Policyholder Prevails In Lapse Action: Despite Admitted Non-Payment of Premium, Court Deemed Grace Notice “Legally Insufficient”

A recent federal court decision may impact insurers confronting policy lapses arising under New York law.

On October 2, 2018, Judge Allyne Ross of the Eastern District of New York granted summary judgment in favor of a policyholder in a dispute concerning the 2012 lapse of a life insurance policy. Shimon Halberstam, as Trustee of the Zupnick Family Trust 2008 B v. Allianz Life Ins. Co. of N. America, Case No. 1:16-CV-6854 (ARR) (ST), 2018 WL 4762253 (E.D.N.Y. Oct. 2, 2018).

Background

The policy was a Flexible Premium Adjustable Life Insurance Policy with a face value of $8 million. The policy contained a 61-day grace period provision: “[A]t least 30 days prior to Termination, we will send written notification . . . advising that the Grace Period has begun. A premium payment sufficient to keep this policy in force for three months is required and must be received prior to the last day of the Grace Period or this policy will Lapse.”

On July 7, 2012, the policy entered a grace period. On August 7, 2012, the insurer sent a grace notice to the plaintiff advising that the policy would lapse unless a premium payment of $116,511.84 was made by September 7, 2012. The amount requested in the grace notice represented “at least three full months [of premiums] in addition to the month for which a balance was owing.” The plaintiff did not make payment by September 7, 2012, and the insurer promptly sent the plaintiff a notice advising that the policy had lapsed.

Litigation

Four years later, the plaintiff sued the insurer, seeking a declaration that the policy was in full force and effect because the grace notice was legally deficient. The plaintiff claimed that the amount requested in the grace notice exceeded three months of anticipated expenses and was thus improper. The parties did not dispute the application of New York law.

The parties cross-moved for summary judgment. The insurer argued that the grace notice was compliant. It further argued that even if the grace notice was deemed non-compliant, the plaintiff’s failure to pay any premium since 2012 resulted in a lapse by default under N.Y. Ins. Law § 3211(a)(1).

Outcome

On October 2, 2018, the court granted summary judgment for the plaintiff. Although the court stated that “the policy’s language is not entirely clear” on whether the insurer may request more than three months’ worth of premium, “the statute is.” The court held that the grace notice did not comply with N.Y. Ins. Law § 3203(a)(1), which contemplates the grace period as a 61-day period in which to “pay sufficient premium to keep the policy in force for three months from the date the insufficiency was determined.” The court held that the grace notice was “legally insufficient” because it requested more than three months of premium. Treating the statutory language as prohibitive rather than permissive, the court held that Section 3203(a)(1) sets a maximum amount that an insurer may request in a grace notice.

Citing Section 3211(a)(1), the insurer argued that “[e]ven where the notice is incorrect and ineffectual, a policy will still lapse for nonpayment after a year as a matter of law.” The court disagreed, finding that the insurer demonstrated an “anticipatory repudiation” of the contract in its post-lapse conduct. For example, the court determined that the insurer’s representation that it would not apply premium received until the policy was reinstated absolved the plaintiff from making premium payments under Section 3211.

Looking Ahead

Policyholders might cite Halberstam in New York cases in which insurers have issued grace notices requesting more than three months of anticipated charges. Several defenses may be available to insurers in such cases.

It may be prudent to emphasize that Section 3203(a)(1) mandates certain policy provisions, including a grace period provision, but it does not dictate the content of grace notices. Section 3203(a)(1) therefore does not apply to the terms of the grace notice, including the amount that an insurer requests in the notice. The content of grace notices is squarely addressed in Section 3211(b)(2), which requires a notice to “state the amount of such payment” due but does not otherwise specify how an insurer may determine a grace notice amount. In addition, insurers sued in lapse disputes may look to Section 3211(d) as a time-bar when litigation is commenced more than two years after the date on which the subject policy lapsed. Along these lines, insurers may want to advance waiver/estoppel defenses based on, inter alia, the significant passage of time.