American General Life Insurance v. First American National Bank

716 S.W.2d 205, 19 Ark. App. 13, 1986 Ark. App. LEXIS 2398

• Court: Court of Appeals of Arkansas
• Decided: September 24, 1986
• Docket: CA 85-400
• Status: Published

Opinions

Donald L. Corbin, Judge.

This appeal comes to us from Pulaski County Circuit Court, Second Division.¹ The trial court found in favor of appellee, First American National Bank. Appellant, American General Life Insurance Company, raises two points on appeal. We reverse the decision of the trial court and dismiss appellee’s complaint.

Young Electric Company purchased a life insurance policy on the life of Robert Reynolds Young from appellant, American General Life Insurance Company, in 1974. A supplementary agreement to this policy contained a premium waiver disability benefit. In 1976, Young Electric Company assigned its interest in this policy to appellee, First American National Bank. Appellee made premium payments by utilizing the automatic premium loan provision of the policy. Approximately every six months from December, 1976, through June, 1980, appellee made premium payments and the balance of the payments were made pursuant to the automatic premium loan provision. Appellee defaulted on its premium payments in June, 1980, when the cash value of the policy diminished to such an extent that it could no longer be used to pay premiums. Appellee was unaware both that there was no remaining cash value in the policy and that the insured had suffered a heart attack on May 1, 1980. On December 31,1980, appellee tendered its cash premium check in accordance with its established practice of paying one monthly premium every six months. On January 30, 1981, appellant returned the check to appellee and advised it that the policy had lapsed for nonpayment of premium and had been placed on extended term insurance which would expire on May 24, 1981. After the return of the premium check, communication and correspondence between the parties was initiated but efforts to resolve the dispute concerning the force and effect of the policy were unsuccessful.

In June, 1981, appellee contacted Mr. Young’s wife and learned that the insured was totally disabled as defined in the premium waiver supplementary agreement of the policy. On July 24,1981, counsel for appellee sent a letter to appellant demanding reinstatement of the policy based on Young’s total disability and the premium waiver disability benefit provision of the policy. On July 30, 1981, appellant received notice that Young was disabled. On August 14,1981, appellee sent proof of the disability of Robert Reynolds Young to appellant and appellee made demand upon appellant under the premium waiver disability provisions of the contract to reinstate the policy.

The pertinent provision of the premium waiver disability benefit provides as follows:

PREMIUM WAIVER DISABILITY BENEFIT

Benefit. The Company, upon receipt of due proof that the Insured is totally disabled, as defined below, will waive premiums under the policy as follows.

No premium which fell due more than one year before written notice of claim is received by the Company at its Home Office will be waived unless it is shown that it was not reasonably possible to give such notice within one year after total disability began and that notice was given as soon as was reasonably possible.

Notice of Proof of Disability. The Company must receive at its Home Office written notice of claim and proof of total disability:

a. While the Insured is living and totally disabled;

b. Not later than one year after the policy anniversary nearest the Insured’s 65th birthday; and

c. Within one year after the due date of the first premium in default, if any.

Failure to give the written notice and proof of claim described above shall not invalidate any claim if it is shown that such notice and proof were given as soon as was reasonably possible.

Appellant refused to reinstate the policy because appellee had failed to furnish written notice of claim and proof of total disability within one year after the due date of the first premium in default.

Appellee brought suit seeking declaratory judgment and reinstatement of the policy along with statutory penalty and attorney’s fees. In its complaint appellee asserted that the written notice and proof requirement was not a condition precedent to waiver of the premiums and that the disability and not notice and proof of the disability created the insured’s duty to waive premiums. Appellee also relied upon the clause of the supplementary agreement which stated that failure to give the written notice and proof of claim would not invalidate any claim if it was shown that notice and proof were given as soon as reasonably possible. Appellant answered asserting that appellee had a duty to give notice of claim and proof of disability within one year after the due date of the first premium in default and that, because appellee failed to give due notice of claim and proof of disability, appellant’s obligation to waive premiums never arose.

