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When an insurer cashes a check for the first premium payment, the insured is entitled to interim coverage under Pennsylvania law unless the insurer can show by “clear and convincing evidence” that the consumer had no reasonable basis for expecting immediate coverage, a federal judge has ruled. In his five-page opinion in Malone v. Guarantee Trust Life Insurance Co., U.S. District Judge Bruce C. Kauffman of the Eastern District of Pennsylvania granted a partial summary judgment in favor of the plaintiff, the widow of a man who died just days before an insurance agent called to finalize his life insurance policy. Kauffman found that plaintiff Susan Malone had proven her breach of contract claim because the undisputed facts showed that her late husband’s initial payment was received and cashed, and that he was never explicitly told by the insurance agent that he would not receive immediate temporary coverage in return for his premium payment. The ruling is a victory for attorneys Eric H. Weitz and Aaron J. Freiwald of Layser & Freiwald, who argued that the insurer’s acceptance of a payment put an interim policy into effect. Although Kauffman’s decision hands the plaintiff a victory on her breach of contract claim, the suit includes several additional claims that must go to trial, including bad faith, breach of the covenant of utmost fair dealing, violations of the Unfair Trade Practices and Consumer Protection Law and negligence. According to court papers, Michael Malone responded to a direct-mail advertisement sent out by First Jersey Insurance Agency and was contacted by one of its agents, Joyce Martin. Martin visited Malone at his home and made a presentation of a Guarantee Trust life insurance policy. The suit alleges that Martin quoted a price of $867 per year for a $150,000 policy. Martin testified in her deposition that she also advised Malone that he could face a higher premium or be rejected due to his diabetic condition. At the end of the first meeting, Martin left with a signed application and a check for the first annual premium, according to the suit. Guarantee Trust cashed the check within two weeks of receiving the application. But the insurer later determined that Malone’s premium was $1,765.50, and therefore issued a policy with a “change form.” When Martin telephoned Malone to discuss the increased premium, she was informed by his widow that he had died of a heart attack just two days before. Guarantee Trust’s lawyer, Elizabeth A. Hunter of Marks O’Neill O’Brien & Courtney, argued that Susan Malone was not entitled to summary judgment on her breach of contract claim because there were numerous factual disputes about whether the policy had ever taken effect. But Kauffman found that under Pennsylvania law, an insurer that cashes a premium check has the burden of proving by clear and convincing evidence that the insured did not expect immediate coverage. Kauffman found that in its 1978 decision in Collister v. Nationwide Insurance Co., the Pennsylvania Supreme Court defined the legal standard governing an insured’s coverage following the submission of an application and payment of the first premium. The Collister court held that, in situations where “the circumstances of the transaction do not indicate that the insurer intended to provide interim insurance, but nevertheless show that the insurer accepted payment of the first premium at the time it took the application, it is then up to the insurer to establish by clear and convincing evidence that the consumer had no reasonable basis for believing that he or she was purchasing immediate insurance coverage.” Absent such a showing, the Collister court held, the insurer will be liable for temporary coverage during the application period. In so ruling, the justices held that “the public has a right to expect that they will receive something of comparable value in return for the premium paid.” Insurers that wish to protect themselves from liability during the interim period may do so, the court held, by simply delaying the acceptance of the premium until the application is approved. Kauffman found that Collister was directly on point and mandated a judgment in Susan Malone’s favor on her breach of contract claim. “Guarantee Trust cashed decedent’s premium check within two weeks of receiving his application, thereby enjoying the advantages derived from the customer’s payment of a premium deposit upon application,” Kauffman wrote. “Under Pennsylvania law, this provided decedent a reasonable expectation that he was covered under an interim policy,” Kauffman wrote. The evidence, Kauffman said, showed that neither the application nor any of Martin’s statements to Malone “provide clear and convincing evidence sufficient to undermine that expectation.”

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