Life Insurance Co. of the Southwest v. Overstreet

POPE, Justice.

Plaintiff, Jacquei Mae Overstreet, sued Life Insurance Company of the Southwest to recover $100,000 as the beneficiary of a life insurance policy on the life of her husband, Maxie Overstreet. The trial court and the court of civil appeals have held that the policy was in force at the time of Over-*781street’s death. 580 S.W.2d 929. The insurer appeals and urges that the policy had lapsed because Overstreet had failed to pay the annual premium either on the due date or within a thirty-one-day grace period. We hold that the policy had lapsed. We accordingly reverse the judgments of the courts below and render judgment that plaintiff take nothing.

Maxie Overstreet, the insured, died on April 24, 1974, at which time he had not paid the 1974 annual premium on the policy. Life Insurance Company says that by the date of death, the policy had lapsed because the premium had fallen due on March 15, 1974, the thirty-one-day grace period had expired on April 15, and the insured’s death on April 24 had occurred nine days after the grace period’s termination. Jacquei Mae Overstreet says, and the courts below have held, that the premium payment date was April 18 rather than March 15, that nonpayment of the annual premium on April 18 did not end the policy until thirty-one more days, and that Overstreet’s death on April 24 was well within the grace period.

The trial court and the majority of the court of civil appeals have held that Maxie Overstreet made his first annual premium payment on April 18, 1972, and that each subsequent annual premium fell due on April 18. That date, which does not appear anywhere in the policy, was determined in this manner:

In February, 1972, Overstreet submitted his application to Life Insurance Company of the Southwest to convert a five-year term life policy to a life insurance policy with endowment at age ninety. The earlier policy provided that it would lapse on March 15,1972. To effect the conversion of the term policy to the policy at issue, Over-street, on March 6, 1972, delivered his premium check to insurer. It was returned because of insufficient funds. Overstreet then wrote a second check which was also returned for insufficient funds. His third check cleared the bank on April 18, 1972.

The insurer treated March 15 as the date annual premiums were due and sent notices to Overstreet on that basis. On March 6, 1973, insurer sent a notice to Overstreet advising him that his annual premium was due on March 15. After he failed to make his payment on that date, the insurer, on April 5, sent him another notice advising that the grace period for late payment would expire April 15. Overstreet still made no payment. The insurer, on April 15, sent him a further notice advising that the premium was past due and that the policy had been terminated. The notice offered, however, to reinstate the policy if Overstreet paid the premium within ten days. On April 25, the last day of the ten-day period, Overstreet paid the premium, which was for the 1973 insurance year. That premium payment was the last that Overstreet ever made. He did not pay his 1974 premium, and he died on April 24 of that year.

The holdings below and the contentions of the beneficiary are that the provisions of Overstreet’s application for the policy were a part of the policy and that the policy did not become effective and was not in force until it was issued and delivered upon the payment of the full first premium. Because that payment was not made until April 18, 1972, the argument is that each annual premium thereafter became due on that date. The application contained this paragraph:

3. Any insurance approved by the Company for issuance as a result of this application, unless effective prior to policy delivery in the manner specified in the receipt attached hereto, shall be considered in force only when a policy shall have been issued by the Company and said policy manually received and accepted by the Applicant and the full first premium paid thereon, in the case of life insurance, during the good health of the Proposed Insureds . .

The policy, however, contains other relevant provisions. We shall now examine them. The first thing that a reader sees upon reading the policy is a plastic window at the top of the first page. Words that were typed and printed at the top of the second page appear through the window. *782The information thus disclosed is the name of the insured, the policy number, the name of the owner of the policy, the amount of the insurance, which was $100,000, the insurance plan, and what the policy calls the “Effective Date.” Opposite the “Effective Date” are the words, “March 15, 1972.”

The next relevant part of the policy is found in the third paragraph on the first page and below the window. It says that the first premium was payable on the “Effective Date,” which, as the policy had already stated, was March 15, 1972. The same paragraph states that subsequent premiums would be payable in periodic installments “thereafter.” The word, “thereafter,” refers to the Effective Date, or March 15, 1972. This third paragraph provides:

The consideration for this Policy is the application therefor and the payment of premiums as herein provided. The first premium in the amount specified in the Insurance Schedule is payable on the Effective Date and subsequent premiums are payable in periodic instalments thereafter until premiums have been paid for the period specified in the Insurance Schedule or until the prior death of the Insured. [Emphasis added.]

