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Conseco Life Insurance Company’s predecessor issued a flexible premium life insurance policy to Johnston & Johnston on the life of Mary Ann D. Johnston in 1988. The Policy’s cash surrender value dropped below zero dollars in December 2010, causing it to enter a sixty-one-day grace period. The Policy terminated in February 2011, after Johnston & Johnston failed to make any payments on the Policy during the grace period. Ms. Johnston died in August 2012. In Johnston & Johnston v. Conseco Life Insurance Co., 13-30010 (5th Cir. 10/17/2013) [enhanced version available to lexis.com subscribers], the Fifth Circuit Court of Appeal was faced with the key question whether any of the several notices Conseco Life Insurance Company sent to Johnston & Johnston satisfied the requirements of Louisiana Statutes that outline notice requirements for lapsing life insurance policies. The district court held that the notices did not. Conseco Life Insurance Company timely appealed.
On April 12, 1988, Johnston & Johnston (“J&J”) purchased an insurance policy from Philadelphia Life Insurance Company (Conseco’s predecessor) on the life of Mary Ann D. Johnston (“Policy”). The Policy insured Ms. Johnston’s life for $1 million. A Life Insurance Protection Rider provided an additional $1 million death benefit, for a total death benefit of $2 million. Ms. Johnston was sixty-eight years old at the time of issuance.
The Policy was a “flexible premium adjustable life insurance plan.” Under the terms of the Policy, J&J chose the amount and frequency of its premium payments. J&J elected to receive annual notices in the amount of $32,451.00, for the so-called “planned periodic premium.” However, because the cost of insurance increased each year, a single annual payment of $32,451.00 became insufficient to cover the cost of insurance and maintain the Policy, requiring J&J to make more frequent payments by the mid-2000s.
The Policy had a cash value. It provided that it would remain in effect so long as its cash surrender value—the amount of money the insured could receive by surrendering or redeeming the Policy—remained sufficient to cover the Policy’s costs for the next month.
The Policy addressed a scenario where the cash value was insufficient to pay the premium due and provided that the policy will enter a grace period. At the end of that period if sufficient premium to cover the monthly deduction is not paid the policy will terminate. The Company promised to send written notice that the policy will lapse 30 days before the end of the grace period to the owner’s last address shown in the Company’s records and to any assignee of record if the premium is not paid.
Failure to pay the planned periodic premium—the $32,451.00 that J&J elected to pay annually—would not affect coverage unless, on a monthly anniversary day, the cash surrender value of the Policy was so low that the next monthly deduction would cause the value to drop below zero dollars. Conseco sent J&J annual planned periodic payment notices. In addition, Conseco sent J&J annual policyholder statements that outlined the cash surrender value, the amount of each monthly deduction, and the date that the cash surrender value was projected to drop below zero dollars if J&J made no contributions.
The April 13, 2010 annual policyholder statement, the last available, informed J&J that the Policy would terminate on June 12, 2010, if J&J made no further contribution. J&J made a payment sufficient to maintain the Policy. On December 12, 2010, Conseco sent J&J a notice that the Policy had again entered a grace period as of that date. According to the December 12, 2010 grace notice, J&J was required to pay $28,794.14 by February 11, 2011, to avoid termination of coverage. Thus, the notice set out a specific amount necessary to maintain the Policy, rather than the planned periodic payment amount of $32,451.00. On January 6, 2011—thirty-six days before February 11—Conseco sent J&J a second grace notice, again stating that J&J would need to pay $28,794.14 by February 11, 2011, in order to avoid termination of coverage.
J&J did not make a payment on the Policy during this period of time. The grace period expired on February 11, 2011, at which time the Policy terminated. Conseco sent J&J a notice dated February 13, 2011, to this effect, which also informed J&J that the death benefit extension period began on February 11, 2011, and would expire on September 12, 2011 (183 days later).
J&J applied for reinstatement of the Policy on August 25, 2011. Conseco sent a notice on September 12, 2011, to inform J&J that the death benefit extension period had terminated as of that date. Conseco refused J&J’s reinstatement application on September 15, 2011, “[d]ue to the evaluation of our underwriting department” and “due to Ms. Johnston’s medical history.”
Between the Policy’s inception in 1988 and its termination in 2011, J&J paid $1,233,195.97 in policy contributions. The Policy entered the grace period a total of twenty-two times over the course of its life.
J&J filed suit in federal district court on June 7, 2012, seeking declaratory relief and specific performance. Conseco moved to dismiss the complaint or, in the alternative, for summary judgment. On October 11, 2012, the district court: (1) denied Conseco’s motion to dismiss the complaint or, in the alternative, for summary judgment; (2) granted J&J’s motion for summary judgment; and (3) entered judgment in favor of J&J. The court held that Conseco’s refusal to accept premium payments from J&J during that year, and to reinstate the Policy, was improper.
The critical question is when the insurance premium necessary to maintain the Policy was “payable” under the statute, since that date determines whether or not Conseco’s notices satisfied the statute’s timing requirements.
The Fifth Circuit concluded that the district court erred in finding that December 12, 2010, is the operative date for statutory purposes. It, therefore, abused its discretion in denying Conseco’s motion to alter or amend the judgment. February 11, 2011 is the date on which the premium became “payable, ” since that is when J&J was required to make its premium payment in order to maintain the Policy. As a result, notice requirements should be calculated from February 11, 2011.
Conseco’s January 6, 2011 notice satisfied the statutory requirements in its timing and its contents. The notice fell within the fifteen- to forty-five-day period required by the statute since Conseco sent it thirty-six days before February 11, 2011, and stated the correct amount “due” in order to maintain coverage under the Policy. The Policy terminated on February 11, 2011, at the close of the sixty-one-day grace period provided for under the terms of the Policy.
The language of the statute supports the conclusion that the payment that is “due, ” “payable, ” and required to be paid is the payment at the end of the grace period, on February 11, 2011. There is no question that Conseco provided J&J with each of the protections required by the statute by providing multiple notices more than required by the statute. Unfortunately, J&J missed each opportunity to pay the premium necessary to maintain the Policy.
Requiring the insurer to give yet another notice, prior to the grace period, is unnecessary when the grace notice itself is sufficient to put the insured on notice that the policy will terminate without further payments. The Policy entered the grace period twenty-two times, and J&J made the necessary payment to maintain coverage twenty-one times. The fact that J&J failed to do so once is not reason enough to graft an additional reporting requirement onto the statute.
Life insurance is a type of gamble. Since no one can know when a person will die the parties to the life insurance contract rely on actuarial tables on the life expectancy of human beings. Sufficient numbers insured allow the insurer to accurately determine the premium required to make a profit from the insurance over a period of time and multiple insureds.
In the mind of the insured he, she or it gambles that the life insured will end quickly and the insurer will pay the promised benefit to the profit of the insured and the insurer gambles that the life insured will live long and prosper and the insurer will receive more premium than it is required to pay in benefits.
In this case J&J lost its gamble. It paid $1,233,195.97 to recover $1 million in death benefits and, when the last payment was due, failed to pay the premium although it received multiple notices. Mrs. Johnston, unfortunately, died shortly after the policy expired and J&J recovered nothing from the policy. In an attempt to recoup its losses and premiums paid it successfully sued the insurer only to have the Fifth Circuit reverse because it ignored the notices and allowed the policy to lapse.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2013, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or email@example.com, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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