Lester v. Aetna Life Insurance Company

• Decision Date: 11 December 1970
• Docket Number: No. 27539.,27539.
• Citation: 433 F.2d 884
• Parties: Don E. LESTER, Jr., Plaintiff-Appellee Cross Appellant, v. AETNA LIFE INSURANCE COMPANY, Defendant-Appellant-Cross Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

433 F.2d 884 (1970)

Don E. LESTER, Jr., Plaintiff-Appellee Cross Appellant, v. AETNA LIFE INSURANCE COMPANY, Defendant-Appellant-Cross Appellee.

No. 27539.

United States Court of Appeals, Fifth Circuit.

October 28, 1970.

Rehearing Denied and Rehearing Denied December 11, 1970.

Charles D. Egan, Benjamin C. King, Shreveport, La., for defendant-appellant.

Jack O. Brittain, Natchitoches, La., for plaintiff-appellee.

Before AINSWORTH, DYER and SIMPSON, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied December 11, 1970.

SIMPSON, Circuit Judge:

This is a Louisiana based, non-jury diversity case brought against Aetna Life Insurance Company (Aetna)¹ by the appellee, Don E. Lester, Jr., the sole beneficiary of a life insurance policy issued to his deceased father, Don E. Lester, Sr. to recover proceeds of the policy.² Lester's timely presented claim under the policy was denied by Aetna on the ground of lapse for non-payment of premium. Applying the Louisiana Notice Statute,³ the district court held for the appellee, explaining that under the circumstances of this case the Louisiana Supreme Court would apply the law of Louisiana and not the law of Wisconsin. Judgment for $34,897.48⁴ with interest and costs was entered and Aetna appealed. Appellee cross-appealed seeking penalties and attorneys' fees. We affirm the district court's judgment on direct appeal and deny relief to appellee on his cross-appeal.

The principal issues confronting us here are (1) the applicability of Louisiana law in preference to the law of Wisconsin; (2) the sufficiency of the notice of lapse given by Aetna to the insured; (3) whether or not Aetna was estopped to claim lapse of the policy; and (4) the failure of the trial court to impose penalties and award attorneys' fee (raised by the cross-appeal). Discussion and decision of issue (3) is rendered unnecessary by our disposition of issues (1) and (2).

The controlling facts were stipulated. For our examination they will be taken from the district court's opinion-order⁵ with minor additions and modifications.

On May 1, 1952, a life insurance policy for the face amount of $50,000 was issued in Milwaukee, Wisconsin, by appellant's Wisconsin agent to Don E. Lester, Sr. By his application Lester, Sr. invoked operation of the automatic loan provisions of clause 8 of the policy (infra) and paid his first yearly premium of $2,252.50. Yearly premiums in that amount were due May 1 of each year thereafter, subject to a thirty-one day grace period.

It is necessary here to quote from or to paraphrase pertinent provisions of the policy. Clause 4 provided:

"All premiums shall be paid in advance at the Home Office of the Company, or to its authorized agent, in exchange for a receipt signed by its Secretary or Assistant Secretary and countersigned by the agent. If any such premium is not paid when due, this policy shall cease, subject to the values and privileges hereinafter described; except that a grace of thirty-one days, during which the policy shall remain in full force, will be allowed for the payment of any premium after the first. * * *" (Emphasis added)

Clause 6 provided that the company would make loans on the security of the policy for an amount not in excess of the net loan value⁶ of the policy. The specified rate of interest on such loans was 5% per year.

Clause 8 contained an automatic loan provision which is available if due written request is made for its operation while there is no default in payment of premiums due. Essentially this clause provides that the amount of any premium due and not paid before the end of the 31-day grace period will automatically be loaned by the company and charged as an indebtedness secured by the policy. However, if the loan value should be insufficient to cover the whole premium due, no automatic premium loan would be made under the provisions of Clause 8 but the provisions of Clause 7 would apply.

Clause 7 contained three options available to the insured in the event the automatic premium loan provision should be insufficient to cover the total premium due. If none of the options provided in the policy were selected by the insured, the policy stipulated that insurance would be continued automatically as extended term insurance under Option (C). In case of any indebtedness against the policy, the extended term insurance would be for the sum insured less the indebtedness and for such a period as the cash value less the indebtedness would purchase.

