loss may be caused by the negligence
of the other party to the agreement."'*" In the recent survey period

the rule of Morsches was firmly entrenched in Indiana in South Tip-
pecanoe School Building Corp. v. Shambaugh & Son, Inc.^'^^ While
Morsches dealt only with a simple owner-contractor construction

relationship, Shambaugh involved a complex construction contract
with an owner, a general contractor, and several subcontractors.

The lawsuit in Shambaugh was a subrogation action brought by
the builder's risk insurer, Hartford Insurance Company, in the name
of the property owner. South Tippecanoe. Hartford had paid South

Tippecanoe for property damage to a high school building under con-
struction which allegedly resulted from negligence by the contrac-

tor, subcontractors, and architects on the project. The various de-
fendants were awarded a summary judgment in the trial court on
the basis that the existing contracts foreclosed an action for the in-

juries alleged.'*^

In order to ascertain the intent of the parties to the construc-

tion contracts the court laid out the relevant provisions of the

general contract (Contract for Construction) and the relevant provi-

sions of the builder's risk insurance policy. The paragraph of the
general contract entitled Property Insurance set forth three obliga-

tions with respect to the procurement of builder's risk insurance.
First, the owner was required to maintain insurance on the entire
project which would protect and include the interest of all the par-

ties for fire and other property damage hazards.'" Second, proceeds

"*/d. (citing Vernon Fire & Cas. Ins. Co. v. American Underwriters' Inc., 356
N.E.2d 693 (Ind. Ct. App. 1976)).

'''388 N.E.2d 284 (Ind. Ct. App. 1979).

""Id. at 285. For a general discussion of Morsches, see Mortensen, Insurance, 1979
Survey of Recent Developments in Indiana Law, 13 Ind. L. Rev. 279, 289-91 (1980).

'"395 N.E.2d 320 (Ind. Ct. App. 1979).

"'Id. at 322.

'"M at 323. The provision stated:
11.3.1 Unless otherwise provided, the Owner shall purchase and maintain
property insurance upon the entire Work at the site to the full insurable
value thereof. This insurance shall include the interest of the Owner, the
Contractor, Subcontractors and Sub-subcontractors in the Work and shall in-



398 INDIANA LAW REVIEW [Vol. 14:379

payable for any loss were to be paid to the owner as "trustee" for
all insureds.'"^ Third, the owner and general contractor were to
"waive all rights against each other" for insured perils and the con-

tractor was required to procure similar waivers from all subcontrac-
tors.'''

The key provision of the insurance policy was the subrogation
clause which allowed the company to be subrogated to the insured's
rights. However, the clause permitted the insured to waive its

rights against subcontractors and other entities performing work
without invalidating the insurance coverage.'"

On the basis of the foregoing contractual limitation the court
found that the contract "evinces an intent to place any risk of loss

on the Work on insurance; the Defendants are intended 'insured'
under the builder's risk policy; and, the waiver provisions are fully

applicable here."'" The court went on to conclude that "a builder's
risk insurer is not entitled to subrogate against one whose interests

are insured even though the party's negligence may have occasioned
the loss, in the absence of design or fraud."''*

sure against the peril of Fire, Extended Coverage, Vandalism and Malicious

Mischief. [Subparagraph]

Id. (footnotes omitted).

'"M The provision stated: "11.3.3 Any insured loss is to be adjusted with the
Owner and made payable to the Owner as trustee for the insureds, as their interests
may appear, . . . [Subparagraph]." Id.

^*^Id. The provision stated:

11.3.6 The Owner and Contractor waive all rights against each other for

damages caused by fire or other perils to the extent covered by insurance

provided under this Paragraph 11.3, except such rights as they may have to
the proceeds of such insurance held by the Owner as trustee. The Contractor

shall require similar waivers by Subcontractors and Sub-subcontractors in ac-

cordance with Clause 5.3.1.5. In waiving rights of recovery under terms of

this paragraph, the term "Owner" shall be deemed to include his employees

and the Architect and his employees as the Owner's representative as pro-

vided for in the Contract Document. [Subparagraph]

Id.

'*^Id, at 324. The clause stated:

In the event of any payment under this policy, the Company shall be

subrogated to all of the Insured's rights of recovery therefor against any per-

son or organization and the insured shall execute and deliver instruments

and papers and do whatever else is necessary to secure such rights. The In-

sured shall do nothing after loss to prejudice such rights.

This insurance, however, shall not be invalidated should the Insured waive in

writing prior to a loss to the described property any or all right of recovery

against any entity for whom work is being performed, or against any subcon-
tractor working on the job insured hereunder.

Id.

'"Id. at 326.

'"M at 328.



1981] SURVEY-INSURANCE 399

The Shambaugh case is a well written and soundly reasoned

opinion. The rule will aid in solving the problem of apportioning

risks in the context of construction contracts and should help to

reduce litigation arising out of construction loss disputes.

