Crum v. Prudential Insurance Company of America

• Decision Date: 28 March 1973
• Docket Number: No. GC 72-51.,GC 72-51.
• Parties: Mrs. Juanita H. CRUM, Plaintiff, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant.
• Court: U.S. District Court — Northern District of Mississippi

356 F. Supp. 1054

Mrs. Juanita H. CRUM, Plaintiff, v. The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant.

No. GC 72-51.

United States District Court, N. D. Mississippi, Greenville Division.

March 28, 1973.

James T. Bridges, Irby Turnel, Jr., Belzoni, Miss., for plaintiff.

John E. Hughes, III, Erskine W. Wells, Jackson, Miss., for defendant.

MEMORANDUM OPINION

KEADY, Chief Judge.

In this diversity action, Mrs. Juanita H. Crum, plaintiff, sues The Prudential Insurance Company of America (Prudential) seeking to recover as beneficiary the sum of $12,840 as the proceeds payable under an insurance policy issued on the life of her husband, Ernest R. Crum, Jr.¹ Prudential denies that the policy was in force when the insured died on February 22, 1971, and asserts that the policy had lapsed for nonpayment of premium. Each party has responded to requests for admission of facts served by the adversary and Prudential has taken the deposition of two of its employees. Upon the basis of these materials and affidavits, both sides have moved for summary judgment, contending that there is no genuine issue of material fact and each is entitled to judgment as a matter of law.

All essential facts are undisputed. On January 1, 1964, Prudential issued its policy in the initial amount of $20,000 as a 15-year decreasing term contract which called for the payment of a premium of $327 annually on January 1. Crum, then 54 years of age, was an implement dealer who resided at Belzoni, Mississippi. In his insurance application, the insured requested that the premiums be paid on an annual basis and accrued dividends applied to the reduction of premiums. All premiums up to and including the one due January 1, 1970, were timely paid; and accrued dividends were always used to reduce the premium. In December 1970, the insured received a notice from Prudential reminding him of the premium due and payable on January 1, 1971; this notice disclosed a net premium due of $207.84 after deducting from the fixed annual premium an accrued dividend of $119.16. Both the premium notice and the policy provided that failure to pay the net premium on or before the due date or within a 31-day grace period would forfeit the policy and cause it to be void. The policy in issue, being a purely term policy, had no cash surrender or loan value or extended term provisions.

Crum failed to pay the net premium within the 31-day grace period expiring February 1, but he did forward his check for $207.84 dated February 15, which was received by Prudential at its Southwest Home Office at Houston, Texas, on February 18. The check was accompanied by Part 2 of the premium notice referred to as the "turn around document". When the envelope containing the check and notice was opened, Prudential's acceptance clerk noted that the premium was more than 38 days past due. The significance of this determination arises from the fact that Prudential's data processing equipment was programmed to unconditionally accept all tenders of premiums up to 38 days after the due date, 7 days being allowed for delays in mail delivery. Crum's check was placed in a batch of other checks received on February 18, the batch was given a designation, and the checks placed in the safe. The acceptance clerk placed Part 2 of the premium notice in a Farrington Optical Scanner which read the data onto magnetic tape; and the magnetic tape was then introduced into an IBM computer for processing on Friday, February 19. Meanwhile, Crum's remittance and the envelope in which it was received were passed to a reconciliation clerk to examine the documents to determine if the tender could be accepted.

On Monday, February 22, the next working day after the magnetic tape was introduced into the computer, the computer made a print-out that the remittance was overdue and was not applied as payment of the premium; it automatically generated a letter to the insured advising that the remittance could not be accepted since it was received after the grace period, but that the policy might be reinstated upon the execution of an application to that effect. This letter, with a form of application for reinstatement, was mailed to the insured on February 22, but was never received by him. Crum died suddenly that very day, February 22, while on a trip to New Orleans, Louisiana. Prudential's financial records showed that the net premium remitted by the insured was not credited to pay the premium but placed in a suspense account and held as an unapplied transaction. Nevertheless, the insured's check was on February 22 deposited to Prudential's general account at Capital National Bank of Houston and honored when presented in due course to the drawee bank. While Prudential maintained general accounts at several Houston banks, it had no separate, restricted account for deposit of funds held in suspense, such as premiums received late after expiration of the grace period.

On March 24, Prudential refunded the net premium of $207.84 by first issuing its check to the deceased insured and then issuing a check to the plaintiff in lieu thereof; on the same date Prudential also issued its check for $119.16 to the deceased insured in payment of the accrued dividend. Although received by plaintiff, these checks have not been cashed. When the net premium was received and processed as heretofore stated, the computer set a follow-up for March 15 (the 74th day after premium due date) to initiate the process of returning the tender if a reinstatement application had not been received. Prudential's custom was to pay accrued dividend within 95 days where an insured failed to pay the net premium due.

The Farrington Optical Scanner and IBM Model 50 computer were efficient, accurate, and standard equipment relied upon by Prudential in the ordinary course of conducting business, and its data processing personnel were qualified and experienced computer operators and programmers. It is admitted that if in force on the date of insured's death, the policy would pay $12,840.

Plaintiff makes two contentions: (1) Prudential's acceptance and deposit of the check in its general bank account waived forfeiture of the policy, especially since the insured's funds representing the net premium due and accrued dividend were retained by the insurer for an unreasonable length of time; and (2) Prudential could not declare a forfeiture of the policy when it had in its hands an accrued dividend sufficient to pay the quarterly premium, and thus applying the dividend, the policy was effective when the insured died. Defendant urges in reply that the remittance was only conditionally accepted under circumstances clearly showing an intention not to waive forfeiture of the policy because of the late-paid premium, and by the insured's election and the policy provisions, Prudential had neither the authority nor duty to change the mode of paying premiums. For reasons that follow, we are of the opinion that Prudential's position is supported by the policy provisions, the applicable law, the undisputed facts, and it is, therefore, entitled to summary judgment in its favor.

It is universally recognized that the unconditional acceptance of a sum tendered in payment of a premium after expiration of the grace period is a waiver of the insurer's right to terminate or forfeit the policy for nonpayment of premium. Yet this rule does not apply to an acceptance expressly made conditional upon the insured's performing some act or satisfying some condition. "Accordingly, there is no waiver where the acceptance and retention are made subject to reinstatement and approval of a changed method of premium payment. Likewise, the acceptance of a check and placing it in a suspense account pending determination of the restoration of the policy does not effect a waiver where such acceptance is clearly conditional." Couch, Cyc. of Insurance Law, 2d Ed., Vol. 6 § 32:360, pp. 580-582. Appleman, Insurance Law and Practice, Vol. 15 § 8501, pp. 351 et seq. Although Mississippi has no factual precedent in point, we are of the opinion that the state Supreme Court would recognize the foregoing principle which is well supported by decisions from various jurisdictions.

The Fifth Circuit, in Dreeben v. Mutual Life Ins. Co., 29 F.2d 963 (5 Cir. 1929), construing New York law, was faced with closely...