GREAT HORIZONS DEVELOPMENT CORP v. Massachusetts Mut. Life Ins. Co.

• Decision Date: 07 June 1978
• Docket Number: Civ. No. H 76-196.
• Citation: 457 F. Supp. 1066
• Parties: GREAT HORIZONS DEVELOPMENT CORPORATION, Plaintiff, v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Northern District of Indiana

457 F. Supp. 1066

GREAT HORIZONS DEVELOPMENT CORPORATION, Plaintiff, v. MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, Defendant.

Civ. No. H 76-196.

United States District Court, N. D. Indiana, Hammond Division.

June 7, 1978.

COPYRIGHT MATERIAL OMITTED

Clyde D. Compton, Edward J. Hussey, Hodges, Davis, Gruenberg, Compton & Sayers, Gary, Ind., for plaintiff.

Peter C. Bomberger, Friedrich, Bomberger, Tweedle & Blackmun, Highland, Ind., for defendant.

MEMORANDUM DECISION

McNAGNY, District Judge.

This matter is presently before the Court on cross-motions for summary judgment. The instant diversity action alleging breach of an insurance contract, was filed by the plaintiff, Great Horizons Development Corporation (hereinafter Great Horizons) on July 19, 1976, against the defendant, Massachusetts Mutual Life Insurance Company (hereinafter Massachusetts Life). Great Horizons seeks to recover $250,000.00 in life insurance proceeds on a policy insuring the life of its late President, Paul E. Schleicher, Jr. In addition to its claim for recovery under the policy, the plaintiff charges Massachusetts Life with malicious, unjustified and oppressive conduct giving rise to a claim for punitive damages in the amount of $750,000.00. On August 11, 1976, Massachusetts Life filed its answer denying any liability under the insurance contract or in punitive damages. In June, 1977, the defendant filed a counterclaim seeking the return of a $1,555.00 dividend payment mistakenly mailed to Great Horizons on May 28, 1975.

On June 21, 1977, the defendant, Massachusetts Life, filed its motion for summary judgment with supporting memorandum. On October 31, 1977, Great Horizons filed its response to the motion of the defendant, and on December 5, 1977, filed its own motion seeking summary judgment. The Court heard oral argument on the cross-motions on December 13, 1977, and permitted each party to thereafter file a supplemental memorandum in support of their respective positions.

The Court has carefully considered the pleadings, depositions of witnesses, answers to interrogatories, together with affidavits in support of the motions, and concludes that there is no genuine issue as to any material fact. For the reasons which the Court will set forth below, the motion for summary judgment of the defendant, Massachusetts Life, is GRANTED, and the cross-motion of the plaintiff, Great Horizons, is DENIED. Additionally, the Court sua sponte DISMISSES the counterclaim of Massachusetts Life due to a lack of subject matter jurisdiction.

I. FACTS

From the pleadings, depositions, answers to interrogatories, and affidavits filed in this cause, the Court is able to separate those facts which are undisputed and which are material to the determination of the cross-motions for summary judgment.

On May 28, 1969, the defendant, Massachusetts Life, issued a $250,000.00 life insurance policy (Policy # X-XXX-XXX) to Mid-American Homes, Inc., an Indiana corporation. The policy insured the life of one Paul E. Schleicher, Jr., the President of Mid-American Homes. A provision of the policy permitted a change in ownership of the policy during the lifetime of the insured. Utilizing this provision, ownership of the policy was first transferred to Eastgate Homes in 1972 and finally to the plaintiff, Great Horizons, in 1973. With this transfer, Great Horizons also became the beneficiary of the policy. The validity of these transfers in ownership is not contested.

The original insurance application was made by Paul E. Schleicher, Jr. in March of 1969. Following the application, the insured was examined by a local medical doctor approved or appointed for that purpose by Massachusetts Life. As a result of the applicant's medical history, Massachusetts Life offered to insure his life, but subject to premiums higher than the standard rate. Policies subject to these higher premiums are referred to as "rated" or "classified premium group" policies. In addition to being a "rated" policy, the contract designated the policy as a "Modified 3 Life Policy." This designation permitted lower premiums for the first three years of the policy.¹

During the first year of the policy, the premiums were paid monthly by pre-authorized automatic checks from the policy owner's bank account. At the first anniversary of the policy, the owner elected to switch to an annual premium. The premiums were paid on an annual basis for the next four (4) years. These annual premiums were paid partly by check and partly by policy loans. These loans were arranged before the expiration of the grace period and are evidenced by loan certificates. The loans during these years were not pursuant to the automatic premium loan provision of the policy. The balance between the amount of the loan and the premium due was paid by check.