E. Insurer's Duty to Settle

One of the realities to be faced by a plaintiff in modern tort
litigation is that defense of a lawsuit is likely to be managed,

negotiated, and tried or settled by the defendant's liability

insurer. '^^ As a result, a plaintiff who has been met with less than
good faith bargaining on the part of a defendant's insurance com-

pany may justifiably desire to see the insurer taken to task. During
the survey period the Indiana Court of Appeals made a definite
statement with respect to the insurer's duty to use good faith in

negotiating with a tort claimant on behalf of its insured tortfeasor.

In Winchell v. Aetna Life & Casualty Insurance Co.,^^° the plain-
tiff brought a lawsuit against the University of Evansville for alleged

injuries to her minor son. While her first lawsuit was pending, the
plaintiff initiated a second lawsuit against the University's liability

insurer, Aetna Life and Casualty, wherein she sought damages for
economic and emotional injuries allegedly caused by the insurer's

failure to settle in good faith.'*' A key fact relied on by the plaintiff
in her second action was that she was also insured by Aetna through
coverage provided by her employer.'*^ This fact, she alleged, created

a fiduciary duty on the part of the insurance company toward her,
and made the company liable for its unwillingness to accept her set-
tlement offers.'*^ The trial court granted the insurance company's
motion to dismiss for failure to state a claim upon which relief could
be granted.'*^

In addressing the issue of the insurer's duty to "make a reason-
able effort to compromise the plaintiff's claim against the defendant-
insured,"'** the court of appeals relied principally upon the 1972 In-

diana case of Bennett v. Slater.^^^ In Bennett, the tort claimant had

recovered a judgment in excess of policy limits against the

'*'See Annot., 50 A.L.R.2d 458 (1956); Annot., 49 A.L.R.2d 694 (1956); Annot.. 41

A.L.R.2d 434 (1955).
'^"394 N.E.2d 1114 (Ind. Ct. App. 1979).

"'Id. at 1115.

''^M The plaintiff also sought punitive damages for alleged willful and intentional
acts by the insurer to deprive her of her rights. Id.

'"^Id.

"'Id. at 1116.

'^154 Ind. App. 67, 289 N.E.2d 144 (1972).



400 INDIANA LAWREVIEW [Vol. 14:379

defendant-insured. Prior to trial, Bennett had offered to settle for

the policy limits but Slater's insurer had declined. When Slater, the
insured-judgment debtor, refused to bring his own action against his
insurer, Bennett sued the company directly to recover his excess
judgment. The dismissal of Bennett's direct action was upheld
because the court of appeals found that the company had no duty to
Bennett to accept Bennett's settlement offer.'" The Bennett court
had concluded that "[t]he duty of an insurance company to protect
its insured against liability cannot consistently be extended to in-

clude protection to one who is seeking to hold the insured liable."'^*
In applying the Bennett rule, the Winckell court noted that its

own factual setting was distinguishable.'^^ However, the court found
the Bennett rule to be particularly significant because the appellant

was suing the insurer prior to termination of her suit against the in-
sured: "If a party with a claim against the insured cannot maintain

an action against the insurer even when the insured refuses to sue,
then surely the claimant cannot maintain such an action before the

insured indicates that it will not sue its insurer."'*"

The court made short shrift of the appellants' fiduciary duty
argument. There were no matters pleaded from which the court
could find reason to make a connection between Winchell's own in-
surance contract with Aetna and her claim for negligence against

the University.'®' The court concluded:

Common sense indicates that such a leap in reasoning is im-
prudent. It stretches the concept of a fiduciary relationship

too far to say that a fiduciary relationship established be-

tween an insurance company and its insured extends to a
lawsuit by that insured against another person insured by

the same insurance company.'*^

Thus, it is clear in Indiana that an insurance company has no
duty to use good faith in negotiating with a tort claimant on behalf

of an insured defendant. Moreover, no special fiduciary duty arises

on the part of the company where it turns out that the claimant and
the tortfeasor are both insured by the same carrier.

'"M at 73-74, 289 N.E.2d at 148 (quoting Keeton, Liability Insurance and Respon-
sibility for Settlement, 67 Harv. L. Rev. 1136, 1176 (1954)).

'^'154 Ind. App. at 73, 289 N.E.2d at 148 (quoting Seguros Tepeyac, S.A., Com-

pania Mexicana v. Bostrom, 347 F.2d 168 (5th Cir. 1965)).
'''*394 N.E.2d at 1117.

'^°Id. The court further commented that Winchell's premature lawsuit "could have

the effect of determining the insured's liability prior to its own trial, because the ques-
tion of the insurer's good faith regarding settlement may be related to the relative
strength of the plaintiff's case against the insured." Id.

'''Id. at 1117-18.

'"Id. at 1118.



1981] SURVEY-INSURANCE 401

The question which remains after Winchell and its reliance upon
Bennett, is who will be responsible for holding the insurance com-
pany accountable for occasional misconduct in defending lawsuits.

