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First Nat'l Bank v. Mut. Tr. Life Ins. Co.





Appeal from the Circuit Court of Macon County; the Hon. John L. Davis, Judge, presiding.


On September 24, 1985, plaintiff, First National Bank of Decatur, brought suit in the circuit court of Macon County against defendant, Mutual Trust Life Insurance Company, seeking to recover as assignee of a policy of life insurance issued by defendant on the life of Angelo Drakos, who was then deceased. After a subsequent amendment, defendant moved to dismiss the amended complaint, and, after a hearing, the court dismissed the complaint in bar of action on January 16, 1986. Plaintiff's subsequent motion for reconsideration or, in the alternative, for leave to file a second amended complaint was denied on March 6, 1986. Plaintiff has appealed. We affirm.

• 1 On appeal, plaintiff maintains that the ruling of the trial court was in error because: (1) section 234(1) of the Illinois Insurance Code (Ill. Rev. Stat. 1983, ch. 73, par. 846(1)) prohibited a lapse or forfeiture of the policy unless certain notices were given, and the complaint alleged a failure to give those notices; and (2) the complaint raised other grounds for relief that had never been ruled upon by the trial court. The question has also arisen as to whether a policy can be forfeited or lapse without an affirmative declaration by the insurer. The only allegation that such a declaration had taken place was the statement in the complaint that defendant had informed plaintiff of its having forfeited the policy on September 16, 1983. As we will explain, any forfeiture of the policy on that date would have been premature.

Section 234 of the Illinois Insurance Code provides in part:

"(1) No life company doing business in this State shall declare any policy forfeited or lapsed within six months after default in payment of any premium installment or interest or any portion thereof, nor shall any such policy be forfeited or lapsed by reason of nonpayment when due of any premium, installment or interest, or any portion thereof, required by the terms of the policy to be paid, within six months from the default in payment of such premium, installment or interest, unless a written or printed notice * * * shall have been duly addressed and mailed with the required postage affixed, to the person whose life is insured, or the assignee of the policy, (if notice of assignment has been given to the company) at his last known post office address, at least fifteen days and not more than forty-five days prior to the day when the same is due and payable, before the beginning of the period of grace * * *." (Emphasis added.) Ill. Rev. Stat. 1983, ch. 73, par. 846(1).

Section 234(1) is stated in terms of prohibiting either a declaration of forfeiture or lapse or of a forfeiture or lapse taking place (apparently without any declaration) within a six-month period after default unless the required notice was given to the insured and, here, the plaintiff as assignee of the insured. Thus the section clearly contemplates that a forfeiture or lapse can be declared or can occur merely by lapse of time without affirmative act by the insurer. No case has been called to our attention which requires an affirmative act by the insurer to cause a policy to lapse for nonpayment of premium where, as here, the policy does not require such an act.

The complaint alleged that no section 234(1) notice had been given to plaintiff. As we have stated, the complaint also alleged that defendant had informed plaintiff that the policy had been declared forfeited on September 16, 1983, which was less than six months from May 1, 1983, the first day upon which the complaint indicated that a failure to pay a due premium had occurred. Accordingly, any such forfeiture or lapse was of no force or effect. The giving of any such declaration of forfeiture would also appear to have been a violation of section 234(1). However, we are unaware of any rule that the making of any such improper declaration would prevent the policy from subsequently becoming lapsed, at least after the expiration of the 6-month period of section 234(1) and the 31-day grace period of the policy. A sanction of prohibiting a policy from ever lapsing for nonpayment of a premium because of a premature declaration of forfeiture would be extraordinarily severe. Such a sanction would be particularly extraordinary here where there is no allegation of detrimental reliance on any such premature declaration of forfeiture.

Notably, section 234(1) requires a notice before the premium becomes due. It does not require any notice that a premium has not been paid. Once the 15- to 45-day period prior to the due date has passed, compliance with the notice requirements in regard to that premium can never be made. The basic dispute is whether the timely giving of notice is required only, as section 234(1) would seem to require, if forfeiture or lapse is claimed to have occurred within the six-month period or, at most, that period plus a time measured by the grace period of the policy. We express no opinion as to whether the six-month period begins to run on the due date or at the expiration of the grace period. However, plaintiff maintains that section 234(1) is, at best, ambiguous and should be construed against the insurer. Plaintiff also asserts that language in the opinions in Illinois decisions indicates that the notice requirement is not limited to lapses and forfeitures occurring within the six-month period.

