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First National Bank of Pennsylvania v. Lincoln National Life Insurance Co.

filed: July 28, 1987.

THE FIRST NATIONAL BANK OF PENNSYLVANIA, TRUSTEE
v.
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, APPELLANT



On Appeal from the United States District Court for the Western District of Pennsylvania (Erie), D.C. Civil No. 86-00019 E.

Author: Sloviter

Before: SLOVITER and STAPLETON, Circuit Judges, and SHAPIRO, District Judge.*fn*

Opinion OF THE COURT

SLOVITER, Circuit Judge.

The district court granted summary judgment for the beneficiary of a life insurance policy notwithstanding the contention of the insurer that the policy had lapsed for nonpayment of premium. The propriety of summary judgment is at issue.

I.

Plaintiff First National Bank of Pennsylvania, the beneficiary of a $100,000 life insurance policy issued to Sidney L. Sherman by defendant, The Lincoln National Life Insurance Company, submitted a claim to recover the net proceeds due under the policy following Sherman's death on March 11, 1985. Lincoln refused payment, claiming that coverage under the policy had lapsed due to Sherman's failure to pay his premiums. First National filed suit against Lincoln in the United States District Court for the Western District of Pennsylvania based on diversity of citizenship. After discovery, the parties filed cross-motions for summary judgment.

In support of its motion, Lincoln relied on the policy, its answers to interrogatories, and the affidavits of Himes M. Silin, the Lincoln sales agent, who handled Sherman's application for the policy, and Donald Schlagenhauf, Lincoln Vice-President familiar with its records and record keeping procedures. The undisputed facts are that at the time of Sherman's application for life insurance, he paid his agent, Silin, a "binder premium" equivalent to a monthly premium payment. The effect of paying the premium when submitting the application was that the policy would be effective as of the date the policy was issued, if it was approved. App. at 215. Otherwise, coverage would not have been effected until delivery, following payment of premium due. Id.

It is common practice to say the binder premium for the lowest premium period permissible and, after approval of the policy, to change the period of premium payment to that desired by the insured. App. at 215-16. Because Sherman paid the binder premium for a month, the policy as written provides for monthly premium installments. App. at 177. Silin's affidavit states that, "Although I do not recall our specific conversation regarding the matter, I do know from the manner and amount by which he made payment of an additional premium at the time of delivery of the policy that Mr. Sherman wanted to pay the policy premium on a semi-annual basis thereafter." App. at 217. Prior to the date when Sherman's next "monthly" premium would have been due, Sherman met with Silin, and gave him a check for $2,553.59, which was the difference between a semi-annual premium and the monthly premium paid. App. at 216. According to Schlagenhauf's affidavit, Lincoln's records were then changed to reflect that Sherman's mode of premium payment was a semi-annual premium. App. at 168.

From August 6, 1975 to August 20, 1981, Sherman was billed semi-annually and paid semi-annually. The semi-annual premium paid by Sherman was $3,082.44, which was lower than if he had paid on a monthly basis.*fn1 Sherman failed to pay the semi-annual premium due on January 27, 1982. Under the policy's "Automatic Premium Loan" (APL) provision, if a premium was not paid during the 31-day grace period, the premium was automatically paid and charged as a loan with interest against the cash value of the policy. App. at 169. Sherman's premiums were paid in this manner for 3 1/2 years from January 27, 1982 until July 27, 1984.

In early September 1984, Lincoln mailed Sherman on its form letter a written notice of a matter "of great importance," advising him that the payment due July 27, 1984 had not been received, reminding him that the APL provisions of his policy could only operate if there were sufficient cash value to his policy, and stating that his then current loan balance on his policy was $19,372.96 at 6 % interest. App. at 170-71, 203. The notice "strongly urge[d]" him to remit the amount due, Sherman never responded to this notice.

When Lincoln sent Sherman the notice of premium due January 27, 1985, there was insufficient cash value remaining in the policy to cover the entire semi-annual premium due, which was $3,082.44. The APL provision provides that premiums would be paid by the automatic loan until the cash value of the policy could no longer support the entire premium payment. App. at 181. The 31-day grace period expired on February 27, 1985, and Lincoln notified Sherman on March 7, 1985 by mail that his policy had expired, but that an application for reinstatement could be made. App. at 207-08. Lincoln mailed a second letter to Sherman on March 28, 1985 again informing him that the policy had expired and that it might be possible to reinstate the policy. App. at 209-10. No response was received, Sherman having died on March 11, 1985. Pursuant to the non-forfeiture provision of the policy, the net cash value of the policy remaining after the grace period, $596.90, was used to purchase a single premium fully paid up life insurance policy of $975.00. App. at 174, 181.

It is First National's position that Lincoln should have applied the remaining cash value of the policy, $596.90, to cover one month's premium, which was $528.85. It argues that this would have extended coverage until February 27, 1985, and that because Sherman's death occurred within the 31-day grace period thereafter, the face value of the policy should have been paid.

In granting summary judgment for First National in the amount of the $78,084.15, which was the $100,000 face value less the outstanding loans against the policy, the district court accepted First National's position. App. at 243. The district court relied upon the provision in the policy that the premium is to be paid monthly, and gave no weight to Lincoln's undisputed documentary and affidavit evidence that ...


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