The obvious person would seem to be the insured. In Bennett v.
Slater,^^^ however, the insurance company exposed its insured to an
excess judgment, forced the plaintiff into litigation, and then

escaped unscathed when the insured refused to exercise his own
chose in action for bad faith.'®* The question of insurance company
accountability is one that should not be overlooked when the courts
have occasion to rule in the future on the issue of the insurer's duty

to use good faith in settling lawsuits.

F. Waiver and Estoppel

Forfeitures of insurance proceeds are not favored in Indiana

law. Nevertheless, failure to pay a premium may result in a for-
feiture unless waived by the insurer or unless the insurer does
something which causes the insured to fail to pay a premium on
time. Failure to timely pay a premium was the subject of two cases
decided during the survey period.

In Hargis v. United Farm Bureau Mutual Insurance Co.,^^^ Farm
Bureau had issued a general liability policy to the Hargises to cover

a recreational facility which they operated. The policy was to run
for a year beginning June 25. An estimated premium was paid in ad-
vance and was then adjusted at the end of the year to the actual
amount of the premium which depended on the number of people us-
ing the recreational facility. If any premium was unearned, it was to
be returned to the insured. On May 14, 1974, a combination billing
statement/cancellation notice was sent to the Hargises. The amount

'^54 Ind. App. 67, 289 N.E.2d 144 (1972).

'^''/d. Numerous problems arise in relying upon the insured to hold the insurer ac-

countable. In practice, the insured may have no idea of the wrong which has been done
to him by the insurer's bad faith refusal to settle. See, e.g., Simpson v. Motorists Mut.

Ins. Co.. 494 F.2d 850 (7th Cir.), cert, denied, 419 U.S. 901 (1974) (wherein the insurance

company negotiated with the claimant and rejected his settlement offers without noti-

fying the insured); Jones v. National Emblem Ins. Co., 436 F. Supp. 1119 (E.D. Mich.
1977) (wherein the insurer conducted negotiation and settlement while misrepresenting

to its insureds the chances of successful defense and potential exposure); Rutter v.

King, 57 Mich. App. 152, 226 N.W.2d 79 (1974) (wherein the attorney for the insurance

company (who had represented the insured in the personal injury action) helped the in-

sured to file his bankruptcy papers in order to discharge an excess judgment). The

reality is that though the insured may be the one positioned to hold the insurer ac-
countable, such alternatives as bankruptcy or flight (as in the Bennett case) may ap-
pear preferable to hiring a new attorney and bearing the cost of further litigation

while one's credit is impaired and one's property is subject to execution.

'^388 N.E.2d 1175 (Ind. Ct. App. 1979).



402 INDIANA LAW REVIEW [Vol. 14:379

due was $221, and if it was not paid by July 8, 1974, the policy was
to be cancelled. Normally a copy of this statement was also sent to
the local agent; in this case, however, none was sent. The Hargises
did not pay the premium although they acknowledged that they had
received the notice.'**

On July 26, 1974, a minor, Ronald Gibbs, was injured on the
premises of the recreational facility. The Hargises notified the local
agent of Farm Bureau and an investigation and processing of the
claim commenced. Farm Bureau paid Patricia Koch, Gibbs' mother,
for some of Gibbs' medical bills. Koch was also told to buy some
medical equipment in expectation of reimbursement.**^ It is unclear
who told Koch to purchase the equipment, but it can be inferred
that it was either the local agent or the adjuster. Neither the agent
nor the adjuster was informed that the last premium had not been
paid.'** The regional adjuster discovered the failure to pay the
premium in January of 1975, at which time a letter was sent to the
Hargises which stated that the company had not waived the
premium requirement.'** Gibbs and Koch filed suit in tort against
the Hargises and subsequently, Farm Bureau brought this action
against the Hargises, Gibbs, and Koch for a declaratory judgment
that it had no obligation to defend the Hargises.'™

The trial court found that no insurance policy was in force on
the date of the accident and that there was no waiver or estoppel by
Farm Bureau that would give effect to the policy.'^' The Hargises,
Gibbs, and Koch appealed.

Four issues were raised on appeal:'^^ (1) Did the trial court abuse
its discretion in denying a motion by Gibbs and Koch for leave to
amend their answer to include the affirmative defenses of estoppel
and waiver? (2) Was Farm Bureau estopped to assert the unpaid
premium by virtue of the actions of itself and its agents? (3) Did
Farm Bureau impliedly waive the payment of the premium as a con-
dition to recover on the policy? and (4) Should the past unused

premiums apply toward the premium due for the term in question?'"

"'Id. at 1177.

'"Id. at 1177-78.

'''Id.

"'Id. at 1178.

""Id.

"'Id.

'"The court said three issues were raised on appeal, but it dealt with estoppel and

waiver as if they were a single issue. Id. at 1179.

'"/d. at 1178-80. There was no evidence presented in regard to the existence or

amount of any unused premiums. The court of appeals refused to consider this fourth

issue. Id. at 1180.



