The HONORABLE E. RICHARD WEBBER, United States District Judge for * the Eastern District of Missouri, sitting by designation.



## United States Court of Appeals FOR THE EIGHTH CIRCUIT

___________ No. 97-2667

___________ Sallie Bates, * * Plaintiff - Appellee, * * Appeal from the United States v. * District Court for the * Western District of Arkansas. Security Benefit Life Insurance * Company, * * Defendant - Appellant. *

___________ Submitted: January 16, 1998 Filed: June 12, 1998

___________ Before LOKEN and MURPHY, Circuit Judges, and WEBBER, District Judge. *

___________ LOKEN, Circuit Judge.

Ro bert Bates purchased an interest sensitive whole life insurance policy fro m First Pyramid Life Insurance Company. Security Benefit Life Insurance Compan y (“SBL”) a ssumed responsibility for administering the policy in 1986. When Bate s missed a premium payment in 1988, SBL lapsed the policy and used its cash value to purchase term life insurance. Bates died after the term insura nce expired. Sallie Bates,The HONORAB LE JIMM LARRY HENDREN, United States District Judge 1 for the Western District of Arkansas. -2- his beneficiary, sued to collect the $100,000 death ben efit, arguing that the policy would have been in fo rce when Bates died had SBL not breached the policy by failing to give Bates notice that he could elect to use its cash value to pay premiums. T he district court 1 agreed with Mrs. Bates, and SBL appeals. We affirm. Mr. Bates initially elected to pay a $600 Annual Premium, an amount sub stantially in excess of the Risk Premium, which is the premium necessary to pay for the lif e insurance being purchased. SBL placed the excess premiums in an Accumulatio n Ac count, earning interest at an annually declared rate. The policy included severa l premium payment options. One opti on, found in Paragraph I.2. of the policy, permitted Bates to pay the Annual Premium from his Accumulation Account, in which case that Account would be reduced essential ly by the amount of the Risk Premium. This option
was only av ailable if the Accumulation Account had sufficient cash value to pay th e pre mium due. Section I of the policy obligated SBL to “notify [Bates] of his ability to el ect any of these options.” In addition, Section B, the policy’s “General Provisions,” obligated SBL to notify Bates annually of critical policy values such as the death benefit, the Ac cumulation Account, the Risk Premium, and the Declared Interest Rate. SB L provided this information in policy anniversary reports.
In September 1988, Bates missed a monthly premium payment. In October, SBL sent h im a letter advising that if the premium was not promptly paid, “the policy wil l lapse subje ct to any automatic premium loan and/or nonforfeiture benefits.” The letter did not advise Bates that

his Accumulation Account had a cash value of $2,203.93, nor did it notify him of his option to pay premium s out of the Accumulation Account. Bates did not reply to this letter. SB L lapsed the policy for nonpayment of premium and used the cash value in his Accumulation Account to purchase $100,000 of Extended Ter m Insurance, relying upon Section H of the policy. This Section, entitled Default orIn Allison v. Security Benefit Life Ins. Co. , 980 F.2d 1213, 1215 n.3 (8th Cir. 2 1992), a class action by a Little Rock insurance agency challenging SBL’ s administration of these policies, SBL represented that it always reinstated a specifi c policyhol der’s lapsed policy when the agency complained. SBL’s treatment of Mr

. Bates suggests this representation was false. Though such a false representation might give rise to a judicial estoppel, we will decide this appeal on its merits. -3- Surrender Options, provides that after a premium default, the policyhol der may surrender the policy for its net cash

value, or may use that cash value to purchase Extended Term
or n onparticipating Paid-up Life insurance. Absent a policyholder election, “th e Extended Term Insurance option will apply automatically.” In early 1991, Bate s complained that he was not advised of his option to pay premiums out of hi s Accumulation Account and insisted that his policy be reinstated on the assumption h e had made th at election. SBL rejected this demand, declaring that his policy “went t o Extended Term as described in Section B and H of your contract.” 2

The issue in this case arises because, when SBL used the Accumulation Account to purchase Extended Term Insurance, it assessed a surrender charge and based the cost of that in surance on its maximum permissible mortality charge. As a result, the cas h value was only sufficient to purchase $100,000 of term insurance through December 25, 1992 . By contrast, had Bates elected to pay policy premiums out of his Accumulation Account beginning in September 1988, the policy would still have been in effect when he died on March 22, 1995.

In J anuary 1996, Mrs. Bates sued in state court to recover the policy’s deat h benefit. SBL removed, and the parties submitted the case to the district court o n undisputed facts. The court held that SBL b reached the policy by failing to provide Mr. Bates timely notice of his premium payment options, that the appropriate remedy was to treat the policy as if Mr. Bates had elected to begin paying premiums out of hi s Accumulation Account in September 1988, and therefore that SBL was obligated to pay the full death benefit to his beneficiary. The court also awarded prejudgment-4-

interest, plus a 12 % penalty and attorney’s fees under Ark. Code Ann. § 23-79-208(a). SBL does not challenge that part of the award on appeal.

