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Court rules: No payment, no life insurance

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The U.S. Court of Appeals for the Fifth Circuit, reversing a district court’s decision, has ruled that a life insurance carrier sent timely notices to the owner of a life insurance policy indicating that the policy was in a grace period, and the owner’s failure to remit payment in response therefore meant that the policy had terminated.

The case

On April 12, 1988, Johnston & Johnston (J & J) purchased a “flexible premium adjustable” life policy from the predecessor to Conseco Life Insurance Company on the life of Mary Ann D. Johnston. The policy insured Johnston’s life for $1 million, and a life insurance protection rider provided an additional $1 million death benefit, for a total death benefit of $2 million. Johnston was 68 years old at the time of issuance.

Under the policy, J & J chose the amount and frequency of its premium payments. It elected to receive annual notices in the amount of $32,451 for the so-called “planned periodic premium.” However, because the cost of insurance increased each year, a single annual payment of $32,451 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 that provided that it would remain in effect so long as its cash surrender value remained sufficient to cover the policy’s costs for the following month. The policy also contained a grace period provision, which provided that the failure to pay the planned periodic premium — the $32,451 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.

For example, if the cash surrender value was $10,000 on April 5, and the monthly costs totaled $8,000 and would be deducted from the policy on April 12, then, as of April 12, the cash surrender value would no longer be sufficient to cover the monthly costs for the next month, May, and the policy would enter a 61-day grace period.

On Dec. 12, 2010, Conseco sent J & J a notice that the policy had entered a grace period as of that date. According to the notice, J & J was required to pay $28,794.14 by Feb. 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.

On Jan. 6, 2011, 36 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 Feb. 11, 2011, to avoid termination of coverage.

J & J did not make a payment on the policy during this period of time, and the grace period expired on Feb. 11, 2011, at which time the policy terminated.

See also: Why procrastination is our worst enemy

J & J, which had paid $1,233,195.97 in policy contributions between its inception in 1988 and its termination in 2011, applied for reinstatement of the policy. Conseco refused the request.

J & J sued, arguing that Conseco’s notices violated Louisiana Revised Statute §22:905, which requires an insurer to provide notice to the insured 15 to 45 days before a premium is payable before declaring a policy forfeited for nonpayment of premiums. It contended that the due date, for §22:905 purposes, was Oct. 12, 2010, the date on which the planned periodic premium was scheduled to be paid, and that the Sept. 21 planned periodic premium notice listed the incorrect amount necessary to maintain the policy, in violation of §22:905. J & J further contended that the Dec. 12, 2010, and Jan. 6, 2011, grace notices were deficient because they were sent after the Oct. 12, 2010 premium due date.

Conseco argued that the relevant date under §22:905 was Feb. 11, 2011, because that was when J & J needed to pay its premiums to avoid the policy terminating. Conseco contended that because the Jan. 6, 2011, grace notice fell within the 15 to 45 day window prescribed by §22:905, it did not violate §22:905.

The district court ruled in favor of J & J, and Conseco appealed.

The policy

The policy provided:

“At some future time, the policy cash value less indebtedness may not cover the next monthly deduction. In such a situation, the policy will enter the grace period and will terminate at the end of that period if sufficient premium to cover the monthly deduction is not paid.”

The policy’s grace period section provided:

“If the cash surrender value on a monthly anniversary day will not cover the next monthly deduction, a grace period of 61 days from such monthly anniversary day will be allowed to pay a premium that will cover the monthly deduction. The Company will 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 rec[or]ds and to any assignee of record if the premium is not paid … If the insured dies during the grace period, any past due monthly deductions will be deducted from the proceeds. The policy will remain in force during the grace period, unless surrendered.”

The Louisiana Insurance Code

Louisiana Insurance Code §22:905 provides:

“A. No life insurer shall within one year after default in payment of any premium … declare forfeited or lapsed any policy issued or renewed, and not issued upon the payment of monthly or weekly premiums or for a term of one year or less, for nonpayment when due of any premium … or any portion thereof required by the terms of the policy to be paid, unless a written or printed notice shall have been duly addressed and mailed to the owner of the policy … at least fifteen and not more than forty-five days prior to the date when the same is payable. Such notice shall state both of the following:

(1) The amount of such premium … or portion thereof due on such policy.

(2) The place where it shall be paid and the person to whom the same is payable.

B. No policy shall be forfeited or declared forfeited or lapsed until the expiration of thirty days after the mailing of such notice. Any payment demanded by the notice and made within the time limit shall be fully compliant with the requirements of the policy in respect to the time of the payment.”

Louisiana law defines “premium” as:

“[A]ll sums charged, received, or deposited as consideration for the purchase or continuance of insurance for a definitely stated term, and shall include any assessment, membership, policy, survey, inspection, service or similar fee or charge made by an insurer as a part of the consideration for the purchase or continuance of insurance.” [La.Rev.Stat. Ann. § 22:46(13)]

The Fifth Circuit’s decision

The circuit court reversed the district court’s ruling in favor of J&J.

The circuit court concluded that the district court had erred in finding that Dec. 12, 2010, was the operative date for §22:905 purposes. Instead, the circuit court reasoned, Feb. 11, 2011, was the date on which the premium became “payable” because that was when J & J was required to make its premium payment to maintain the policy. The circuit court reasoned that, in the flexible premium context, the only payments required were those that were sufficient to maintain the policy. Therefore, the payment “required by the terms of the policy to be paid” was the payment necessary to prevent the policy from terminating. In this case, the Fifth Circuit declared, that was the payment on Feb. 11, 2011, at the conclusion of the grace period.

In other words, the policy “merely entered a grace period on Dec. 12, 2010,” as it had done before, according to the circuit court. The policy “did not terminate for nonpayment of premiums until Feb. 11, 2011. Therefore, the premiums were ‘payable’ on that date.”

Given this reasoning, the circuit court found that the notice requirements should be calculated from Feb. 11, 2011.

The Fifth Circuit then ruled that Conseco’s Jan. 6, 2011, notice satisfied the requirements of §22:905 in its timing and its contents. It ruled that the notice fell within the 15 to 45 day period, since Conseco had sent it 36 days before Feb. 11, 2011, and it stated the correct amount “due” to maintain coverage under the policy. J & J’s failure to make a payment on Dec. 12, 2010, resulted in the policy entering a 61-day grace period, the circuit court said. The policy “was capable of being paid on Dec. 12, 2010, but it was not required to be paid at that point. Thus, payment was ‘due’ and ‘payable’ on Feb. 11, 2011.”

Therefore, the circuit court decided, the policy terminated on Feb. 11, 2011, at the close of the 61-day grace period provided for under the terms of the policy.

It then remanded for entry of judgment in favor of Conseco.

The case is Johnston & Johnston v. Conseco Life Ins. Co., No. 13–30010 (5th Cir. Oct. 17, 2013). Attorneys involved include: Charles W. Herold, III, George Adam Cossey, Hudson, Potts & Bernstein, L.L.P., Monroe, LA, for Plaintiff–Appellee; Scott Nikolaus Hensgens, Jason Allen Walters, Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, LA, for Defendant–Appellant; Dana Livingston, Susan Schlesinger Vance, Alexander Dubose & Townsend, L.L.P., Austin, TX, for American Council of Life Insurers.

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Originally published on FC&S Legal: The Insurance Coverage Law Information Center. FC&S Legal is theindustry’s ONLY single-source, comprehensive portal developed specifically for insurance coverage law professionals.To find out more, visit All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.