1981] SURVEY-INSURANCE 403

The court found no abuse of discretion as to the first issue/^^
Leave to amend is a matter of discretion with the trial court. The
trial court had permitted the Hargises to amend their answer to in-
clude estoppel and waiver as affirmative defenses."* Gibbs and Koch
were not permitted to amend because the action was for declaratory
judgment on a contract to which they were not parties. Any
recovery inuring to Gibbs and Koch would depend on the existence
of a contractual relation between Hargis and Farm Bureau."*

Because Gibbs and Koch were not permitted to amend, resolu-
tion of the other three issues did not apply directly to them but to
the Hargises. Resolution of issues (2) and (3) gave the court an op-

portunity to explain the difference between estoppel and waiver.'"

Waiver is distinguised from estoppel in that waiver includes an in-

tent to surrender a known right while intent is immaterial for estop-
pel. An implied waiver may be shown when a party by his actions
indicates an intention to waive his rights inducing the other party to

act upon the belief that there has been a waiver. Estoppel requires

a deception by which the other party is induced to rely on the acts

or statements to his detriment."* Obviously, the distinction between

implied waiver and estoppel is difficult to discern.

The court found that estoppel did not apply because there had
been no detrimental reliance."' The Hargises did not change their
position or give up any defense because of the acts of the company's

agents.**" The Hargises claimed an estoppel based upon the insurer's
payment of medical bills and its promise to reimburse Mrs. Koch for
her purchase of medical equipment. A further estoppel was claimed
because the policy had been treated as in force for six months. The
court reasoned that the Hargises could not be "lulled by a false

sense of security to not acquire insurance elsewhere to cover an ac-

cident which had already occurred."'*'

There are two possible problems with this reasoning: First,
while the Hargises did nothing after the accident, Koch did rely on
the acts of the agents of Farm Bureau in telling her to purchase
medical equipment. To the extent that the Hargises would be relieved

"Yd at 1178.
"'Id.

"""[PJarties who are strangers to the contract and not named therein as the in-
sured have been held not entitled to claim waiver or estoppel against the company so
as to extend the coverage of the policy to include their interest in the insured prop-

erty." 45 C.J.S. Insurance § 677, at 622 (1946).

'"388 N.E.2d at 1178-79.

"'BLACK'S Law Dictionary 1417 (5th ed. 1979).
"'388 N.E.2d at 1178.

'"Id. at 1179.

'«'M



404 INDIANA LAW REVIEW [Vol. 14:379

of liability for this cost by Farm Bureau's promise to pay, their posi-
tion was changed in reliance on the acts of Farm Bureau's agents. Sec-
ond, while the Hargises would not have purchased insurance from
another insurer after the accident, they might have done so had

they been informed of the cancellation prior to the accident. Or-
dinarily, an insurance policy cannot be cancelled without notice to

the insured.'*^ It is unclear whether the billing statement was suffi-
cient notice to cancel. If the premium was not paid because the
statement was lost or mislaid or because of oversight, obviously the
notice of cancellation would be lost, mislaid or overlooked, too. In ad-
dition, no notice was sent to the insured's local agent, which might
have been construed as additional notice to the insured.

The Hargises also argued that the premium requirement was im-
pliedly waived by the acts of the agents in treating the policy as in

effect for six months after the accident. ^^^ The court refused to im-
pute the knowledge of cancellation by the home office to the local
agent.^" Because the intent to waive rights is necessary for a

waiver, an agent who was not aware of failure to pay a premium
could not intend to waive the failure as a condition of recovery. The
court gave four reasons for this: (1) Failure to pay the premium and
the cancellation notice were never discussed by the agent and the
Hargises; (2) the Hargises never paid the premium and nothing was
discussed as to using previous excess premium towards the
premium due; (3) "most, if not all, insureds know that if they fail to
pay the premiums they are no longer insured;""^ and (4) the
Hargises were not injured by the length of the period during which
the policy was treated as in force.'*'

There are numerous problems with this reasoning. First, there

are strong policy reasons for imputing the knowledge of the home
office to the agent. Farm Bureau knew that no premium had been
received and that it had cancelled the policy on July 8, 1974. It

would seem that Farm Bureau should have a duty to inform its
agents and adjusters that the policy had been cancelled within a

reasonable time rather than let them treat the policy as in force for
six months. Because the agents were not notified. Farm Bureau
should be bound by the representations of the agents. Second, it

"'Hoosier Ins. Co. v. Ogle, 150 Ind. App. 590, 276 N.E.2d 876 (1971); LaSalle Cas.

Ins. Co. V. American Underwriters, Inc.. 148 Ind. App. 675, 269 N.E.2d 563 (1971);

Allstate Ins. Co. v. Morrison, 146 Ind. App. 497, 256 N.E.2d 918 (1970); United Farm

Bureau Mut. Ins. Co. v. Adams. 145 Ind. App. 516, 251 N.E.2d 696 (1969).

"'388 N.E.2d at 1179.

"*Id.

'''Id,

"Yd.



