McKee v. Federal Kemper Life Assur. Co., J-C-89-95.

• Decision Date: 15 November 1989
• Docket Number: No. J-C-89-95.,J-C-89-95.
• Citation: 726 F. Supp. 245
• Parties: Rose Nell McKEE, Plaintiff, v. FEDERAL KEMPER LIFE ASSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Eastern District of Arkansas

726 F. Supp. 245

Rose Nell McKEE, Plaintiff, v. FEDERAL KEMPER LIFE ASSURANCE COMPANY, Defendant.

No. J-C-89-95.

United States District Court, E.D. Arkansas, Jonesboro Division.

November 15, 1989.

Frank Snellgrove and Lance Miller, Walker, Snellgrove, Laser & Langley, Jonesboro, Ark., for plaintiff.

Barry Deason and Lucinda McDaniel, Barrett, Wheatley, Smith & Deacon, Jonesboro, Ark., for defendant.

MEMORANDUM OPINION AND ORDER

GEORGE HOWARD, Jr., District Judge.

On May 8, 1989, plaintiff filed an action in the Circuit Court of Craighead County, Arkansas seeking proceeds of a life insurance policy, along with a statutory penalty and attorney's fees for failure of defendant to pay. Defendant removed the action to this Court. Pending before the Court are cross motions for summary judgment. Most of the facts, recited below, are not in dispute.¹

On April 27, 1988, Bobby McKee completed an application with defendant for a life insurance policy in the amount of five million dollars. The policy was issued on July 1, 1988, naming plaintiff as the beneficiary. It had a two year contestable period. Bobby McKee was killed in a tragic car accident on a highway outside Kennett, Missouri on February 20, 1989.

Plaintiff submitted a proof of loss to defendant's agent, Ricky Lynn Floyd, on March 1, 1989. Defendant received the proof of loss on Friday, March 3, 1989.

On March 6, 1989, Mary Beth Jachec, claims representative with defendant, assigned the investigation of McKee's death to Equifax. On March 15, 1989, Jachec wrote plaintiff's counsel to advise them that the investigation had begun but that payment may be delayed due to the investigation. Plaintiff's counsel was also informed that a normal investigation would take between six to eight weeks and that the five million dollar policy would accrue interest at the rate of eight percent from the date of death.

On March 20, 1989, plaintiff's counsel wrote defendant requesting that the settlement check be forwarded to them when the claim was complete. Jachec wrote plaintiff's counsel on April 10, 1989, to advise them that defendant was still awaiting additional information. By letter dated May 2, 1989, Jachec informed counsel that defendant was awaiting one more report before the claim would be finalized.

Payment was approved on May 3, 1989, and a check for $5,072,454.24 issued on that date was mailed to plaintiff's counsel by letter dated May 4, 1989. The check was received by plaintiff's counsel on Saturday, May 6, 1989. On Monday, May 8, 1989, counsel returned the check and enclosed in the same envelope a summons and complaint asserting that the check was paid more than two months after the date of proof of loss and was for an incorrect amount.

Defendant answered the complaint on May 18, 1989, admitting that it had miscalculated the amount of interest in the original check, having computing interest from March 3, 1989, rather than February 20, 1989, the date of death. Defendant recalculated the interest owed and tendered a check in the amount of $5,084,554.18 into the Registry of the Court on May 19, 1989. On July 13, 1989, to avoid possible controversy, defendant tendered an additional $15,503.77 representing an additional fourteen days of interest.

ANALYSIS

Plaintiff contends that defendant was required to pay the policy proceeds within two months after receipt of proof of loss. She relies on A.C.A. sec. 23-81-113 which provides:

(a) There shall be a provision that when a policy shall become a claim by the death of the insured, settlement shall be made upon receipt of due proof of death and, at the insurer's option, surrender of the policy or proof of the interest of the claimant or both surrender and proof.

(b) If any insurer shall specify a particular period prior to the expiration of which settlement shall be made, the period shall not exceed two (2) months from the receipt of the proofs.

In the instant case, the policy stated: Proceeds should be paid within 30 days or less of the time we receive proof of the death of the insured. If they are not paid within that time, we will pay 8% interest per year on the proceeds and any premiums paid beyond the month in which death occurs.

Plaintiff contends that section 23-81-113(b) sets a two month limit for payment of proceeds on a life insurance policy. Failing to pay within the time required by statute, plaintiff argues, triggers the statutory penalty of A.C.A. sec. 23-79-208(a) which provides:

In all cases where loss occurs and the ... life ... insurance company ... liable therefor shall fail to pay the losses within the time specified in the policy, after demand made therefor, the ... firm, corporation, or association shall be liable to pay the holder of the policy or his assigns, in addition to the amount of the loss, twelve (12%) damages upon the amount of the loss, together with all reasonable attorney's fees for the prosecution and collection of the loss.

Defendant asserts that the Arkansas courts have created an exception to the penal provisions of section 23-79-208(a); i.e., an insurer will be allowed a reasonable time to investigate a claim.

No court has interpreted section 23-81-113(b). On its face, it sets forth a legislative intent that life insurance claims be settled within two months. The Court is persuaded, however, that the failure to comply with the time limitations does not automatically subject an insurer to the statutory penalties.

The penalty nature of section 23-79-208 "is directed against unwarranted delaying tactics of insurers." Simmons First National Bank v. Liberty Mutual Insurance Co., 282 Ark. 194, 198, 667 S.W.2d 648 (1984).

The legislature has recognized a social and moral purpose in providing for the allowance of a statutory penalty and attorney's fees in litigation between insured and insurer. These reasons include discouraging oppressive delay in recognition of liability, deterring arbitrary or capricious denial of claims, and insuring the ability of claimants to obtain legal representation.

USAA Life Insurance Co. v. Boyce, 294 Ark. 575, 578, 745 S.W.2d 136 (1988).

The Arkansas courts have recognized that because the statute is highly penal in nature it is to be strictly construed. Callum v. Farmers Union Mutual Ins., 256 Ark. 376, 381, 508 S.W.2d 316 (1974). The Arkansas courts have also acknowledged that there are "many exceptions to liability for the statutory penalty and attorney's fee". Federal Life & Casualty Co. v. Weyer, 239 Ark. 663, 667, 391 S.W.2d 22 (1965).

Thus, the Arkansas courts have specifically found that the language in XX-XX-XXX "to the effect `shall fail to pay the same within the time specified in the policy after demand made therefor' contemplates that the insurer shall have a reasonable time to make necessary investigation in reference to the loss and the circumstances thereof after...