United States Court of Appeals,

Fifth Circuit.

No. 93-4105.

FIRST AMERICAN BANK & TRUST OF LOUISIANA, Plaintiff-Appellant,

v.

TEXAS LIFE INSURANCE COMPANY, Defendant-Appellee.

Jan. 5, 1994.

Appeal from the United States District Court for the Western District of Louisiana.

Before WISDOM, HIGGINBOTHAM, and SMITH, Circuit Judges.

WISDOM, Circuit Judge:

The plaint iff in this case appeals from a grant of summary judgment in favor of the defendant

on the question whether an insurance company was required to pay the proceeds of a life insurance

policy to a third-party assignee who held the policy a s collat eral for a loan. The question arises

b ecause the insurance company contends that the policy had been terminated. The district court 's

construction of the controlling state statute led to a similar conclusion. We agree wi th that

interpretation and, accordingly, affirm that court's judgment.

I. Factual Background

William C. Rowe, Sr. obtained a life insurance policy in the amount of $1,000,000 from Texas

Life Insurance Company ("Texas Life"). Mr. Rowe, in turn, assigned the policy to First American

Bank & Trust of Louisiana ("First American" or "the bank") to whom he was indebted. Mr. Rowe

remained obligated to pay the premiums on the policy, while the bank held the policy as collateral for

his debts.

First American notified Texas Life that the policy had been assigned to it. The bank also sent

Texas Life a questionnaire asking Texas Life whether it would notify First American if the policy

threat ened to terminate. Texas Life filled out the questionnaire and stated that it would give First

American notice "in ample time to protect its collateral."

The life insurance policy came up for renewal on February 18, 1988. On February 9, Texas1 Stout v. Borg-Warner Corp., 933 F.2d 331, 334 (5th Cir.), cert. denied, --- U.S. ----, 112

S.Ct. 584, 116 L.Ed.2d 609 (1991).

2 Fed.R.Civ.P. 56(c). Life sent Mr. Rowe a notice that his premium would be due in nine days. On February 29, Mr. Rowe

paid a one-month inst allment towards the annual premium. This payment, while tardy, ensured that

the policy would remain in effect until March 18, 1988, the next installment due date.

On March 9, 1988, nine days prior to the due date for the March installment, Texas Life again

sent a notice to Mr. Rowe informing him of the impending deadline for March. This time, however,

Mr. Rowe did not pay. Texas Life sent another premium due notice, but could not coax the monthly

installment from Mr. Rowe.

On May 19, 1988, Texas Life terminated the policy for nonpayment of premium. Although

some dispute exists, Texas Life asse rt s that it sent notices of this termination to Mr. Rowe, to the

bank, and to the agent who had handled the polic y. The bank, however, contends that it never

received the notice.

Mr. Ro we was killed in an automobile accident on February 25, 1991. First American, as

assignee of the deceased's policy, subsequently ma de a demand on Texas Life for payment of the

proceeds of the life insurance policy. Texas Life refused to pay those proceeds on the grounds that

the policy had terminated on May 19, 1988.

First American filed suit against Texas Life in Louisiana State Court seeking the $1,000,000

benefits package under the p o licy. Texas Life removed the case to federal court which, in turn,

granted Texas Life's motion for summary judgment. First American took this appeal.

II. DISCUSSION

Summary Judgment Standard

In reviewing a grant of summary judgment, this Court applies the same standard applied by

the district court. 1 A grant of summary judgment is appropriate where there is "no genuine issue as

to any material fact" and "the moving party is entitled to judgment as a matter of law." 2 Summary

judgment should be granted where the moving party presents evidence which negates any essential3 Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265,

274 (1986).

4 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d

202, 211 (1986).

5 La.R.S. 22:177 (West 1959) states in pertinent part:

§ 177. Written notice required before lapsing life policies.

No life insurer shall within one year after default in payment of any premium,

installment, loan or interest, declare forfeited or lapsed any policy issued or

renewed, and not issued upon the payment of monthly or weekly premiums or for

a term of one year or less, for non-payment when due of any premium, installment,

loan or interest, or any portion thereof required by the terms of the policy to be

paid, unless a written or printed notice stating:

(1) The amount of such premium, installment, loan or interest, or portion thereof

due on such policy; and

(2) The place where it shall be paid and the person to whom the same is payable,

shall have been duly addressed and mailed to the person whose life is insured or

the assignee of the policy of notice of the assignment has been given to the insurer,

at the last known post office address of such insured or assignee, postage prepaid

by the insurer or any person appointed by it to collect such payment, at least fifteen

and not more than forty-five days prior to the date when the same is payable.

