The opinion of the court was delivered by: MCLEAN
This is an action to recover the face amount, less an outstanding loan, of a life insurance policy issued by defendant upon the life of plaintiff's late husband, William Loss. Plaintiff is the beneficiary named in the policy. The defense is that the policy lapsed prior to the death of the insured because of his failure to pay premiums. Jurisdiction is based upon diversity of citizenship. The parties have stipulated that New York law applies.
There is no dispute as to the relevant facts, which I find to be as follows.
On October 29, 1956, defendant issued a term life insurance policy, No. 798-04-42, in the face amount of $ 50,000 on the life of William Loss. The policy gave the insured the right of conversion. On August 27, 1957, on the application of the insured, the policy was converted to the policy here involved, a limited payment life policy No. 823-57-67, also in the face amount of $ 50,000. The conversion was made effective as of May 18, 1957, which thereupon became the 'policy date.' The policy provided for a semi-annual premium of $ 1,263.50 payable on May 18 and November 18 of each year during the life of the policy, which continued until May 18, 1999 unless sooner terminated by the death of the insured or otherwise in accordance with the policy terms.
The first premium due as of May 18, 1957 was paid, partly in cash and partly by applying the surrender value of the previous term insurance policy. When the next premium came due on November 18, 1957, Loss borrowed $ 1,072.95 from defendant on the policy and added to it $ 190.55 of his own funds in order to make up the total of $ 1,263.50. Loss signed a loan agreement to evidence the loan, which provided that he assigned the policy to the defendant as security for the loan and that any indebtedness under the agreement should be 'automatically repaid to the Company out of the cash value of the policy' in the event that the policy was surrendered or if there should be a default in premiums or 'if the indebtedness becomes equal to or greater than the cash value.' The agreement provided that the loan would bear interest at the rate of 6 per cent per year, payable on each policy anniversary, and if not paid when due, it would be added to the principal. The loan agreement further provided:
'If on or before any policy anniversary the indebtedness equals or exceeds the cash value of the policy, the policy shall terminate thirty-one days after notice has been mailed to the last known address of the insured * * *.'
On April 30, 1958, defendant mailed to Loss a printed 'Notice of Amount Due' stating that on May 18, 1958 there would become due a premium of $ 1,263.50 plus loan interest of $ 22.19, making in all $ 1,285.69. The printed notice stated that unless this amount were paid on the due date, or within 31 days' grace period thereafter, 'the policy and all payments on it will become forfeited and void, except as to the right to a surrender value, paid-up policy or continued term insurance when provided by statute or in the policy.'
On May 2, 1958 Loss wrote to defendant inquiring how much he could borrow 'against value in the policy as of May 18, 1958.' To this inquiry defendant replied on May 8 stating that it would be 'glad to arrange a loan to pay the premium due May 18, 1958,' and that a payment by Loss of $ 730 plus loan interest of $ 22.19 would 'complete this transaction.' Obviously the difference between the premium of $ 1,263.50 and $ 730, i.e., $ 533.50, was to be the amount of the new loan.
Defendant apparently made an error in this computation for, on May 20, 1958, the manager of the branch office of defendant, who seems to have known Loss personally, wrote to him stating that he had asked the home office to send Loss a loan blank and that if Loss wished to borrow to cover the current semi-annual premium, he would need to put up $ 480.98 in cash 'to continue your policy in force to November 18, 1958.' Even this figure was not entirely accurate, for on May 21, defendant's home office wrote to Loss saying that the correct cash amount required would be $ 467.81 plus interest on the previous loan of $ 22.19, totaling $ 490. This figure remains unchanged in defendant's subsequent correspondence. The letter of May 21 went on to say that for a cash payment of $ 930, Loss could borrow enough to pay two semi-annual premiums and keep the policy in force for another full year, i.e., until May 18, 1959.
The thirty-one day grace period expired on June 18, 1958. Loss had not paid the premium and had not arranged for a loan. On June 23, 1958 defendant sent to him a mimeographed from letter reminding him that the sum of $ 1,285.69 due on May 18 had not been received, expressing the thought that it might have been overlooked, and stating that 'we will accept your payment without any further requirements if sent to us by July 2, 1958 (provided the insured is alive).' On June 25 the manager of defendant's branch office wrote again to Loss saying that he had been informed that the policy had lapsed for non-payment of premium due May 18 but that it could be 'reinstated' on or before July 2, 1958 and urging Loss to give serious consideration to this offer. Loss made no reply to this letter. He did not pay the premium or arrange for a loan. On July 15, 1958, he died.
The policy, under the heading 'Options on Lapse,' provides that if a premium is not paid by the end of the grace period, Option C shall become effective, unless other options are elected, presumably by the insured, which they were not in this case. Option C provides for the continuance of the policy from the due date of the defaulted premium as 'paid-up non-participating term insurance,' the amount of which shall be the 'face amount plus any existing dividend additions and deposits, less any indebtedness.' The duration of such extended term insurance shall be 'such as the cash value less any indebtedness shall provide when applied as a net single premium.' Defendant proceeded to apply this provision. It determined that the amount of the extended term insurance to which Loss was entitled was $ 48,905 and that the 'cash value less any indebtedness' of Policy No. 823-57-67 (referred to as Loss's 'equity' in the policy), was $ 4.86. When applied 'as a net single premium' this was sufficient to maintain the extended term insurance in the amount of $ 48,905 in force for three days, i.e., from May 18, 1958 to May 21, 1958. Defendant did not notify Loss in his lifetime that it had set up this extended term insurance for him, for the necessary bookkeeping was still in process when Loss died, and by that time the extended term insurance had already expired.
There is New York authority to the effect that a default in the payment of a premium occurs on the date when the premium falls due and is not paid. The grace period is merely a waiver of the consequences of the default for thirty-one days. It does not alter the due date. Hand v. Equitable Life Assurance Society of the United States, 251 App.Div. 321, 296 N.Y.S. 543 (1st Dept. 1937).
It makes no difference in the outcome of this case whether the default occurred on May 18, 1958 in accordance with this rule, or whether it occurred on June 18, when the grace period expired. I will accept the earlier date as the correct one. Policy No. 823-57-67, therefore, lapsed on May 18, 1958 and plaintiff, as its beneficiary, has no rights thereunder, unless this result is prevented by one or more of the various theories which plaintiff here advances. The extended term insurance also lapsed before the death of the insured, unless plaintiff is correct in the contention which she makes in this regard, which will be considered hereinafter.
Plaintiff's first contention is that defendant did not properly apply the terms of the policy when it advised Loss that he would need to pay $ 490 in order to satisfy the premium due on May 18. Plaintiff asserts that in fact no additional cash was needed for that purpose, and that if Loss had been so informed, he would have arranged for a policy loan in order to keep the policy in force. To evaluate this contention, certain provisions of the policy must be examined.
The policy contains a 'Table of Cash, Loan and Other Values' which is prefaced by the following legend:
'These values apply on the policy anniversaries indicated, assuming that all premiums up to such anniversaries have been paid and that there are no dividends or indebtedness. Values ...