## Facts

- An applicant sought life insurance, arranged payment of the initial premium, and completed the required physical examination on the same day.
- The insurer’s agent issued a written conditional receipt stating coverage would be effective as of the latest date the application and physical were completed.
- The receipt also stated the insurer’s only obligation would be to return the payment unless the insurer determined the applicant was an acceptable risk under its “limits, rules, and standards” as of the application/physical date.
- The applicant died later that same day from an apparent heart attack.
- After the death, the insurer investigated and determined the applicant was uninsurable for the policy sought, denied liability, and returned the premium.
- In a diversity action applying Ohio law, the district court found the insurer’s uninsurability determination was made in bad faith, but entered judgment for the insurer because it also found a good-faith determination would have reached the same result.

## Issues

1. Whether an insurer that issues a conditional receipt conditioned on a later acceptability determination may avoid liability after a bad-faith uninsurability determination by arguing that a hypothetical good-faith determination would also have denied coverage.
2. Whether the conditional receipt’s promise of relation-back coverage requires the insurer’s underwriting determination to be made in good faith under its stated standards.

## Decision

- The Sixth Circuit reversed and remanded.
- The court held the insurer was liable under the conditional receipt because its bad-faith determination that the applicant was an unacceptable risk breached the receipt’s terms.
- The court rejected the district court’s reliance on a counterfactual, good-faith determination as a basis to deny recovery after a finding of actual bad faith.

## Legal Principles

- A life insurance application is an offer; a conditional receipt can provide interim, relation-back coverage while the insurer retains the option to accept or reject after underwriting.
- When a conditional receipt conditions coverage on the insurer’s determination of acceptability under its “limits, rules, and standards,” the insurer must make that determination in good faith.
- A bad-faith underwriting determination under a conditional receipt constitutes a breach that triggers liability for the coverage promised.
- After a finding of bad faith, the insurer cannot defeat liability by asserting it would have denied coverage even if it had acted in good faith.

## Conclusion

Because the insurer’s post-application determination of uninsurability was found to be made in bad faith, the insurer breached its conditional receipt obligation and remained liable for the promised coverage; it could not avoid liability by reconstructing a hypothetical good-faith denial.


Rohde v. Massachusetts Mut. Life Ins. Co., 632 F.2d 667 (6th Cir. 1980)