Gray v.

Great American Reserve Insurance Company

Supreme Court of Alabama, 1986
Justice Beatty:

Facts: James and Hazel Gray signed a joint application for health insurance with Great American in April
1984, taken by Sides, who was to become a broker for Great American, but was not an agent at the time.
The plaintiff alleges that Sides claimed the coverage would begin upon payment of the first month’s
premium, which was then subsequently paid by Gray. Sides officially became a broker for Great
American in May 1984, and Great American began to process Gray’s application. In June 1984, Mr. Gray
was injured by being thrown from a horse and was treated at the West Alabama General Hospital. He
shortly thereafter notified Sides of the claim. In October 1984, Great American notified Gray stating that
benefits would be denied since no policy had been issued prior to his injury. A week later, Gray filed suit
against Great American for breach of an insurance contract, bad faith for refusal to provide contractual
benefits, and fraud and misrepresentation. He later added two negligence claims. Great American filed for
several summary judgements, and the trial court ultimately ruled in favor of the defendant.

Issue 1: Was a valid contract providing health insurance enacted when Gray paid his first month’s
insurance premium to Sides?

Issue 2: Did Sides have the authority to bind the insurer to his contract, thereby obliging Great American
to cover medical expenses for Gray’s injuries?

Issue 3: Did Great American ratify Sides’ oral declaration by processing his application?

Holding 1: No

Holding 2: No

Holding 3: No

Rationale 1: According to a similar case, Gillilan v. Federated Guaranty Life, Inc., an application for
insurance is only an offer, and does not develop into a contract until it is accepted by the insurer. It is
clear that the coverage is to begin sometime in the future (not upon the signing between Sides and Gray)
after Great American completes an investigation and determines the insurability of the applicant.

Rationale 2: Plaintiff claims that agent misrepresented the time in which the contract was to go into
effect. That may be the case, but the agent had no authority to bind the insurer to cover whatever expenses
may be claimed by the applicant until the insurer, the principal, signs the agreement, seeing that they have
the authority and not the agent. There was not even an actual agency relationship between Sides and
Great American at the time of the Gray-Sides deal. Although that relationship later bloomed into Sides
becoming a broker, it was made clear in the agreement that Sides’ authority was limited to “solicitation
and procurement of applications,” and he had no authority to bind a contract on behalf of the company.

Rationale 3: When Great American processed the application, it was unaware of the oral declaration made
by Sides to Gray. A principal cannot ratify an agreement which has not been brought to his knowledge.
Trial court decision confirmed.