1981] SURVEY-INSURANCE 405

makes no difference that the agent and the Hargises never discuss-
ed the premium, because implied waiver, by definition, is usually

discerned from actions rather than express statements.^" Third,

even if the agent had no authority to bind Farm Bureau, the ad-
juster did. An adjuster is regarded as the representative of the com-
pany.*** "[A]cts performed by him within the usual scope of business

entrusted to him are binding on the company in the absence of
notice of any limitations to the insured or fraud."'*' There is author-

ity to support an implied waiver when the adjuster treats the policy
as valid and effective, even when there is a defense known to the in-
surer.

•®°

Finally, the facts do not indicate whether the Hargises were in-

jured by the delay before refusal to honor the policy. Presumably,

they were operating without insurance during this period and could
have been liable for other accidents. It is also unclear whether they

changed their position in any way as a result of the belief that they
were covered for the accident.

Brand v. Monumental Life Insurance Co.^^^ raises the issue of
whether there is a forfeiture of the proceeds of a life insurance

policy for failure to pay a premium within a 31-day grace period
when the established company policy was to accept payments within
sixty days after the grace period.*'^ An agent of Monumental visited
Bruce and Dorothy Brand at their home on July 9, 1975 for the pur-
pose of collecting an overdue premium on a $10,000 insurance policy
on the life of Bruce Brand. Bruce died five days later without having

paid the premium. Dorothy tendered the overdue premium on July
22, 1975, but the tender was refused by Monumental's agents. Mon-
umental admitted that it normally accepted premiums for sixty days
after the end of the grace period provided that the insured was
alive and in apparent good health and that Monumental would have
accepted the premium had Bruce Brand been alive and apparently
well.**' From a trial court decision for Monumental, Brand
appealed.*®* In reversing the trial court,*'^ the court of appeals af-

'"See note 142, supra.

"*16A J. Appleman, supra note 32. § 9369.
"'Id.

""See Travelers Ins. Co. v. Eviston, 110 Ind. App. 143, 37 N.E.2d 310 (1941) (a
general agent of insurance company, in the absence of the insured's knowledge of
limitation on his authority, has authority to bind the company by his acts to the extent
of modifying terms and conditions of the policy); Penn Mut. Life Ins. Co. v. Senhenn,
40 Ind. App. 85, 81 N.E. 87 (1907) (payment of premium may be waived).

'"396 N.E.2d 417 (Ind. Ct. App. 1979).

"7d. at 419.

"Yd.

"Vd. at 418.

"Yd. at 422.



406 INDIANA LAW REVIEW [Vol. 14:379

firmed its long-standing rule in Odd Fellows' Mutual Aid Associa-
tion V. Sweetser^^^ that the insurance company will be estopped to
insist on a forfeiture when, by an agreement, the insured is led to
believe that the premiums will be accepted after the date specified
as the end of the period. ^'^ This agreement does not have to be ex-
press; it can be implied from statements or established by a mere
course of conduct.''* Monumental's practice was to accept the
premium only if the insured was alive and seemed to be in good
health. Such a practice conditions liability on having no risk during
the extension period. This was prohibited in Michigan Mutual Life
Insurance Co. v. Custer,^^^ because it "enable[s] the company, under

a show of leniency, to receive all the benefits of the extension, and
yet remain in a condition to repudiate all liability during the same
time."^"" Recovery for a loss occurring before payment should not be
disallowed when the company has extended the time for payment
beyond the date of loss. Indiana agrees with the majority of jurisdic-

tions in this rule,^°' which is consistent with the general disfavor

which forfeitures face.^"^

G. Arbitration

Arbitration is a means of dispute settlement common to in-
surance contracts. While arbitration clauses are usually enforced if

applicable, the court of appeals found on two recent occasions that
an arbitration was not applicable to the situation before it.

During the survey period, the court of appeals decided an ar-

bitration clause case which it considered to be one of first impres-

sion. In McNall v. Farmers Insurance Group^°^ David McNall was
severely injured when the motorcycle on which he was riding was
struck by a motorcycle driven by Rick Waterson. Waterson was un-
insured and did not have an operator's license. David's father, Ralph

McNall, held three policies of insurance issued by Farmers In-
surance Group, all of which contained uninsured motorist coverage.

Farmers denied that it was liable under the policies because the
motorcycle on which David had been riding was not an insured vehi-

"ni7 Ind. 97, 19 N.E. 722 (1889).

""M at 101. 19 N.E. at 723.

"n28 Ind. 25, 27 N.E. 124 (1891).

^""Id. at 30-31, 27 N.E. at 126.

'"'See 15 J. Appleman, supra note 32, § 8404; G. CouCH, supra note 39, § 32:135.

'""'Union Ins. Exch., Inc. v. Gaul, 393 F.2d 151 (1968); Guardian Life Ins. Co. of

America v. Brackett, 108 Ind. App. 442, 27 N.E.2d 103 (1940); Painter v. Massachusetts

Mut. Life Ins. Co., 77 Ind. App. 34, 133 N.E. 20 (1921).