By May 28, 1974, the fifth anniversary of the policy, Great Horizons was the owner, and elected to return to a monthly premium schedule. This change to a monthly premium schedule was necessitated by serious cash flow difficulties at Great Horizons. During the sixth year of the policy, certain of the monthly premiums were paid by check and others by operation of the automatic premium loan provision of the policy. The February 28, 1975, premium was paid entirely by automatic premium loan. When the next premium came due on March 28, 1975, the security remaining in the policy was insufficient to permit an automatic premium loan to cover the entire premium. Great Horizons arranged with the defendant to pay the balance between the maximum automatic premium loan and the premium amount due by a separate check. After the March 28, 1975, premium was paid, the total indebtedness on the policy including interest due or accrued, equaled the then value of the policy. Massachusetts Life did not notify Great Horizons that it would terminate the policy due to total indebtedness equalling or exceeding the value of the policy. The April 25, 1975, premium was never paid, and at the expiration of the 31 day grace period there was no security in the policy to engage the automatic premium loan provision. No further premiums were paid on Policy No. 4-465-594.

On or about May 28, 1975, Massachusetts Life mailed a check to Great Horizons in the amount of $1,555.00. The check represented a dividend payable to owners of policies in force on their anniversary date. Subsequently, Massachusetts Life demanded return of the dividend, which demand Great Horizons refused.

It was the practice of Massachusetts Life to send policy owners a notice of premium payments due before the actual date a premium payment was required. The plaintiff concedes receipt of these notices, at least as they relate to the premiums relative to this action.

In the absence of a specific request, the defendant did not notify Great Horizons of the loan value available for utilization under the automatic premium loan provision of the policy. However, there is evidence in the record that the comptroller of Great Horizons determined and verified the cash values of all company owned life insurance policies at least annually for audit purposes.

Paul E. Schleicher, Jr., the insured, died on October 7, 1975. Thereafter, Great Horizons submitted to the defendant proof of the death of the insured and its claim for benefits. After repeated demands for payment of the policy proceeds were refused by Massachusetts Life, the plaintiff commenced this action.

II. Policy and Statutory Provisions

The life insurance policy issued on May 28, 1969, was drafted by Massachusetts Life and contained the usual litany of conditions, outlining the rights and duties of the parties to the contract, most of which are not relevant to the instant cause of action. Certain provisions of the policy, however, are crucial to a determination of this case.

A provision entitled PREMIUMS² stipulates that the premiums may be paid annually, semi-annually, quarterly or monthly. The premium section of the policy also indicates that failure to pay a premium by the end of the grace period will lapse the policy. The policy provides for a 31 day grace period.³ In event of a policy lapse for failure to timely pay premiums, the contract provides a reinstatement clause⁴ permitting the owner the right to reinstate the policy within 31 days after expiration of the grace period without evidence of insurability. Thereafter, the policy allows reinstatement within five (5) years of the due date of the premium, but only upon satisfactory evidence of insurability.

Other policy provisions which are crucial in a determination of this case relate to loan privileges guaranteed to the policy owner. In general, policy loans⁵ may be obtained after the first anniversary of the policy, provided there is sufficient security and a proper assignment of the policy. Sufficient security⁶ denotes that the value of the policy plus the value of any paid up additions and dividend accumulations exceeds the amount of a loan together with all existing indebtedness and interest due or accrued to the due date of the next premium.

In addition to regular loans, the policy in question provides for automatic premium loans⁷ in the event the owner fails to pay a premium by the last day of the grace period, and there is sufficient value in the policy to secure a loan for the premium amount. The policy also contains a clause detailing general provisions relating to loans.⁸ In addition to establishing the interest rate chargeable on policy loans, this clause requires that prior to terminating the policy because total indebtedness equals or exceeds the then value of the policy, Massachusetts Life must give the owner at least a thirty-one (31) day notice.

Inasmuch as the statutes in effect at the time a life insurance policy is issued are as much a part of the policy as if they had been incorporated within its terms, Sun Life Assurance Co. of Canada v. Darnell, 107 Ind.App. 204, 20 N.E.2d 680 (1939), certain Indiana st...