No policy shall in any case be forfeited or declared forfeited or lapsed until the

expiration of thirty days after the mailing of such notice.

6 See Lemoine v. Security Indus. Ins. Co., 569 So.2d 1092, 1096 (La.App. 3 Cir.1990), writ

denied, 573 So.2d 1120 (1991). No real dispute exists as to whether the statute controls.

Although at first blush this case might appear to fall within the statute's exception for policies

issued on a payment of monthly premiums, the policy at issue is for a term that exceeds one year

and based on annual premiums (although the insured may choose to pay on a monthly basis). See

Lemoine, 569 So.2d at 1095. element of the opposing party's claim or where any essential element is without factual support. 3 In

the context of the present case, First American had the burden of demonstrating genuine dispute as

to a material fact, i.e., a real issue for trial. 4

La.R.S. 22:177 Notice Requirements

This diversity case turns on our interpretation of La.R.S. 22:177, the controlling Louisiana

statute. 5 Section 22:177 sets forth a framework which binds insurance companies t o give written

notice before a life insurance policy may lapse or be forfeited. As a forfeiture statute, we construe

it strictly. 67 Lemoine, 569 So.2d at 1096.

Section 22:177 requires that notice of a premium payment deadline be given at least 15 days

prior to the date the premium is due. This section sets an outer boundary as well: an insurance

company may not give more than 45 days notice to an insured that the policy is coming due. The

purpose of the notice requirement is "to protect insureds against loss of their policies through mere

neglect to pay premiums and to give them a fair chance to meet the payments when due." 7

No factual basis exists upon which Texas Life can assert t hat it gave timely notice. Both

parties acknowledge that, if a notice wa s sent , it was sent only nine days—as opposed to the

statutorily pres cribed 15—before the premium was due. The question posed, then, is what

repercussions flow from that failure to comply wit h t he st at ute. In particular, our inquiry is how

Texas Life's failure to give t imely notice of a premium payment deadline affects its abilit y to terminate

the policy when the insured doesn't pay his installments.

The One-Year Extension

La.R.S. 22:177 provides: "No life insurer shall within one year after default in payment of

any premium

... declare forfeited or lapsed any policy ..." unless the insurer complies with the statute's

no t ice requirements. This provision means that, if no notice is given (or if the notice given is

defective) the policy automatically extends for one year. This provision is plain on its face and not

subject to dispute in the instant ma t t er: Texas Life's failure to give 15 days notice resulted in a

one-year extension of the policy.

First American, however, raises the subsidiary issue of whether the Texas Life's failure to give

notice at the end of the one-year extension automatically extended the policy for another year. The

bank argues that the policy can be terminated only with written notice. It contends that Texas Life

never provided written notice and, therefore, the policy remained in force until Mr. Rowe's death.

This ingenious const ruct ion is without support either in the words or the purpose of the

statute. The statute's language gives no indication that a failure to give notice of termination after

that one year should result in an o ther year of extended coverage. Moreover, that proffered

interpretation would have dramatic implications: a simple mistake by an insurance company's mail8 569 So.2d at 1096. The court reached the same conclusion in Vining v. State Farm Ins. Co.,

409 So.2d 1306, 1313 (La.App. 2 Cir.), w rit denied, 412 So.2d 1098 (1982).

9 98 Misc.Rep. 456, 163 N.Y.S. 56 (Sup.Ct.), aff'd, 166 N.Y.S. 1091 (1917).

10 151 N.Y.S. 1084, 166 A.D. 625 (Sup.Ct.1915). room employee could result in a self-perpetuating life t ime policy. It is true that the insurance

company could terminate the policy after one year, but we are hesitant to impose such a drastic

penalty for failure to do so. Reason dictates that the policy automatically expire after the one-year

extension.

