Opinion ID: 166821
Heading Depth: 1
Heading Rank: 7

Heading: Alternative basis for reversal

Text: But even if we accepted the bankruptcy court’s finding that the August 15 draft was intended to pay the August 3 premium, we would reverse on an alternate basis. The Trustee alternatively posed two questions: (1) if the bankruptcy court was correct in finding that the August 15 draft was intended to pay the August 3 premium, did Sovereign waive its right to declare a default by failing to timely declare and notify Durability of a lapse in September and by drafting, receiving, and applying the September 15 payment after the policy had lapsed by its terms; and (2) should Sovereign be estopped from declaring a forfeiture because it had no right to unilaterally apply the September 15 PAC draft proceeds to the August premium instead of to the September premium without notice. Based on our application of Oklahoma law, we answer both questions affirmatively. Mr. Van Koughnet conceded that the September 15, 1986 draft “was paid” on the proper date, but that “thereafter it was reversed . . . to cover the premium that was not paid, which was August of ‘86.” Aplt. App. Vol. III at 1936. He -25- testified that on September 22, Sovereign applied the funds paid under the September 15 draft to the August 3 premium without notice to Durability. See id. at 1920, 1958. -26- As stated earlier in this order and judgment, under Oklahoma law, waiver may be shown by a course of action on the part of insured which treats the policy as a valid and subsisting policy which the insurer could have declared forfeited because of a breach or nonpayment. And likewise that the insurer may by a course of conduct be estopped from asserting cessation or lapse of a policy for nonprompt payment where there was a course of action . . . to accept payments out of time . . . . However, it is quite generally held that the provisions of an insurance policy requiring prompt payment of the premiums, and the provisions for lapse or cessation of the policy for nonprompt payment are valid, essential, and enforceable provisions of the contract, and that the insurer cannot be denied the benefits of such wholesome provisions of the policy unless the insurer has voluntarily waived the same, or is held to have waived the same by some act indicating an intention not to act or rely upon the lapse or cessation, or has proceeded or acted in a way or manner wholly inconsistent with the enforcement of the provisions for lapse or cessation for nonprompt payment. Brooks, 26 P.2d at 433 (citations omitted). In his briefing to the bankruptcy court, the Trustee cited Equitable Life Assurance Society of United States v. Davis, 58 P.2d 542 (Okla. 1935). There, the Oklahoma Supreme Court held that an [i]nsured [is] presumed to rely on the course of proceedings long established, and naturally would expect that his premium payments would be made as usual. Where any course of proceedings is followed in the payment of premiums, a divergence from a course of proceedings by the insurer, without notifying the insured, will estop the insurer from defending a suit on the policy for nonpayment of premiums. .... -27- [H]aving once undertaken to act in insured’s behalf in this regard, and all parties having led insured to rely upon a continuance of such a course of action, they cannot, without warning or notice, discontinue making such payments, to the detriment of insured or the beneficiary in this policy. Once having undertaken the task, they must perform it diligently, well, and without neglect, just as a man is not obliged to enter a position of peril to save another, but having done so he is not to be permitted to bring the person out of the perilous position, and then allow him to perish, through negligence. Id. at 545-46. For the purposes of our waiver/estoppel analysis, we will assume that the bankruptcy court’s finding that the returned August 15 payment was for the August 3 premium, and not for the September 3 premium, is not clearly erroneous. Applying this assumption, the August 3 premium payment was not made by September 3. Thus, as a matter of law, because the August payment was not made during the thirty-one day grace period, the insurance policy lapsed by its terms on September 3 unless Sovereign waived the lapse. We also assume that the bankruptcy court’s finding that Sovereign did not discover until September 18 that the August 15 draft was returned is not clearly erroneous. Assuming these facts, it is undisputed that, after it discovered on September 18 that the policy had lapsed on September 3, Sovereign did not notify Durability of the policy’s lapse or cancel the September 15 draft that Sovereign contends was intended to pay the September 3 premium. Instead, it informed Durability, through the notice of returned check, only that the August 15 draft had -28- not