Appeals court rules against life insurance policyholder in grace period dispute

NEW ORLEANS – The U.S. Court of Appeals for the Fifth Circuit has reversed and remanded a district court’s judgment that had ruled in favor of a now-deceased life insurance policyholder.

In a dispute between the plaintiff, Johnston & Johnston, and defendant, Conseco Life Insurance Company, disparate interpretations of a grace period timeline and actual date of policy termination are at issue.

On Oct. 17, the Fifth Circuit reversed a district court judgment for abuse of discretion in favor of Conseco.

In October 2012, the district court entered a ruling in favor of the plaintiff, holding that the “due date” for the policy was Dec. 12, 2010, when the policy’s grace period began. In addition, the court ruled that if the due date had been Feb. 11, as the defendant claimed, Conseco failed to provide another 30-day grace period after the policy “lapsed” at the end of the grace period. The court concluded that because Conseco did not meet the requirement of the applicable Louisiana Revised Statute that notice be sent to the insurer between 15 and 45 days before the policy termination on Dec. 12, Johnston’s insurance coverage should have extended for another year.

In 1988, the plaintiff purchased a “flexible premium adjustment” life insurance plan with Conseco for a total death benefit of $2 million. This type of plan allows the policyholder to change the amount and frequency of premium payments.  The policy stated that the plan would remain in effect as long as there was a positive cash value.

According to the policy, Conseco was responsible for sending a 30-day notice when the cash value would not cover the next monthly deduction. If unpaid, the policy would enter a 61-day grace period, which it did 22 times over its lifetime. The plaintiff was also covered for a “death benefit extension period,” an extra 183 days after the grace period ended. If this extension period began, Johnston would not be allowed to make payments on the terminated policy.

Conseco maintains that it met requirements to send appropriate notices to the plaintiff. Their case hinges on their claim that the policy “due date” was Feb. 11, 2011. Conseco claims it sent notice on Sept. 21, 2010 of a premium payment due Oct. 12, 2010. Then, on Dec. 12, 2010 it sent another notice stating the policy had entered a grace period and coverage would be terminated on Feb. 11 if the premium was not paid. Conseco sent a second notice on Jan. 6 with the same information.

At this point in Conseco’s timeline, the policyholder failed to make a payment and the policy was terminated. It sent a notice to the insured to this effect on Feb. 13, also stating that the death extension period had begun and would expire on Sept. 12, 2011. Johnston’s accountant attempted to make a payment on Feb. 14, but the plan terms prevented premium payment on a terminated policy. The accountant filed for reinstatement on Aug. 25, 2011. This reinstatement application was refused by Conseco on Sept. 15, 2011.

Johnston maintains that the “due date” was Oct. 12, when the planned periodic payment was scheduled. According to this interpretation, the notices sent by Conseco on Dec. 12 and Jan. 6 were too late.

The appeals court found the plaintiff’s arguments “unpersuasive,” and ruled in favor of Conseco’s interpretation that the due date for the policy (when it was “payable”) was Feb. 11, 2011 and that “there is no question that Conseco complied with [statue] requirements.” The appeals court found that Johnston’s flexible premium policy was not entitled to a second grace period.

The case was heard by Circuit Judges Carolyn Dineen King and Edward C. Prado and Chief Judge Carl E. Stewart.

Case no. 13-30010.