Although the Louisiana courts have not address ed this issue directly, the cases construing

section 22:177 implicit ly rely on a similar construction. For example, in the L emoine case, the court

stated that the effect of a failure to comply with the notice requirement is "to prohibit the insurer from

declaring a forfeiture or lapse in a policy for the one year period following default in payment of a

premium." 8 It estops the insurer from terminating, but only for the one year prescribed by statute.

First American relies on an old New York case, Davis v. Northwest Mutual Life Ins. Co. 9

, for

the proposition that the insurance policy should remain in effect until the company formally sends a

notice of termination. In the Davis case, the court held that, under a similar statute, the policy was

not terminated after a one-year extension. In Davis, however, the insured made a payment during

the course of that year. This is a crucial distinction.

Unlike Davis, the case of Liesny v. Metropolitan Life Ins. Co. 10

, cited by the Davis court, is

synonymous with the facts here at issue. In L iesny, the insured failed to make a payment during the

one-year extension and, consequently, the court held that the policy had terminated. We too refuse

to read the one-year extension in section 22:177 as self-perpetuating, absent a clear indication that

the legislature so intended.

The 30-Day Provision

Even if an insurance company gives proper and t imely notice of a premium deadline, section

22:177 creates for the insured a "safe zone" during which the policy cannot lapse or be forfeited. The

statute provides:11 La.R.S. 22:177 (emphasis added).

12 La.R.S. 1:9 (West 1987) states: "Unless it is otherwise clearly indicated by the context,

whenever the term "or' is used in the Revised Statutes, it is used in the disjunctive and does not No policy shall in any case be forfeited

... until the expiration of 30 days after the mailing of

such notice.

Texas Life argues that the date the notice is mailed triggers a 30-day time period in which payment

must be made. After those 30 days, the policy can be terminated. Hence, it argues, the fact that it

gave only nine days notice does not contravene the statute, provided that the insured had a total of

30 days in which to comply.

Texas Life has misconstrued the purpose of the 30-day rule. This provision does nothing to

cure the defect resulting from the company's failure to give 15 days notice. Instead, this provision

declares a dead zone of 30 days during which the policy cannot lapse or be forfeited after the mailing

of a timely premium notice. We emphasize that this 30-day rule requires proper notice as a predicate.

Failure to give at least 15 and not more than 45 days notice before the premium is due renders the

30-day provision inapplicable. Here, as stated above, Texas Life gave only nine days notice; hence,

the 30-day provision has no bearing on the issues presented by this appeal.

This reading allows a coherent construction of the statute as a whole. The threshold inquiry

is whether proper, t imely notice was given. The one-year extension, as detailed above, applies when

no notice has been sent or the notice that was sent was untime ly o r otherwise defective.

Alternatively, if proper notice was given, the 30-day rule applies, giving the insured a 30-day grace

period in which to secure another means of protection.

Who Gets The Notice?

The determinative clause in the statute as affects the bank's rights is, happily, the least

ambiguous: Section 22:177 requires the insurance company to send notice to "the person whose life

is insured or

t he assignee of the policy". 1 1 Not surprisingly, the bank would have us read "or" as

"and" while the insurance company believes that "or" is used here in the disjunctive.

Louisiana state law dictates that t he word "or" is to be read in the disjunctive, unless the

provision at issue indicates otherwise. 12 We find no such indication here and believe the statute tomean "and/or'."

13 Lester v. Aetna Life Ins. Co., 295 F.Supp. 1208 (W.D.La.1968), aff'd, 433 F.2d 884 (5th

Cir.1970), cert. denied, 402 U.S. 909, 91 S.Ct. 1382, 28 L.Ed.2d 650 (1971).

14 Some courts have determined that notice should go to whomever is responsible for the

payment of the premiums. See, e.g., Gleason v. Massachusetts Mutual Life Ins. Co., 43 F.Supp.

824, 827 (N.D.Ohio 1942).

15 We do not, however, agree with the appellant's charge that the statute results in "an absurd

consequence". The legislature may well have feared placing an onerous burden on insurance

companies and found this provision to be an attractive compromise.