In support of its contention that section 234(1) is applicable to forfeitures or lapses occurring at any time, plaintiff cites Baxter v. Metropolitan Life Insurance Co. (1925), 318 Ill. 369, 149 N.E. 243, DC Electronics, Inc. v. Employers Modern Life Co. (1980), 90 Ill. App.3d 342, 413 N.E.2d 23, and Stevenson v. Prudential Insurance Co. (1941), 308 Ill. App. 401, 32 N.E.2d 175. At oral argument, it also called our attention to a recent decision of this court in Bellmer v. Charter Security Life Insurance Co. (1986), 140 Ill. App.3d 752, 488 N.E.2d 1338. The case of Baxter did not concern a requirement that the insured give notice of the due date or premiums. There, the requirement that premiums be paid within the grace period after the due date as provided in the policy was held to have been waived by the conduct of the insurer's agent in previously accepting tardy payments.

In DC Electronics, the appellate court held that a summary judgment in favor of the beneficiary of a life-insurance policy was required under the following circumstances. The policy had an expiration date of June 1, 1978, with an option provision whereby it could be renewed for an additional five-year period upon the payment of a premium on or before the termination date. On April 5, 1978, the insurer sent the insured a letter describing his right to renew, but the letter did not conform fully with section 234(1). The insured died on November 4, 1978, without having paid the June 1, 1978, renewal premium. Then, on November 13, 1978, the owner of the policy tendered the June 1, 1978, premium. The appellate court concluded that section 234(1) was applicable to the requirement for payment of the June 1, 1978, renewal premium and that absent compliance, the owner had an additional period of six months to cure the default. The DC Electronics decision did not make clear whether, absent compliance with section 234(1), the grace period would be 6 months or the 31-day grace period of the policy plus 6 months. In any event, the opinion made clear that the court ruled as it did because the six-month period had not expired when the premium was tendered. The decision in DC Electronics is entirely consistent with the ruling of the trial court here.

In Stevenson, the insured died on September 21, 1938. The June 16, 1938, premium had not been paid in full. On August 30, 1938, the insurer sent a notice to the insured referring to the premium due September 16, 1938, and stating that if it was not paid within the 31-day grace period of the policy, the policy would be forfeited. This notice had been given pursuant to section 234 of the Illinois Insurance Code. The Stevenson court held that by giving this notice and threatening a forfeiture in October 1938 for nonpayment of the September premium, the insurer waived a forfeiture for nonpayment of the June premium. The appellate court then stated:

"Moreover, we are further of opinion that under the provisions of the statute above quoted, the policy could not be declared forfeited by the company unless and until the notice required by the statute was given, and the insured having died before the time specified in the notice had expired, the policy was in full force and effect." Stevenson v. Prudential Insurance Co. (1941), 308 Ill. App. 401, 410, 32 N.E.2d 175, 179.

The foregoing language of the Stevenson court is confusing. The insurer attempted to avoid the policy on the basis of the failure to pay the June premium, but the notice in question concerned the September premium. The opinion is silent as to whether a similar notice was sent prior to the due date of the June premium. The first portion of the quoted language would seem to refer to the requirement that a notice should have been given prior to the due date of the June premium, but the latter portion seems to indicate that forfeiture could not be obtained for failure to pay the September premium because the grace period of the policy had not expired. In any event, the language has little applicability to the question of whether the statutory requirement for notice applies to forfeitures or lapses for nonpayment more than six months after the expiration of the grace period of a policy. In Stevenson, the period between the June default and the insured's death was much less than six months.

In Bellmer, the insured failed to pay a premium due in October 1978 on time but tendered a payment on December 31, 1978. The tender was refused by the insurer because it was not paid within the 31-day grace period provided by the policy. The insured died on July 14, 1979, and the insurer refused to pay under the policy, contending that it had lapsed because of the failure to pay the October 1978 premium. Apparently, the insurer had given notice to the insured in the form required by section 234(1) in regard to the October premium, but had not given such notice to the owner. This court held that the policy had not lapsed because section 234(1) required notice to the owner as well as the insured. Notably, as in DC Electronics, a premium had been tendered within six months of the due date of the unpaid premium. Thus, that court did not pass upon the controlling question presented here as to whether, when more than the grace period of the policy and the six-month period of section 234(1) have passed without payment of a premium due, the policy may be treated as forfeited or lapsed even though no notice in conformity with section 234(1) was given.

We recognize the abhorrence which the law holds for forfeitures and its policy to construe ambiguities in insurance contracts in favor of insureds, beneficiaries, and assignees. However, we can give no logical interpretation to section 234(1) other than that its prohibition against forfeitures and lapses refers only to those occurring within six months of the default in payment of premium. That is what it clearly states. Nor can we interpret section 234(1) to require that a declaration of lapse or forfeiture be made. It indicates an assumption to the contrary. Several States have statutory ...

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