Lester, Sr. timely paid his yearly premiums from his Wisconsin residence until 1957. At that time, with the full knowledge of Aetna he moved to Natchitoches Parish, Louisiana, where he lived until his death on February 2, 1963. Lester, Sr. paid premiums on the policy in Louisiana as they became due from 1957 through 1961. He paid a total of $22,525 in premiums from 1952 through 1961.

After moving to Louisiana, Lester, Sr. entered into several transactions with Aetna concerning the life insurance policy in question. In 1958, he changed the beneficiary of the policy to the administrator of his estate. Then on October 27, 1961, he again changed beneficiaries, this time naming the appellee, Lester, Jr., sole beneficiary. On August 2, 1961, Lester, Sr. obtained a policy loan of $12,398.84 from appellant, secured by the cash surrender value of the policy.

On May 1, 1962, the yearly premium became due. At that time the policy loan indebtedness totaled $12,850.02, composed of principal in the amount of $12,398.84 and interest due of $451.18. The cash surrender value of the policy on the May 1, 1962 anniversary was precisely $12,850.00. The 2¢ deficiency prevented the automatic policy loan provision from taking effect. Also, there was of course no cash value available to secure extended term insurance, because of the 2¢ excess of indebtedness over cash value.

A notice of premium payment due was issued to Lester, Sr. indicating that on the premium due date of May 1, 1962 he would owe the yearly premium of $2,252.50 and $451.18 in interest due on the loan. But the notice did not indicate that the automatic policy loan provision was ineffective. Moreover, the record does not show with certainty when the notice was issued by appellant or received by Lester, Sr.

On July 2, 1962, 31 additional days after expiration of the 31-day grace period, Aetna issued a notice informing Lester, Sr. that the automatic loan provision was inoperative, because the policy did not have sufficient remaining value to pay the premium by loan, and, therefore, the policy had lapsed without value other than the right to apply for reinstatement. Aetna, by letter dated July 3, 1962, advised Lester, Sr. that he could apply for reinstatement by completing a form and remitting the overdue premium of $2,252.50. Lester, Sr. immediately mailed to appellant the completed application, a check for $2,703.68 (yearly premium plus loan interest) dated July 6, 1962, and a note reading: "Sorry, but Notice was misplaced. Please notify me if you reinstate". This check was good and would have been honored by the bank at any time it was presented between July 6, 1962 and January 23, 1963.

On August 8, 1962 Aetna advised its insured by letter that he must submit a physician's statement, including details of any cardiovascular findings, before his application could receive further consideration.⁷ Having received no response to its request for a physician's statement, the appellant by letter dated January 23, 1963 returned the decedent's check for $2,703.68. Ten days later, February 2, 1963, the insured died.

At the threshold we must consider whether or not the district court erred when it applied the Louisiana law in lieu of the Wisconsin law. The district court's reasoning was that since Louisiana was the place of the most "significant contacts" the Louisiana premium notice statute governed. The effect of this was to require Aetna before lapsing the policy, to give the insured sufficient notice both that his May 1, 1962 premium was due and also that the automatic loan provision covering late premiums was inoperative.

Conversely, under the law of Wisconsin, Aetna would have had no duty to give notice. The Wisconsin law contained no premium notice statute. Under it, therefore, the policy would have legally lapsed.

The argument for application of Wisconsin law is based on the traditional "lex loci contractus" doctrine, calling for application of the law where the contract was made, performed, or delivered. The policy involved here was of course "delivered" to Lester, Sr. in Wisconsin by appellant's Wisconsin agent. Hence on this appeal we must decide whether or not the district court correctly applied the "significant contacts" approach in lieu of the lex loci contractus or "place of delivery" approach.

It is helpful here to state and then reason from well established principles. In diversity cases, federal courts must apply the substantive law of the state. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). When a federal court sitting in a diversity case is faced with an apparent conflict between relevant laws of two or more states, it must resolve the conflict in accord with the conflict of laws principles developed by the courts of forum state. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). The rub is that it is sometimes not entirely clear what principles have been developed or how the developed principles should be applied in a new fact situation. When this occurs, the court must closely scrutinize the specific facts, law, and equities involved and divine what law the Supreme Court of the forum state would apply.

In this case the district court followed the Klaxon mandate and went to the Louisiana conflicts of law rule embodied in Article 10 of the Louisiana Civil Code which provides in pertinent part the following:

"The form and effect of public and private written

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