16 See Ohio Code § 9371; Gleason, 43 F.Supp. at 828.

17 We are, of course, bound by the rules of construction passed by the legislature, notably

including: "When the wording of a Section is clear and free from ambiguity, the letter of it shall

not be disregarded under the pretext of pursuing its spirit." La.R.S. 1:4 (West 1987). be plain on its face. Hence, we conclude that the statute means what it says: The insurance company

may notify the insured or the assignee, but need not notify both.

First American argues that this construction is untenable for it would allow a policy to lapse

through mere neglect, in direct cont ravent ion of the purpose of section 22:177. It is true that the

purpose of the statute is to protect the insured against losing his insurance coverage through mere

neglect to pay his premiums and, further, to give the insured a fair chance to meet the payments when

due. 13 This purpose, however, is designed to protect the insured, not the assignee. Here, no

allegation exists that Mr. Rowe did not receive notice or that his inadvertence or neglect caused the

policy to lapse. 14

First American nonetheless argues that it is unfair to charge an assignee with the knowledge

that a policy is in arrears without requiring the insurance company to provide that information. While

we recognize the bank's frustration, we cannot escape the stri ctures of the statute. 1 5 Other

legislatures have taken notice of this problem and altered their laws accordingly. 16 If the people of

Louisiana determine that the statute should read "and" instead of "or", th e mechanisms exist so to

modify it

. 17

In sum, Texas Life met its obligations under the statute by notifying Mr. Rowe only.

First American's Contract Claims18 In addition, First American contends that Texas Life became contractually obligated to notify

the bank as a result of the questionnaire it filled out at the bank's request. Texas Life answered in

the affirmative when asked, "In the event of premium default: ... [w]ill you notify assignee in

ample time for assignee to protect its collateral?"

Under a theory of promissory estoppel, Texas Life most likely was required to give

notice of termination to the bank. Although Louisiana courts have not directly addressed

this question, other states have relied on promissory estoppel in this context. See

Northw estern Bank v. Employer's Life Ins., 281 N.W.2d 164, 165-66 (Minn.1979);

Missouri Cattle Loan Co. v. Great Southern Life Ins. Co., 330 Mo. 988, 1009, 52 S.W.2d

1, 10 (Mo.1932). In any event, we need not engage in an independent analysis for Texas

Life's obligation as a result of the questionnaire, if it exists, is no greater than that imposed

by the terms of the policy itself.

19 Because we hold that, under any reading, the policy had terminated prior to Mr. Rowe's

death, we need not resolve specifically whether the policy or the questionnaire created contractual

obligations. The framework we have elucidated, however, follows the principle that a third-party The bank contends that, under the terms of the insurance policy, Texas Life was required to

notify both Mr. Rowe and First American. The contract between Mr. Rowe and Texas Life states

that after a grace period of 61 days following a failure to meet the premium deadline, the insurance

company "will notify [Mr. Rowe] and any assignee recorded on [Texas Life's] records in writing." 18

First American charges that Texas Life failed to send a notice of the termination in a manner that

satisfied the policy.

We need not resolve this contention for, under the facts of this case, the question is irrelevant.

Even if we proceed with the bank's assertion that no notice was sent, we conclude that Texas Life

had long since ceased to be obligated under the policy by the time that Mr. Rowe died.

Although the Louisiana

court s have not resolved this question, we feel that the statutory

parameters set forth in 22:177, while admittedly not co nt rolling in the contract context, are

appropriate guideposts. Accordingly, we conclude that the proper remedy for breach of the notice

provisions of th is policy is to extend coverage by, at most, one year. We cannot, from our

perspective, arrive at a better solution than that reached by a legislature weighing the same issues.

Under this reading, of course, Texas Life still prevails because Mr. Rowe died long after that one year

expired.

Texas Life, if it was contractually obligated at all, was bound to give First American notice

of the termination sufficient to allow the bank to protect its collateral. 19 Mr. Rowe died three yearsbeneficiary's rights under a contract cannot exceed that of the party to the agreement. See Avatar

Exploration, Inc. v. Chevron U.S.A., Inc., 933 F.2d 314, 318 (5th Cir.1991). after the premium default. The one-year extension that we suggest above gave First American plenty

of time to protect its interests.

We have considered the appellant's various arguments, whether discussed here or not. For

the reasons indicated, the district court judgment granting the defendant's summary judgment motion

is AFFIRMED.