Farm Bureau Mut. Ins. Co. of Arkansas v. Shaw

• Decision Date: 11 June 1980
• Docket Number: No. CA,CA
• Parties: FARM BUREAU MUTUAL INSURANCE COMPANY OF ARKANSAS, Appellant, v. Bruce L. SHAW, Appellee. 80-31.
• Court: Arkansas Court of Appeals

Page 432

600 S.W.2d 432

269 Ark. 757

FARM BUREAU MUTUAL INSURANCE COMPANY OF ARKANSAS, Appellant, v. Bruce L. SHAW, Appellee.

No. CA 80-31.

Court of Appeals of Arkansas.

June 11, 1980.

Released for Publication by the Court of Appeals.

Hodges, Hodges & Hodges, by David Hodges, Newport, for appellant.

Harkey, Walmsley & Belew, by John M. Belew, Batesville, for appellee.

NEWBERN, Judge.

The circuit court held that a 12% penalty and the appellee's attorney's fee were to be paid by the appellant pursuant to Ark.Stat.Ann., § 66-3238 (Repl.1966). The main question with which we are presented is whether an insured may be entitled to the statutory penalty and attorney's fee if the insurer has paid the claim to the insured for payment. The appellant has raised subsidiary questions which will also be addressed. We hold in favor of the appellee because the statute applies regardless whether the late payment is made to the insured or insured's mortgagee.

On August 8, 1975, the premium became due on the appellee's policy of insurance issued by the appellant covering fire loss to a large poultry house and its contents. The appellant sent a notice to the appellee that his premium was due. The wife of the appellee testified that the notice she and her husband received granted a 10-day "grace period." The parties have stipulated for purposes of this appeal, although it does not appear in the record, that an employee of the appellant testified that the notice mailed to the appellee did not extend any grace period. The appellee presented as an exhibit a premium notice, addressed to him and to the mortgagee, which said "we are extending the protection for ten (10) days from the due date as shown." On the morning of August 18, 1975, the insured's structure and contents were totally destroyed by fire. On that same date, the appellee filed a proof of loss document with the appellant.

The poultry house and its contents were mortgaged to the Farmers Home Administration (FHA) in an amount exceeding $29,000. The insurance policy was for a maximum amount of $24,000.

Although the appellee made no formal or written demand for payment upon the appellant, he testified that he spoke with appellant's local agent about the matter, and at one point informed the agent he planned to get a lawyer in connection with his claim. The testimony of the appellant's agent confirms that such a statement was made by the appellee. Formal demand for payment was made to the appellant by FHA on January 7, 1976. On March 12, 1976, the appellee filed suit against the appellant and named FHA as a second defendant for the purpose of assuring protection of "any interest they have in said insurance policy." The case was removed to a United States District Court upon petition for removal by FHA. On December 13, 1976, the appellant paid $24,000, the maximum coverage, to FHA. FHA then withdrew from the case and was dismissed as a defendant in the Federal Court which then remanded the case to the circuit court for Sharp County where the penalty and attorney's fee were awarded.

We agree with the appellant's position that where the policy issued to a mortgagor contains a loss payable clause in favor of a mortgagee, as in this case, the parties have effected a "preappropriation" of the insurance proceeds to payment of the mortgage debt. Sureck v. U. S. Fidelity and Guaranty Co., 353 F.Supp. 807 (W.D.Ark., 1973); Sharp v. Pease, 193 Ark. 352, 99 S.W.2d 588 (1937). We also agree with the appellant's position that the payment of insurance proceeds to a mortgagee pursuant to such a clause when the mortgagee's interest exceeds the amount of the proceeds satisfies the obligation of the insurer to the insured. However, these propositions do not address the question of liability for the statutory penalty or fee in the event payment to a mortgagee is late.

The appellant contends the appellee is prohibited from taking advantage of the statutory penalty and fee because he did not comply with that portion of the statute which requires demand upon the insurer. However, the only cases cited on this point are ones holding that formal demand is not necessary. Phoenix Ins. Co. v. Fleenor, 104 Ark. 119, 148 S.W. 650 (1912); Metropolitan Life Ins. v. Shane, 98 Ark. 132, 135 S.W. 836 (1911). The appellant says these cases do not apply because the appellee did not make a demand, and because the appellee had not paid the premium. The latter contention seems relevant only to a question of coverage and thus not relevant to the question whether sufficient demand was made. The cases cited by the appellant on this point are relevant in that they provide that no "formal" demand need be made, and there was evidence in the record before us from which the court could have concluded that an informal demand was made.

We agree with the appellant's argument that an insurer should have a reasonable time to investigate the circumstances of a loss after a demand for payment has been made. Clark v. New York Life Ins. Co., 245 Ark. 763, 434 S.W.2d 611 (1968); Clark...