^"^392 N.E.2d 520 (Ind. Ct. App. 1979).



1981] SURVEY-INSURANCE 407

cle under any of the policies. Farmers also claimed that David had

been contributorily negligent.^"*

Each of the three policies contained the following arbitration

clause:

4. Arbitration: If any insured making claim hereunder and

the Company do not agree that such insured is legally enti-
tled to recover damages from the owner or operator of an
uninsured motor vehicle because of bodily injury to the in-

sured, or do not agree as to the amount payable hereunder,
then either party, on written demand of the other, shall in-
stitute arbitration proceedings by serving upon the other a

formal demand for arbitration.^"^

Farmers demanded that the claims be submitted to arbitration. The
McNalls filed suit instead to establish four things: (1) the existence

of coverage; (2) Waterson was an uninsured motorist; (3) Waterson's
liability; and (4) the amount of damages.^"® Farmers moved to dismiss
and to order the McNalls to go to arbitration. The trial court
granted summary judgment in favor of the McNalls on the issue of
the existence of coverage and determined that Waterson was an un-
insured motorist. The liability of Waterson and the amount of
damages were tried to a jury. The senior McNall was awarded
$6,000 damages, but David was awarded nothing.^"^ David and
Farmers appealed. The court addressed and resolved six issues.^"^
Only one of these will be considered here: whether the trial court er-
red in denying Farmers' motion to require arbitration.

The court of appeals found that arbitration was required on
three issues only: (1) the existence of an uninsured motorist; (2) the

liability of that uninsured motorist to the insured; and (3) the

amount of damages.^"' Because the question of whether the policies
covered David was not one of these issues, arbitration was not re-
quired and the issue could be determined by a court of law.^'" The
court of appeals also found that the trial court properly retained jur-

isdiction over the dispute after deciding the issue of coverage.^" The
court stated that Indiana had never dealt with the issue of whether
denial of coverage was a waiver of an arbitration provision,^'^ but

""'Id. at 521.

""Id. at 522.

""Id. at 521.

""Id. at 521-22.

""Id. at 522.

""Id.

"'Id.

'"Id. at 524.

^'^G. Couch, supra note 39, § 50.108, cites two Indiana cases. Orient Ins. Co. v.

Kaptur, 176 Ind. 308, 95 N.E. 230 (1911) and Milwaukee Mechanics' Ins. Co. v. Stewart,



408 INDIANA LAWREVIEW [Vol. 14:379

that Indiana had "followed the general rule that denial of liability
under an insurance policy is a waiver of the right to demand per-
formance of conditions precedent.""^ In fact, the Indiana Supreme
Court held in Orient Insurance Co. v. Kaptur^^* that where an in-
surer, after being given notice of the loss, denied all liability, the in-

sured was relieved of an obligation to submit to arbitration before
bringing suit.^^^ The facts in Kaptur are not sufficiently clear to
determine whether the issue was precisely the same as in McNall,
but it is clear that Indiana has always followed the general rule that

a denial of liability is a waiver of obligations under the contract."* If
Indiana has never considered the precise issue in McNall before, the
rule here is only a logical extension of previous cases.

Clearly some of the issues decided by the trial court in McNall
were issues which the parties had agreed to submit to arbitration
under the policies."^ To the extent that the trial court decided these
issues, the reasons behind arbitration are usurped. Those reasons in-

clude utilization of a less expensive means of dispute settlement and
relief of crowded court dockets. Had the court held that the
McNalls, after having brought suit to establish coverage, must stop
that proceeding and begin a new one before an arbitrator, these
policy reasons would be disserved."* Additionally, the amount of
time necessary to settle the dispute would be increased.

In Liddy v. Companion Insurance Co. ,"' the court of appeals held
an arbitrator did not have jurisdiction to interpret an insurance con-

tract.^^° The insured, who owned two cars insured under one policy,
sought arbitration on whether the insurer was required to pay the

13 Ind. App. 640, 42 N.E. 290 (1895), for the proposition that the insurer's denial of

liability on an insurance policy estops the insurer from insisting on arbitration when

the insured brings an action on the policy.

"'392 N.E.2d at 523 (footnote omitted). See Ohio Farmers Ins. Co. v. Vogel, 166

Ind. 239, 76 N.E. 977 (1906) (proof of loss); Globe Life Ins. Co. v. Miller, 94 Ind. App.

289, 180 N.E. 689 (1932) (proof of death); United States Health & Accident Ins. Co. v.
Clark, 41 Ind. App. 345, 83 N.E. 760 (1908) (written notice of loss).

"'176 Ind. 308, 95 N.E. 230 (1911).

^'Yd. at 311, 95 N.E. at 231.

"'In Ohio Farmers Ins. Co. v. Vogel, 166 Ind. 239, 243, 76 N.E. 977, 978 (1906), the

court said:

The principle is old and thoroughly established that when a party repudiates

a contract and denies liability under it, the performance of conditions prece-

dent, such as notice, demand, tender and the like, are waived on the ground

that the law will not require a thing to be done which the party entitled has

excused, or given notice that it will be unavailing. This principle applies to

insurance as well as other contracts.

