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Insured's Incapacity Does Not Excuse Non-Payment of Premiums, Absent a Policy Provision to the Contrary

ERISA and Life Insurance News
(December 21, 2012)

Principal Life Insurance Company issued a $650,000 term life insurance policy to Dr. Elter, who paid the first premium on February 7, 2007. Future premium payments were due annually thereafter. Dr. Elter designated his wife as beneficiary under the policy.

Dr. Elter underwent cancer surgery in Baltimore, Maryland, on January 10, 2008, and was expected to return home to North Carolina ten days after the surgery. Due to medical complications, however, Dr. and Mrs. Elter did not return to North Carolina until March 15, 2008.

On January 17, 2008, Principal Life mailed to Dr. Elter a notice of premium due on February 5, 2008. When the premium was not paid by the due date, Principal Life sent a letter notifying Dr. Elter that his policy had entered the grace period and would terminate if the premium was not received by March 7, 2008. Receiving no payment, Principal Life notified Dr. Elter by letter dated March 7, 2008, that his policy had terminated.

On March 16, 2008, the day after the Elters returned to North Carolina, Mrs. Elter discovered the March 7, 2008, termination notice. At the direction of their insurance agent, the premium payment was mailed to Principal Life.

Principal Life returned the late premium payment by letter dated March 21, 2008, informing Dr. Elter that the policy had terminated and providing instructions regarding the reinstatement process. The Elters took no further action with respect to the policy, and Dr. Elter died on September 18, 2009.

On February 7, 2011, after being notified by the North Carolina Department of Insurance that it did not have authority to require Principal Life to reinstate the coverage, Mrs. Elter filed suit to recover death benefits under the policy. The issues presented on summary judgment were: “(1) whether Dr. Elter’s alleged incapacity excused his failure to make in a timely fashion the February 5, 2008 premium payment; and (2) whether Principal complied with the notice requirements of North Carolina General Statute § 58-58-120.”

Mrs. Elter contended “that Dr. Elter’s alleged incapacity at the time the premium payment was due and throughout the thirty-one-day grace period excuses his failure to timely make the February 5, 2008 premium payment.” The Court distinguished Dr. Elter’s policy from those that include provisions for waiver of premium in case of disability, noting that “courts have consistently acknowledged that there is a material distinction between a failure to provide proof of disability and a failure to pay a premium.”

The court also held that the contract law doctrine of impossibility of performance was inapplicable, because “[t]he condition of payment of the premium is a ‘material part of the exchange’ so that it cannot be excused by incapacity.” Finally, the court noted “that insurance treatises uniformly recognize that the law does not excuse non-payment of premiums when due based on incapacity, absent a provision in the policy to the contrary.”

Mrs. Elter further argued that Principal Life failed to comply with North Carolina’s lapse notice statute, and that a one-year statutory grace period applied, rather than the 31-day grace period provided by the policy. Section 58-58-120, “at base, requires the insurer to provide the insured with the necessary information to avoid default and to inform the insured of the consequences of failure to timely pay the premium.”

The court held that Principal Life’s January 17, 2008, premium notice “was sufficient to satisfy § 58-58-120” and rejected Mrs. Elter’s argument that the notice had to recite the statutory language verbatim. The notice served the statutory purpose of placing Dr. Elter on notice of the consequences of non-payment of premium.

The court thus granted summary judgment in favor of Principal Life. The case is on appeal in the Fourth Circuit.

Click here to view the full December 2012 Edition of the ERISA and Life Insurance News.

H. Sanders Carter
T (404) 962-1015
F (404) 962-1220
Kenton J. Coppage
T (404) 962-1065
F (404) 962-1256
Kip D. Nelson
T (336) 378-5206
F (336) 433-7443

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