The case was decided based upon the stipulated facts and the briefs of the parties. The trial court found that under the language in the supplementary agreement providing for premium waiver disability benefit, the existence of disability fixed liability and not the notice and proof of claim. The court also found that the notice of claim and proof of total disability were given within a reasonable time. Judgment was awarded in favor of appellee.

Appellant raises two points for reversal: (1) The trial court erred in finding that the language of the premium waiver disability benefit agreement creates a condition subsequent; and (2) the trial court erred in finding that notice of claim and proof of total disability were given as soon as was reasonably possible under the circumstances.

It is well-settled that, unless notice of disability and proof thereof are made conditions precedent to recovery under disability clauses by the inescapable language of the policy, it is the existence of disability that fixes liability and not proof thereof. J.C. Penney Life Insurance Co. v. Warren, 268 Ark. 1132, 599 S.W.2d 415 (Ark. App. 1980). The general rule is that the failure to give notice or make proof within a specified time in accordance with the terms of the policy does not operate as a forfeiture of the right to recover, unless the policy in express terms or by necessary implication makes notice of claim and proof of disability a condition precedent to recovery. New York Life Insurance Co. v. Moose, 190 Ark. 161, 78 S.W.2d 64 (1935). Therefore, the first issue to be addressed in this appeal is whether the language of the premium waiver disability benefit agreement creates a condition subsequent or a condition precedent.

In the case at bar, the provision requiring notice of claim and proof of disability within one year is conditional, i.e., notice and proof within one year from the due date of the first premium in default are required in those cases where it is reasonably possible to give such notice and proof. If it is not reasonably possible to give notice and proof within one year after disability began then notice and proof must be given as soon as reasonably possible. Under Arkansas case law this is not “inescapable language” making receipt of notice and proof of disability a condition precedent to recovery under disability clauses.

In J.C. Penney Life Insurance Co. v. Warren, the pertinent provisions of the policy in question provided as follows:

The Company will waive the payment of all premiums becoming due upon this policy during the continuance of total and permanent disability as herein defined upon receipt of its home office or administrative office of due proof that the insured has suffered such disability. . . .

NOTICE AND PROOF OF CLAIM — A written notice of claim of such disability and proof of such disability must be presented to the home office or administrative office of the company (a) during the lifetime of the insured, (b) during the continuance of total disability, and (c) within six months of the due date of the first premium in default, if there be default. Failure to give such notice and such proof within such times shall not invalidate any claim if it shall be shown that it was not reasonably possible to give such notice and such proof within such times, and that such notice and such proof were given as soon as reasonably possible.

Upon reading the above-stated provisions, this court found in J.C. Penney that it was the existence of disability that fixed liability and not the proof thereof. In essence, this court held that the rights under the policy were not forfeited by a nonpayment of premiums subsequent to the disability, construing notice and proof to be in the nature of a condition subsequent. The provisions of the policy in question here are materially indistinguishable from those in J.C. Penney. Therefore, we agree with the trial court’s finding that the language of the premium waiver disability benefit agreement creates a condition subsequent to liability, in this case.

The second issue to be addressed by this court is whether notice of claim and proof of disability were given within a reasonable time. The policy provides that failure to give notice and proof will be excused if it was not reasonably possible to give such notice and proof.

It is well-settled that an assignee can receive by way of assignment no better rights than the assignor had. Union Planters National Bank of Memphis, Tenn. v. Moore, 250 Ark. 272, 464 S.W.2d 786 (1971). Therefore, appellee, as assignee of the rights under the life insurance policy, stands in the shoes of Young Electric Company, assignor of that interest.