^"See text accompanying notes 205-06 & 210, supra.
"«392 N.E.2d at 524.

"'390 N.E.2d 1022 (Ind. Ct. App. 1979).

"^'Id. at 1029.



1981] SURVEY-INSURANCE 409

uninsured motorist coverage limits on each car,^" presumably to

avoid Indiana's rule against stacking.^^^ The court held that the ar-
bitration clause in the policy provided for arbitration of two issues
only: "(1) whether . . . the insured . . . [was] legally entitled to

recover damages /rom the . . . operator of an uninsured automobile;
and (2) if so, the amount of damages . . . ."^^^ It did not include the
amount the insurance company would have to pay the insured.^"
Presumably, that amount would be the policy limits, but because the
policy limit was the issue, an interpretation of the policy would be

required. Interpretation of contracts involves questions of law,

which the arbitrator did not have jurisdiction to decide.

H. Financial Responsibility Act

1. Effect of the Acf. — The Indiana Court of Appeals, in Grimes
V. Government Employees Insurance Co.,^^^ reiterated that the In-
diana Financial Responsibility Act^^® was not meant to be a com-
pulsory insurance statute. Grimes was involved in an accident with
Roberts, an Illinois resident. Grimes recovered a judgment against
Roberts' estate for $275,000. Government Employees Insurance
Company (GEICO), Roberts' insurer, paid to Grimes $20,000, which
was the limit of liability for bodily injury sustained in a single acci-
dent. The policy contained a provision^^^ under which GEICO
obligated itself to pay an amount which an out-of-state motorist
would be required to maintain under an applicable financial respon-

sibility law. The minimum amount stated in the Indiana Financial

'"Id. at 1024.

'''See text accompanying notes 108-27 supra. The "separability clause" in Liddy
did not apply to the uninsured motorist coverage. 390 N.E.2d at 1033.

^'^390 N.E.2d at 1028.

"*Id.

"%02 N.E.2d 50 (Ind. Ct. App. 1980).
''"IND. Code §§ 9-2-1-1 to -45 (1976 & Supp. 1980).
^"The policy provision read:

It is agreed that, subject to all the provisions of our policy except where
modified herein, the following provision is added:

If, under the provision of the motor vehicle financial responsibility law
of any state or province, a non-resident is required to maintain insurance

with respect to the operation or use of a motor vehicle in such state or pro-
vince and such insurance requirements are greater than the insurance pro-

vided by the policy, the limits of the company's liability and the kinds of

coverage afforded by the policy shall be set forth in such law, in lieu of the

insurance otherwise provided by the policy, but only to the extent required

by such law and only with respect to the operation or use of a motor vehicle
in such state or province ....

402 N.E.2d at 51.



410 INDIANA LAWREVIEW [Vol. 14:379

Responsibility Act was $30,000.^* Grimes brought an action to com-
pel GEICO to pay an additional $10,000, the difference between the
$30,000 required by the Act and $20,000 already collected.'''^ The
trial court held for GEICO.''"

In affirming the trial court,^'' the court of appeals quoted exten-

sively from Green v. State Farm Mutual Automobile Insurance CoP"^
and Hill v. Standard Mutual Casualty Co.^^ In Green, one Whitaker
obtained insurance from State Farm while in Mississippi, and then
moved to Indiana where he was involved in an accident with Green.
Green sued Whitaker and State Farm defended. State Farm then filed
an action to determine the limit of its liability. The policy limit was
$5,000 less than the amount required by the Financial Responsibility
Act in force at the time.'''' The court of appeals refused to require an
additional $5,000 recovery because it found that the Act was not
compulsory insurance law.''^ Proof of financial responsibility was
defined in the Act as "proof of ability to respond in damages for
liability thereafter incurred, arising out of the ownership,

maintenance or use of a motor vehicle."''* The court reasoned that
no proof of responsibility is required until after the first accident

and no recovery on that required insurance could be obtained until

the driver was involved in a second accident. Therefore, Green could
not recover."^

In Hill, the Seventh Circuit Court of Appeals held that a policy

was not rendered ambiguous as to whether a guest in an automobile
could recover from the insurer, by a provision protecting the in-

sured from liability imposed by a state's financial responsibility

act."* The court said:

'^'IND. Code § 9-2-1-15 (1976), in effect at the time of the accident, read:

Proof of financial responsibility shall mean proof of ability to respond in

damages for liability thereafter incurred, arising out of the ownership,

maintenance or use of a motor vehicle, in the amount of fifteen thousand

dollars [$15,000] because of bodily injury to or death of any one [1] person . . .

in the amount of thirty thousand dollars [$30,000] because of bodily injury to

or death of two [2] or more persons in any one [1] accident, and in the amount

of ten thousand dollars ($10,000] because of injury to or destruction of prop-

erty in any one [1] accident. Proof in the amounts required by this section

shall be furnished for each motor vehicle registered by such person.
^"402 N.E.2d at 51.