FromSBL’s perspective, this is a simple case. Because Bates never elected t o pay premi ums out of his Accumulation Account, and did not choose a different default option after failing to pay the September 1988 premium, SBL properly lapsed the policy and purchased Extended Term Insurance as required by Section H of the policy at the end of the premium payment grace period. The problem with this theory is that SBL’s October 1988 warning letter (1) did not advise Bates that he could elect a differen t premium payment option under Section I of the policy, (2) did not notify him that hi s AccumulationAccount had sufficient cash value to pay the premiums for an extended period of time, and (3) did not advise him of his various default options under Section H. The letter only said that, upon default, the policy would lapse “subject to . .

. nonforfeitu

re benefits.” Nonforfeiture benefits is a term not used or defined in Section H nor, as best we can determine, anywhere else in the policy. The question, then, i s whether SBL’s carelessly worded warning letter breached its contractual duties under the policy.

As this is a diversity case, we apply Arkansas law in construing the policy. See Langley v. Allst ate Ins. Co. , 995 F.2d 841, 844 (8th Cir. 1993). Insurance policies are const rued like other contracts, with the different clauses interpreted to harmonize th e entire c ontract. See Home Indem. Co. v. City of Marianna , 761 S.W.2d 171 (Ark

. 1988). If a policy provision “is fairly susceptible of two interpretations, one favorable to the insured and the other favorable to the insurer, the former will be adopted.” Keller v. Safeco Ins. Co ., 877 S.W.2d 90 (Ark. 1994).

Under Arka nsas law, an insurer may not lapse a policy for nonpayment o f premiums if the insurer has sufficient fund s belonging to the insured to pay the premium due. See Metropolitan Life Ins. Co. v. Stewart , 68 S.W.2d 1017 (Ark. 1934). This rule has its origin in the “fundamental principle of justice which will compel one who-5-

has funds in his hands belonging to another . . . to use such funds, if at al l, for the benefit, and not to the injury, of the owner.” St ate Life Ins. Co. of Indianapolis v. Mitchell , 126 F.2d 867, 870 (8th Cir. 1942). The rule does not inval idate automatic default provisions app lying a policy’s cash surrender value “to purchase paid up non-participatin g insurance” if the policyholder has failed to apply the cash surrender value to purchase premiums. Washington Nat’l Ins. Co. v. Simmons , 147 S.W.2d 3, 6 (Ark. 1941). But when the automatic default option is less favorable to the insured, as it was in this case, the insurer “cannot put the insured to an election of options upon failure to pay premiums . . . until it first ascertains the profits or dividends due the insured which might be used to pay premiums and after notification to him of the amount. ” Stewart , 68 S.W.2d at 1019 (emphasis added).

Section I of

the policy, which obligated SBL to notify Bates of his premiu m payment options, must be construed in light of this principle. Section I imposed a duty to notify Bates o f his “ability to elect” a premium option. Bates had the ability to elect the option t o pay premiums out of the policy’s cash value only when his Accumulation Account had acquired sufficient cash value, a date that could not be determined at the policy’s inception because market interest rates determined how rapidly the Accoun t
wo uld grow. SBL did provide annual reports stating the current value of Bates’ s Accumulat ionAccount. But that is not the notice Stewart requires. It is during th e payment grace period, when the insured is facing default, that Paragraph I.2. provides
a premium pa yment option that is significantly more favorable to the insured than th e default options under Section H. Moreover, SBL was obligated to provide anniversary reports under Paragraph B.15. of the policy, whereas it was obligated to give notice of premium payment options under Section I. Bearing in mind the principle that an insurer must use the policyholder’s funds for his benefit, and the principle that a contract should be construed to give effect to all its provisions, see Continental Cas. Co. v. Davidson , 463 S.W.2d 652, 655 (Ark. 1971), we agree with the district court that the notic e
re quirement

in Section I obligated SBL to include the following information in it s October 1988 warning letter: the amount of cash value then in Bates’s-6-

Acc umulation Account, his option to use that cash value to pay the past-due premium, and a comparison of the duration of t he whole life policy if cash value were used to pay premiums under Paragraph I.2., with the duration of the Extended Term Insurance that would be purchased under the automatic default option of Section H. SBL argues it fulfilled its contractual notice obligation because Section I of th e policy provides actual notice of premium payment options, and because an independent insurance a gent testified that he explained those options to Bates on more than on e occasion. However, as neither of those methods provided the specific notice that w e conclude was required after Bates failed to pay a premium in September 1988, th e distric t court correctly concluded that SBL breached the policy and that Bates woul d have elected to pay premiums out of his Accumulation Account had he been properl y and timely informed of that option.

The judgment of the district court is affirmed. Mrs. Bates is entitled to recover he r reasonable attorney’s fees on appeal under Ark. Code Ann. § 23-79-208(a)

. Accordingly, in addition to taxingcosts of the appeal in this court, she may apply to the district court for an attorney’s fee award.
A true copy.

Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT

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