## Facts

- Stephen Hildebrand applied for life insurance with Franklin Life Insurance Company and paid the first month’s premium to a soliciting agent.
- Franklin issued a conditional premium receipt stating coverage would be effective as of the application date only if the underwriting department later determined Stephen met the company’s standards of insurability under its “rules and practices.”
- Before underwriting was completed and while the application was en route to the home office, Stephen died in an automobile accident.
- After learning of the death, Franklin conducted a special investigation that revealed Stephen had a poor driving record with multiple violations and accidents.
- Franklin rejected the application as not meeting its underwriting standards, refused to pay a death benefit, and tendered a refund of the premium.
- Judith Ann Hildebrand, Stephen’s mother and named beneficiary, sued to recover the policy proceeds, asserting the conditional receipt provided coverage at the time of death and that the post-death rejection was improper.

## Issues

1. Whether the conditional premium receipt created interim life insurance coverage as of the application date, or only conditional coverage dependent on later underwriting approval under the insurer’s rules and practices.
2. Whether the insurer’s decision to reject coverage under a conditional receipt is constrained by a requirement of good faith and nonarbitrary application of established underwriting standards.
3. Whether the trial court erred by instructing the jury that the insurer had to prove its underwriting “rules and practices” conformed to the reasonable expectations of an ordinarily prudent person and were applied promptly and regularly.

## Decision

- The appellate court reversed the judgment for the beneficiary and remanded for a new trial.
- The court held the trial court’s jury instructions misstated the governing standard by substituting a “reasonable expectations of an ordinarily prudent person” test for the contractual condition in the receipt.
- The proper inquiry is whether the insurer made a genuine underwriting determination and applied its established underwriting rules honestly, in good faith, and without arbitrariness or caprice.
- Whether the insurer’s post-death investigation and rejection reflected good-faith application of existing standards was a fact question for the jury under correct instructions.

## Legal Principles

- A conditional premium receipt is an enforceable contract that may provide interim coverage only on the conditions stated in the receipt.
- When coverage is conditioned on the applicant meeting the insurer’s underwriting “rules and practices,” the insurer may rely on those standards, but must apply them in good faith.
- The insurer’s discretion under such a receipt is limited; rejection may not be arbitrary, capricious, or a pretext to avoid liability after a loss.
- Jury instructions must track the contractual standard and the good-faith limitation; courts should not require the insurer to prove its underwriting standards match a lay “reasonable expectations” benchmark.

## Conclusion

The court required a new trial because the jury was instructed under an incorrect “reasonable expectations” standard; liability under a conditional premium receipt depends on whether the insurer, in good faith and consistent with its established underwriting rules, would have found the applicant insurable.


Hildebrand v. Franklin Life Ins. Co., 455 N.E.2d 553 (Ill. App. Ct. 1983)