'^Id.

'''Id. at 54.

'^^68 Ind. App. 434, 343 N.E.2d 828 (1976).
'^110 F.2d 1001 (7th Cir. 1940).

'^n68 Ind. App. at 435-37, 343 N.E.2d at 829-30.

'''Id. at 438, 343 N.E.2d at 831.

"'Ind. Code § 9-2-1-15 (1976) (emphasis added).
"'168 Ind. App. at 439, 343 N.E.2d at 831.

"niO F.2d at 1006.



1981] SURVEY-INSURANCE 411

In our opinion this particular law seeks to increase

public protection in respect to motor vehicle operation. But

the Indiana Law is not a general compulsory insurance law.
It merely guarantees the ability of a selected group of

drivers or owners to respond in damages for future ac-
cidents. In other words, the Indiana Financial Responsibility

Law protects the victim against the automobile operator's
second accident, and in this case it was the operator's first
accident.^*®

In Grimes the Indiana Court of Appeals held that at the time of

the accident Roberts was not required to maintain insurance to
drive his car in Indiana and therefore State Farm did not have to
pay the amount required under the Financial Responsibility Act.^*"
The court went on to justify the holding on the basis that the Act
was intended to operate in futuro.^^'

The interpretation in Green, as followed in Grimes, of the In-
diana Financial Responsibility Act is probably correct. Financial

responsibility laws are intended to require liability insurance as a

condition of using the highways but only after the driver has been

involved in an accident.^*^ The purpose of these laws, though, is to
protect the public and to provide a fund from which persons injured

by negligent operation of automobiles may recover."^ To the extent
that victims of accidents with out-of-state motorists cannot be

assured of this fund unless the driver has previously had an accident

in Indiana, this purpose may possibly be thwarted.

2. "No Action" Clause. — In American Underwriters Inc. v. Cur-
tis,'^** Curtis and other claimants were involved in an accident with
Johnson, Johnson was insured by American Underwriters (AUI)
under a policy issued pursuant to the Indiana Financial Respon-

sibility Act.^*^ The claimants sued and obtained a default judgment
against Johnson in excess of $50,000. Proceedings supplemental
were then brought against AUI to recover on the insurance policy .^*^

The trial court held AUI liable for the $30,000 policy limit.^"^ AUI ap-
pealed, raising two issues: (1) Is suit by the claimants against AUI

'''Id.

'"''402 N.E.2d at 53.

'"Id. at 54.

'"'7 Am. Jur. 2d Automobile Insurance § 20 (1980).

'"Id. § 22.

""392 N.E.2d 516 (Ind. Ct. App. 1979).

'"^IND. Code §§ 9-2-1-1 to -45 (1976 & Supp. 1980).
'"''392 N.E.2d at 517-18.

'"Id. at 518.



412 INDIANA LAW REVIEW [Vol. 14:379

barred under the "no action" clause of the Financial Responsibility

Act, because there was no final judgment after an actual trial? and
(2) Is the action barred because of a failure to give notice to AUI of
the suit against the insured?^^*

The "no action" clause of the Indiana Financial Responsibility
Act states: "No action shall lie against the insurance carrier by or
on behalf of any claimant under the policy until after final judgment
has been obtained after actual trial by or on behalf of any claimant

under the policy."^'" AUI contended that a default judgment falls
short of an actual trial and that the claimants could not recover on

the policy until they had established Johnson's liability in a con-

tested trial. The court found the reasoning logical but was not con-
vinced that the Act required a claimant to force the insured to

answer a complaint and contest the action.^^" In any case, AUI failed
to specifically plead this defense in its answer to the claimants' ac-
tion or at a hearing on the matter. Because the matter was neither
raised nor tried by implied consent, the issue was waived by AUI.^*^
The court indicated its reluctance to permit an insurance company
to wait until an adverse judgment was obtained before raising its
defense.^^^

AUI also claimed that the act "impliedly required"^^^ the claim-
ants to give notice to AUI of their suit against Johnson. The court
held, however, that "notice is neither contemplated nor required

under the Financial Responsibility Act."^^'' Liability becomes ab-

solute whenever loss or damage covered by a policy occurs. The
court refused to insert a notice requirement that was not intended

by the legislature.^^^

The question remains whether the court would have set aside
the default judgment and permitted the insurance company to de-
fend on behalf of the insured in an actual trial against the plaintiff,

had the company raised the lack of notice at the earliest possible
moment. In all fairness, an insurance company should have the op-
portunity to raise policy defenses before becoming bound by a judg-

ment. A requirement that the third party give notice to the in-
surance company when it brings suit against a party whom it knows
to be insured would assure the company of every opportunity to
defend.

'''Id.

'"IND. Code § 9-2-l-5(c) (Supp. 1980) (emphasis added).
^^392 N.E.2d at 518 n.2.

'"Id. at 519.

"7d. at 519 n.4.

^^M at 519.