On the third page, there is a paragraph which requires the insured to pay his premiums annually in advance. A provision of that paragraph says that the premiums “shall fall due on the same day of the month on which the first premium is due,” and that the failure to pay the premium when due or within the grace period will end the policy except as it otherwise provides. All premiums were thus due on the day on which the first premium was due. The first premium, as we have seen from the paragraph on the first page, was due on the “Effective Date”; and that date, as the policy stated at the outset, was March 15. This is the paragraph concerning premium payments:

PREMIUM PAYMENTS. Any premium hereon is payable in advance at the Home Office of the Company, or to an authorized agent of the Company, in exchange for the Company’s official receipt signed by the President or Secretary and countersigned by the agent. Premiums may be paid in periodic instalments at the instalment rates specified in the Premium Schedule but premiums may be changed to a monthly basis only if the amount of the monthly premium is stated in the Premium Schedule. The payment, of an annual, semi-annual, quarter-annual or monthly premium will maintain this Policy in force for one year, six months, three months or one month, respectively. Such periods will be deemed to expire and the next premium shall fall due on the same day of the month on which the first premium is due. Failure to pay any premium when due or within the period of grace provided shall cause this Policy immediately to become void except as otherwise provided herein.

This court by several earlier decisions has adopted the rule of the majority of jurisdictions in this country. That rule is that a definite statement in the policy of the date on which annual premiums will be due is the due date. Such a statement of the due date controls even over a provision stating that a policy will not be in force until it is initially delivered and the first premium is paid during the good health of the insured. Once the policy comes in force, all of the terms of the policy become operative including its provision about the “Effective Date.” Southland Life Ins. Co. v. Vela, 147 Tex. 478, 217 S.W.2d 660 (1949); Great Southern Life Ins. Co. v. Peddy, 139 Tex. 245, 162 S.W.2d 652 (1942); Kurth v. National Life & Accident Ins. Co., Inc., 79 S.W.2d 338 (Tex.Civ.App.-San Antonio 1935, writ ref’d); 1 Appleman, Insurance Law and Practice § 105 (1965). This court’s decision in Peddy, supra, reversed the judgment of the court of civil appeals and rejected the reasoning that there was an inconsistency and ambiguity in a policy which provided that although it would be in force upon its delivery, the premiums would be due at an earlier stated date. Great Southern Life Ins. Co. v. Peddy, 151 S.W.2d 346, 351-52 (Tex.Civ.App.-Beaumont 1941), rev’d, 139 Tex. 245, 162 S.W.2d 652 (1942); 7 Williston on Contracts § 905 (3d ed. 1963); see Annot., 44 A.L.R.2d 472 (1952).

*783The policy before us expressly fixes the Effective Date at March 15, 1972. The policy provides that “The first premium . is payable on the Effective Date,” that is, on March 15, 1972; that “subsequent premiums are payable in periodic in-stalments thereafter”; and that “The payment of an annual premium will maintain this Policy in force for one year . . . .” This one-year period, according to the policy, “will be deemed to expire and the next premium shall fall due on the same day of the month on which the first premium is due.” In this case, as was also the case in Vela, Peddy, and Kurth, supra, the premium was not paid on the day it was “due.” Although the first premium was not in fact paid on the Effective Date, March 15, it was clearly “due” on that date; it was “payable” then. In Peddy, this court wrote:

The great weight of current decisions sustains the rule that when a policy specifically provides for the payment of premiums, and expressly specifies the date from which the premium period is to be computed, and makes that date the day on which recurring premiums are due and payable, such date will control, irrespective of the date on which the policy is delivered.

162 S.W.2d at 653.

By its decision in Vela, supra, this court also settled the rule that the contract is enforceable as written notwithstanding the fact that the first premium is paid late, that is, after it is “due” and “payable.” This is the rule even though the insured obtains less than a full year’s coverage for the first year’s premium. The court in Vela wrote:

No public policy is violated by a contract between an insurance company and an insured whereby premiums are to be paid from the effective date of the policy rather than the date of its delivery, even though the effect thereof is to charge a premium for a period when the insured has no protection.

217 S.W.2d at 663.

Stating a definite “Effective Date,” as this policy does, is important for reasons expressed in Vela, Peddy, and Kurth, supra. A definite time is essential to such determinations as the insured’s age at the “Effective Date” and the resulting premium rate, cash surrender value, loan value, paid-up insurance benefits, incontestible period, Acme Life Ins. Co. v. White, 99 S.W.2d 1059 (Tex.Civ.App.-Eastland 1930, writ ref’d), and grace period.

The premium was due and payable on the effective date. It was paid neither by that date nor within the grace period that followed.

The judgments of the courts below are reversed, and judgment is here rendered that plaintiff take nothing.

Dissenting Opinion by BARROW, J., in which McGEE, CAMPBELL and SPEARS, JJ., join.