been paid, and that Durability should bring in a personal check to cover the returned PAC draft “as soon as possible.” Aplt. App. Vol. III at 1861. Then, on September 22, Sovereign retained the funds received from Durability’s bank for the September 15 PAC draft. The Trustee cited cases from other states holding that, when an insurer accepts a premium payment for a subsequent month, the insurer waives the right to claim that the policy lapsed for failure to timely make a prior premium payment. But the bankruptcy court rejected the Trustee’s waiver/estoppel argument. First, it distinguished the cases cited by the Trustee with its finding that Sovereign did not know on September 15, when it drafted the September premium, that the August draft had been returned. But the court ignored the undisputed fact that Sovereign did know on September 22, when it retained and allegedly applied the funds to the August 3 premium, that the policy had lapsed, and yet it still accepted, retained, and applied the funds. Thus we do not see the distinction the bankruptcy court made. In addition, the bankruptcy court found that Sovereign’s conduct of demanding on September 19 “that Durability bring the premiums on the Policy current on or before October 4, 1986” established that it did not intend to waive its right to premiums owed. Id. at 1806. But this statement misses the Trustee’s point that Sovereign waived its right to claim that the September premium was not -29- paid once it kept the money that it withdrew by PAC draft to pay the September premium without warning Durability that it was going to do something different with the PAC proceeds than it had done for the past two years. As stated above, the notice of returned check simply and specifically stated that the August 15 check had been returned and that Durability should return the notice with a personal check “as soon as possible.” Id. at 1861. It further provided that Durability had until October 4, 1986, to make the “total” payment due September 3, 1986 of $131.75. Id. And the parties’ PAC agreement provided that “[e]ach check, when paid, will constitute a receipt for the life insurance premium . . . with respect to which such check is drawn to the extent shown thereon . . . .” Id. at 1848 (emphasis added), and Sovereign contends that the September 15 draft was intended to pay for the September 3 premium. As the bankruptcy court noted, “[t]he modification of a contract requires the mutual assent of the parties” in Oklahoma. Id. at 1809 (citing Oklahoma law). Because the PAC agreement provided that each PAC draft would serve as a receipt for the premium for which it was drawn, it appears that, when Sovereign received and cashed the September 15 payment without further notifying Durability that it was going to do anything other than apply the payment to the September 3 premium as provided by the PAC agreement and the parties’ longstanding practice, Sovereign waived its right to later claim, or should be estopped from asserting, that the -30- September 3 premium had not been paid. See Equitable Life Assurance Soc’y, 58 P.2d at 545; see also Am. Ins. Union v. Mehrton, 300 P. 659, 663 (Okla. 1931) (holding that conduct of insurance company in receiving and keeping reinstatement application estopped it from “setting up the defense of nonpayment”). In sum, Sovereign could have declared the policy as lapsed on September 18, when it discovered that the August 15 check was returned, but it did not do so. Instead, it gave Durability an opportunity to make the August 3 payment “as soon as possible” with a personal check and waived its right to declare a default. See Ill. Bankers Life Assurance Co. v. Cutlip, 49 P.2d 1051, 1060 (Okla. 1935) (noting that an insurer waives provisions requiring prompt payment by treating the policy as valid when it could have declared forfeiture and also may be estopped from declaring lapse for nonprompt payment when it accepts payments out of time). Because Sovereign, with full knowledge that the lapse had occurred, chose to keep the proceeds of the September 15 PAC draft and never informed Durability of its plan to use those proceeds for something other than what the draft was intended (to pay the September 3 premium under Sovereign’s contention), under Oklahoma law Sovereign is estopped to claim that the September 3 premium was not paid. Thus, the policy did not lapse on October 4, but Sovereign still had the right to be paid the August 3 premium. Therefore, -31- when the bankruptcy petition was filed on October 6, 1986, the Trustee had the right to assume the bankruptcy contract by tendering any past-due premiums to Sovereign within the sixty-day period prescribed by statute. The judgment of the district court is REVERSED and REMANDED for further proceedings consistent with this order and judgment. Entered for the Court Michael W. McConnell