Johnston v. Conseco Life Ins. Co.

• Decision Date: 17 October 2013
• Docket Number: No. 13–30010.,13–30010.
• Court: U.S. Court of Appeals — Fifth Circuit
• Parties: JOHNSTON & JOHNSTON, Plaintiff–Appellee v. CONSECO LIFE INSURANCE COMPANY, Defendant–Appellant.

732 F.3d 555

JOHNSTON & JOHNSTON, Plaintiff–Appellee

v.CONSECO LIFE INSURANCE COMPANY, Defendant–Appellant.

No. 13–30010.

United States Court of Appeals,

Fifth Circuit.

Oct. 17, 2013.

Charles W. Herold, III, George Adam Cossey (argued), Hudson, Potts & Bernstein, L.L.P., Monroe, LA, for Plaintiff–Appellee.

Scott Nikolaus Hensgens, Attorney, Breazeale, Sachse & Wilson, L.L.P., Baton Rouge, LA, Jason Allen Walters (argued), Bradley Arant Boult Cummings, L.L.P., Birmingham, AL, for Defendant–Appellant.

Dana Livingston, Susan Schlesinger Vance, Alexander Dubose & Townsend, L.L.P., Austin, TX, for Amicus Curiae American Council of Life Insurers.

Appeal from the United States District Court for the Western District of Louisiana.

Before STEWART, Chief Judge, and KING and PRADO, Circuit Judges.

CAROLYN DINEEN KING, Circuit Judge:

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. The key question is whether any of the several notices Conseco Life Insurance Company sent to Johnston & Johnston satisfied the requirements of Louisiana Revised Statutes § 22:905, which outlines notice requirements for lapsing life insurance policies. The district court held that the notices did not. Conseco Life Insurance Company timely appealed. For the following reasons, we REVERSE and REMAND for entry of judgment in favor of Conseco Life Insurance Company.

I. FACTUAL AND PROCEDURAL BACKGROUND

On April 12, 1988, Plaintiff–Appellee Johnston & Johnston (“J & J”) purchased an insurance policy from Philadelphia Life Insurance Company 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. Defendant–Appellant Conseco Life Insurance Company (“Conseco”) merged with Philadelphia Life Insurance Company in 1996 and subsequently assumed the Policy.

The Policy was a “flexible premium adjustable life insurance plan.” Unlike a term or whole life insurance policy, which requires periodic premium payments to maintain coverage, a flexible premium policy does not have scheduled premium due dates. Rather, the policyholder can change both the amount and the frequency of premium payments. See, e.g., La. Admin. Code tit. 37, § 8503 (2013) (defining “Flexible Premium Universal Life Insurance Policy” as a “universal life insurance policy which permits the policyowner to vary, independently of each other, the amount or timing of one or more premium payments or the amount of insurance”).

Under the terms of the Policy, J & J chose the amount and frequency of its premium payments.¹ 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.² 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 Policy³—remained sufficient to cover the Policy's costs for the next month.⁴ These costs, which Conseco deducted from the Policy's cash value on a monthly basis, included the cost of insurance, the cost of any other benefits provided for under the Policy, and the monthly expense charges.⁵

With J & J paying premiums only on an intermittent basis, but deductions coming on a monthly basis, it was possible that, at some point, the Policy's cash value might not be sufficient to cover deductions for the next month. The Policy addressed such a scenario:

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, in relevant part:

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.

As per the grace period provision, 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,⁶ 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 of a policy 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 sixty-one-day grace period.

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.

Separately, J & J was a class member in a class action settlement of a case against Conseco in federal district court in California. Pursuant to J & J's rights as a class member, if the Policy terminated, J & J was entitled to a “death benefit extension period” after the grace period ended. This period would provide coverage to J & J for the Policy's $1 million face amount for an additional 183 days following termination of the Policy.⁷ Once the death benefit extension period began, J & J would not be able to make any premium payments on the Policy, since the Policy would no longer be in effect at that point.

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. However, the Policy entered a grace period a few months later, on September 12, 2010. Conseco notified J & J that the grace period would expire if J & J did not pay $38,778.46 before November 12, 2010. J & J paid this amount on October 6, 2010, preventing the Policy from reentering a grace period until December 12, 2010.⁸

Separate from the September 12 grace period notification, on September 21, 2010, Conseco sent J & J a planned periodic premium notice, informing J & J that a premium of $32,451.00 would be due on October 12, 2010.⁹

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.¹⁰ 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's accountant, Ralph Speirs, Jr., was out of the office due to illness during the grace notice periods, and he did not review the grace notices until February 13, 2011, a Sunday. He called Conseco on February 14, seeking to pay the amount set out in the notices. A Conseco representative informed Mr. Speirs that “it was too late to pay the premiums,” but that J & J could apply for reinstatement of the Policy.

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. J & J argued that Conseco's notices violated Louisiana Revised Statutes § 22:905, which requires an insurer to provide notice to the insured fifteen to forty-five days before a “premium” is “payable” before the insurer can declare a policy forfeited for nonpayment of premiums. As detailed below, § 22:905...