Hess v. Transamerica Occidental Life Insurance

[943]

Opinion

ROUSE, J.

Plaintiffs Rae Hess and the company of which she is the sole shareholder, chief executive officer and chairperson of the board, appeal from a judgment entered in favor of defendant insurer on a complaint seeking reformation of an insurance contract and damages for breach of contract and bad faith.

Plaintiffs filed a complaint on September 3, 1982, alleging that, in 1971, she had sought a $100,000 life insurance policy from defendant’s predecessor, Occidental Life Insurance Company (Occidental). According to the complaint, the policy was “key person” insurance required by the Small Business Administration as a condition for that agency’s approval of a loan to plaintiff Hess’s financially troubled chemical company. After its own doctor examined Mrs. Hess and discovered that she had higher than normal blood pressure, Occidental agreed to issue the policy only on condition that plaintiffs pay a premium surcharge of $1,000 per quarter. In 1978, at plaintiffs’ urging, Occidental reviewed Mrs. Hess’s medical condition and rerated her, dropping the $1,000 per quarter premium surcharge.

By their complaint plaintiffs sought reformation of the insurance contract and return of approximately $60,000 which they contended was improperly collected by the insurer in premium surcharges. They also alleged that, by its discriminatory rating of Mrs. Hess as a substandard insurance risk, the insurer had breached its duty under the contract to deal with plaintiffs in good faith.

An amended complaint naming Occidental’s successor, Transamerica Occidental Life Insurance Company (Transamerica), was filed December 30, 1982. The insurer successfully demurred to the reformation cause of action in the amended complaint, and plaintiffs were given leave to amend. A second amended complaint was filed March 14,1983. Once again the insurer brought a demurrer and at the hearing on the demurrer the court permitted plaintiffs to submit what was in substance a proposed version for a third amended complaint. On May 16, 1983, the demurrer as to the first cause of action in the second amended complaint was sustained without leave to amend. Plaintiffs unsuccessfully sought an extraordinary writ to set aside that order.