Royal MacCabees Life Insurance Company v. Mona Peterson, as Surviving Spouse and Designated Primary Beneficiary of Monte Peterson, Deceased

Citation: 139 F.3d 568Docket: 97-2317

Court: Court of Appeals for the Seventh Circuit; April 14, 1998; Federal Appellate Court

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Royal Maccabees Life Insurance Company sued Monte Peterson for a declaration regarding its obligation to issue a $750,000 life insurance policy. Peterson counterclaimed, alleging Royal's negligence due to an unreasonable delay in processing his application. The district court ruled in favor of Royal, granting summary judgment and a declaratory judgment. 

Peterson was to start as president and CEO of High Sierra Sports Company on May 8, 1995, with the insurance policy as part of his compensation. His application was received by Royal on April 4, and additional information was requested, which Peterson provided. Royal considered him insurable by May 2 but did not issue the policy until May 15. On May 7, Peterson was hospitalized and diagnosed with cancer, a fact Royal learned only later. Despite this, Royal issued the policy and collected premiums before rescinding it in August upon discovering Peterson's illness.

The district court found that the six-day delay did not cause prejudice to Peterson, as there was no evidence he could have secured insurance elsewhere in that timeframe. Tragically, Peterson died while the summary judgment was pending, leading to his wife being substituted as the beneficiary. The key issue on appeal is whether Peterson is entitled to a jury trial regarding his negligence claim against Royal for the delay in issuing the policy.

Illinois law governs the case involving Royal, an insurance company, which has a duty to respond promptly to insurance applications. The law mandates that insurers must act with reasonable promptness, either by granting coverage or notifying the applicant of rejection, to avoid misleading the applicant into a false sense of security or causing delays in securing alternative coverage. There is no obligation to issue a policy, but insurers cannot unduly delay their decision.

In this instance, Royal claims it cannot be held liable for a six-day delay in responding to Peterson's application because he did not demonstrate that he could have obtained insurance elsewhere during that time. Peterson, however, argues that liability could arise if Royal found him insurable but failed to communicate this in a timely manner. Royal concedes that it considered Peterson insurable as of May 2, suggesting the potential for liability due to the unreasonable delay.

While both parties referenced the Geraghty case, which emphasizes the need for evidence of insurability to establish prejudice, the court overlooked the necessity to evaluate whether Peterson could have obtained insurance from Royal itself. Given that Royal acknowledged finding Peterson insurable, the court should not have granted summary judgment to Royal and should have allowed Peterson to present his case to a jury regarding the unreasonable delay under Illinois law. Royal retains the opportunity to present further evidence in its defense.

Royal asserts it has no legal obligation to issue insurance policies, even to those it deems insurable. However, under Illinois law, Royal is required to promptly decide on applications—either by issuing a policy or rejecting it—enabling the applicant to seek alternative insurance. A delay in this process could result in liability for damages incurred due to the delay. Royal admitted to a six-day delay in ruling on an application, which will be evaluated by a jury to determine its appropriateness. While the district court dismissed Peterson's claim regarding a breach of contract due to Royal's unilateral rescission of his policy, only the negligence claim is currently under appeal. Other circuit courts have established similar burdens for plaintiffs in negligent delay claims. Additionally, although there might be valid reasons for the delay—such as waiting for a response from a reinsurer—this issue is left for the jury to decide, without the court expressing an opinion on the justification of the delay. The case is reversed and remanded for further proceedings.