Hotaling, M.D. v. Chubb Sovereign Life Insurance

• Decision Date: 21 February 2001
• Docket Number: No. 00-1363,00-1363
• Citation: 241 F.3d 572
• Parties: (7th Cir. 2001) ANDREW J. HOTALING, M.D., Plaintiff-Appellant, v. CHUBB SOVEREIGN LIFE INSURANCE CO. and JEFFERSON PILOT FINANCIAL LIFE INSURANCE CO., Defendants-Appellees
• Court: U.S. Court of Appeals — Seventh Circuit

Page 572

241 F.3d 572 (7th Cir. 2001)

ANDREW J. HOTALING, M.D., Plaintiff-Appellant, v. CHUBB SOVEREIGN LIFE INSURANCE CO. and JEFFERSON PILOT FINANCIAL LIFE INSURANCE CO., Defendants-Appellees.

No. 00-1363

In the United States Court of Appeals For the Seventh Circuit

Argued September 20, 2000

Decided February 21, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 23--Harry D. Leinenweber, Judge. [Copyrighted Material Omitted] Before COFFEY, EASTERBROOK, and EVANS, Circuit Judges.

COFFEY, Circuit Judge.

After the death of his wife (Sylvia Morris), Andrew J. Hotaling, M.D., sued Chubb Sovereign Life Insurance Company and Jefferson Pilot Financial Life Insurance Company (collectively "Chubb") for $1 million alleging that a life insurance policy issued by Chubb (and covering his deceased wife) was in effect at the time of her death. The primary issue both at trial and on appeal is whether Chubb complied with 215 Ill. Comp Stat. 5/234, which requires all life insurance companies licensed to operate within Illinois to send premium-due notices to their policyholders before allowing a life insurance policy to lapse.¹ After a bench trial, the district court found that Chubb had complied with the Illinois statute and entered judgment in favor of Chubb. We affirm.

I. BACKGROUND

On May 8, 1995, Sylvia Morris purchased a universal life insurance policy from Chubb which provided life insurance coverage of $1 million. The policy required an annual premium of $2,570.04 to be paid on or before the eighth day of May each year. Additionally, the policy specifically provided that "[i]f the premium is not paid within the [61-day] Grace Period, this policy will lapse or terminate without value." When Morris purchased the policy in 1995, she paid the first year's premium in advance. It is undisputed that during the following year (1996), Chubb sent a premium-due notice to Sylvia Morris and the premium was timely paid by her husband, Andrew Hotaling. This dispute arises because Hotaling claims that Chubb failed to send a premium-due notice to his wife the third year; that is, in 1997.

A. The Policy Lapses

It should be noted at the outset that at the bench trial Chubb was unable to produce a copy of the premium-due notice it allegedly sent to Sylvia Morris prior to lapsing her policy nor did the carrier introduce the testimony of an employee who specifically recalled sending Morris a notice.² Despite the absence of a copy of the actual premium-due notice sent to Morris, Chubb maintains that it sent such a notice to Morris on April 22, 1997, in the normal course of its business. Hotaling testified at trial that he did not receive such a notice and that he would have been aware if Morris had received such a notice because he was in charge of paying their family bills.

Chubb additionally asserts that in June 1997 it sent a "lapse pending letter" to Morris alerting her to the fact that her life insurance policy would lapse if a premium payment was not received within the policy's grace period. Chubb introduced a copy of this letter at trial, which reads in relevant part:

Dear Ms. Morris,

Currently your policy does not have enough value to cover the monthly expenses due on May 08, 1997. We are concerned that your policy will lapse without value on July 08, 1997 unless you take immediate action.

The minimum payment is $854.72. Please understand that if this policy lapses, you are losing the financial security and protection this insurance coverage provides you.

* * * *

Please don't let this policy lapse, contact your Chubb Sovereign Life representative listed below or a customer service representative today.

Hotaling denies that either he or his wife ever received a letter of this nature from Chubb.

According to Hotaling's trial testimony, neither he nor his wife was aware that anything was amiss regarding her life insurance coverage until receiving a "lapse letter" from Chubb dated July 9, 1997, which stated that her policy had lapsed due to non-payment of premiums. The lapse letter stated:

We regret to inform you that your policy coverage with Chubb Sovereign Life Insurance Company is no longer in force because we did not receive your past due premium as prescribed by your policy. We are sorry that you have made this decision to leave our company.