In J. C. Penney this court found that the failure to give notice and proof within six months of the due date of the first premium in default was reasonable under the circumstances. In that case this court found the following facts to be relevant to this determination:

The evidence clearly shows that Mr. Warren suffered from kidney failure in February of 1976 and from that time until the date of his death he was on dialysis, at first two or three times a week in a hospital at Memphis and then beginning in December of 1976, two or three times a week in his home at Hughes, Arkansas. The testimony shows that during Mr. Warren’s entire illness, and up until the time of his death on November 1, 1977, Mrs. Warren was employed full time in Memphis, Tennessee. During the entire time of Mr. Warren’s illness, Mrs. Warren was apparently working at her job or with her husband, on an average of approximately 16 hours a day. The testimony further shows that Mr. Warren was gravely ill and was barely able to take care of his day to day needs.

Id. at 1136-1137, 599 S.W.2d at 418. The jury in J.C. Penney found that it was not reasonably possible for notice and proof to be given within the time provided by the policy and this court affirmed that judgment.

In Barnett v. Southwestern Life Insurance Co., 269 Ark. 940, 601 S.W.2d 604 (Ark.App. 1980), the appellant in that case claimed that he had become totally disabled before he defaulted on his premium payments and that he had failed to give notice of claim or proof of disability because his disability involved his mind and mental alertness. Appellant in that case asserted that his mental disability came under the savings clause in the policy, much the same as the clause in question in the case at bar, which provided that a failure to give notice of disability is excused if it is shown that it was not reasonably possible to give such notice within the time required. This court rejected that argument, holding that the evidence of mental disability fell short of proving that the disability was of such degree as to excuse the failure of timely notice under the clause. Id. at 944, 601 S.W.2d at 606. This court stated the following in Barnett:

It is regrettable that Appellant failed to avail himself of the opportunity to have premiums waived, but that failure was the result of his own omission and it would be an inequity of somewhat greater proportions, we conclude, to transfer the burden of the omission to the opposing party, where to do so would require a wholesale rewriting of language of the policy. The many precedents on that general subject require that policy language, if plain, be adhered to.

Id. at 945, 601 S.W.2d at 607 (citation omitted).

In Mutual Life Insurance Co. v. Morris, 191 Ark. 88, 83 S.W.2d 842 (1935), the Arkansas Supreme Court held that the failure to give notice and proof of disability within the time required was excused where, from the time the condition of the insured was discovered until his death, the insured was critically ill and in no condition to look after his business affairs.

In the case at bar the policy provided that notice and proof must be given within a year after the due date of the first premium in default. The parties stipulated that on June 15,1980, the first payment in default came due. On December 31, 1980, appellee tendered its cash premium check in accordance with the agreed practice. On January 30,1981, appellant returned the check and notified appellee that the policy had been placed on extended term. Appellee first learned that Young was totally incapacitated on June 22,1981. (Young had been disabled since May 1,1980.) On July 24, 1981, counsel for appellee sent a letter to appellant notifying it that Young was disabled and requesting reinstatement of the policy. Appellant received this letter on July 30,1981, and this was the first notice appellant received that Young was disabled. Therefore, the first payment in default came due on June 15,1980, and appellant received notice of claim on July 30, 1981. Appellant did not receive proof of Young’s disability until August 14, 1981.

The question is whether notice and proof were given as soon as reasonably possible. The trial judge found that they were. Appellee did not prove to the trial court why it was incapable of communicating with Young during that period nor that Young was incapable of informing appellee of his disability. Appellee presented no evidence which would explain why it was not reasonably possible to give notice and proof of disability to appellant within one year. The cases cited above indicate that the courts are reluctant to excuse the failure to give timely notice and proof of disability. Failure has been excused only in those cases where there were grave and extenuating circumstances prohibiting timely notification of claim and proof of disability. We find that appellee failed to prove that notice and proof of disability were given as soon as was reasonably possible under the circumstances. We find that to excuse the failure to give timely notice and proof in this case, where there has been no showing that it was unreasonable to give timely notice and proof, would require “a wholesale rewriting” of the terms of the policy. For this reason we reverse the trial court’s decision and dismiss appellee’s complaint.

Cracraft, C.J., concurs. Cooper and Mayfield, JJ., dissent.

1 This case has been delayed by reassignment because of the differing views as to how it should be written. The court regrets this necessary delay.