* * * *

Please give careful consideration to reinstating this valuable policy protection. You may have the option of continuing this coverage by completing reinstatement requirements and paying the past due premium of $854.72. Your Chubb Sovereign Life representative listed below or a customer service representative would be available to answer your questions and guide you through this process.

On July 31, 1997, three weeks after receiving the lapse letter, Morris phoned Chubb and requested reinstatement forms pursuant to the information contained in the final lapse letter of July 9, 1997. Chubb forwarded Morris the necessary paperwork the following day, August 1, 1997. The reinstatement letter and application forms Chubb mailed to Morris stated that, for purposes of underwriting, Morris would be required to undergo and pass a medical examination prior to the reinstatement of her policy. Morris scheduled the required medical exam for August 24, 1997. Tragically, before the medical examination date arrived, Morris was diagnosed with terminal brain cancer, rendering her uninsurable. Morris died less than five weeks later.

B. Procedural History

Following Morris's death, Hotaling requested that Chubb disburse the benefits he was entitled to receive under the terms of Morris's policy. Chubb refused Hotaling's request for payment, maintaining that Morris's policy had lapsed prior to her death due to her failure to pay her premium before the expiration of the policy's grace period on July 8, 1997. Hotaling countered that Chubb could not validly lapse the policy because Morris had never received a premium-due notice alerting her that the policy was about to lapse as required by the Illinois Insurance Code. Thereafter, Hotaling filed a complaint in the Circuit Court of Cook County, Illinois, on December 14, 1998, alleging that Chubb had violated 215 Ill. Comp. Stat. 5/234.

After Chubb removed the case to federal court, a bench trial was held on December 15, 1999. At trial, Hotaling testified that he had never received a premium-due notice from Chubb or the lapse-pending letter, and argued that the failure to send a premium-due notice pursuant to Illinois law prevented Chubb from legally lapsing Morris's policy.

Chubb, on the other hand, claimed it had complied with the statute by mailing a premium- due notice to Morris, but admitted that it could not produce any witnesses who could testify that they recalled placing Morris's specific premium- due notice in the mail. Chubb, however, did introduce testimony and evidence explaining its usual procedures that insure that premium-due notices are mailed to all customers, such as Morris, who have failed to pay their premiums due in a timely fashion. Chubb called Ronald Reed, an assistant vice-president of information technology at Chubb, who testified that Chubb utilized a computer system which "automatically handles the billing of the premium [as in] the case of the policy of Sylvia Morris." After hearing Reed's testimony and related paperwork documenting Chubb's business practices used to notify its customers of delinquent premium payments, the trial judge made the following findings of fact based on Reed's testimony:

4. The fact issue in the case was whether the statutorily required notice (215 ILCS 5/234) was mailed by Chubb to Morris. Chubb has an almost fully automated system of mailing premium notices and other correspondence to the holders of its Universal Life Policies. It is set up to bill 19 days in advance. In order to generate these premium notices and other correspondence, Chubb has contracted with Management Applied Programming ("MAP"), a firm located in Santa Barbara, California. The process starts when the Chubb computer in Concord, New Hampshire, which is programmed to generate a list of all policies that premium notices are to be sent (sic) that date. The Chubb computer is connected by leased line with the MAP computer and the list, or abstract, is transferred electronically to California. In turn the MAP computer is programmed to print the name of the insured, the policy number, the premium amount due, and the due date, on pre-printed forms. The premium due notices are checked for quality control, i.e., to insure readability, then checked to make sure that the number of notices "is in close agreement with the number that should be there." They do not do an actual count because they do approximately 1,000 notices a day. The notices then go to the mail room where a machine automatically folds the notices, [and] stuffs them [into] window envelopes. The notices are then postage metered and taken to a mail drop where they are picked up by the post office.

5. Two extracts are generated, one by Chubb, which is the list that is transferred to MAP. MAP in turn generates a list of all notices printed by it. The MAP list can only be generated if the initial transmission from Chubb has been successful. The MAP computer is programmed to refuse to print the notices if the system inadvertently fails to print one or more of the notices. Neither MAP nor Chubb, however, keep a duplicate of the actual premium notices sent. Chubb however does keep a copy of all other correspondence to the policy holder, such as lapse warnings and lapse notices.

6. According to Chubb's records the premium notice process for Morris' policy commenced in Concord, New Hampshire, at 1:08 a.m. EST on April 22, 1997, and was received at MAP in California, at 10:16 p.m. PST, April 21, 1997, 8 minutes later. The notice was printed and programmed to contain the name of the insured, the...