Legg v. Fortis Ins. Co.

Citations: 978 So. 2d 776; 2007 WL 1866764Docket: 2060550

Court: Court of Civil Appeals of Alabama; June 29, 2007; Alabama; State Appellate Court

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Marcus Neal Legg appealed a summary judgment from the Madison Circuit Court regarding his claims against Fortis Insurance Company and John Alden Life Insurance Company for breach of contract and bad-faith refusal to pay an insurance claim. The Court of Civil Appeals of Alabama affirmed the lower court's decision. The undisputed facts indicated that Legg applied for short-term medical insurance coverage on June 24, 2003, and paid the initial premium of $161.96, intending to pay subsequent premiums of $121.96 monthly via personal checks. John Alden issued a medical certificate covering up to 185 days, with premium payments directed to Fortis.

Under Alabama law, disability insurance includes coverage for expenses due to sickness and mandates certain statutory provisions, including a grace period for late premium payments. Specifically, a monthly premium disability policy must provide at least a 10-day grace period during which the policy remains active. Legg received an "Optional Monthly Premium Rider" that reiterated the monthly billing structure and included a grace period clause, stating that if payments were not received by the end of this period, the insurance would lapse. The ruling emphasized that unlike life insurance policies, disability insurance policies are not required to allow the deduction of unpaid premiums from benefits during the grace period.

Legg made timely monthly premium payments to extend his insurance coverage until October 28, 2003, but failed to pay the premium due on October 29, 2003, initiating a 10-day grace period until November 8, 2003. During this grace period, he underwent hernia surgery on October 31, 2003. Legg claimed to have mailed a premium check on November 7, 2003, but it was not received until November 17, 2003, after the grace period ended, and he lacked proof of mailing. Fortis refunded both this payment and a subsequent payment made on December 15, 2003, indicating that coverage had lapsed on October 28, 2003, and no payments were made within the grace period. Consequently, Legg's claim for medical benefits related to the surgery was denied due to the lapsed certificate. 

Legg filed a two-count complaint against John Alden and Fortis, alleging breach of contract and bad faith for not paying his claim, seeking damages of $20,074.75 for each count. The case was initially removed to federal court but was remanded later. The defendants moved for summary judgment, supported by deposition excerpts, exhibits, and an affidavit from a Fortis employee. Legg opposed this with his own affidavit. The trial court granted summary judgment in favor of the defendants, affirming the denial of Legg’s claim. 

The legal principle established is that while a grace period allows late premium payments to be effective if made within that timeframe, the obligation to pay premiums remains, and failure to receive payment within the grace period results in policy lapse. The court concluded that Legg’s claim was properly denied as he did not meet the conditions for coverage during the grace period, validating the summary judgment decision.

New York law mandates a grace-period provision in health-insurance policies, allowing coverage to continue during this period. However, in Zaitschek v. Empire Blue Cross, the court ruled that an insurer is not obligated to pay claims arising during the grace period if the premium was unpaid. The court clarified that the grace period exists to enable policyholders to make late payments, not to provide additional coverage without payment. Coverage terminates retroactively to the last month of payment after the grace period expires without payment.

On appeal, Legg cited Blue Cross-Blue Shield of Alabama v. Colquitt, arguing that his claim should be honored despite nonpayment of the premium due on October 29, 2003, because it arose during the grace period. The court noted that Legg's citation of Colquitt, not previously raised in the trial court, does not constitute a new theory on appeal. In Colquitt, the insured's failure to pay a premium did not negate coverage because he had submitted payments through his former employer, and the court upheld a judgment in favor of the insured, rejecting the insurer’s argument regarding coverage lapses. The case illustrates the complexities of grace periods and policyholder obligations within health insurance contracts.

A new consideration from the insured to the underwriter is required to extend an insurance contract term, as established in *Inland Mutual Ins. Co. v. Hightower*. However, a ten-day grace period in the contract implies that if a loss occurs within this period, the unpaid premium is considered paid, thereby extending the policy. This principle is supported by cases like *Equitable Life Assur. Soc. of United States v. Roberts* and *Benefit Ass'n Ry. Employees v. Bray*, which assert that insurers must apply dividends or benefits to cover unpaid premiums to prevent policy forfeiture. The *Colquitt* case erroneously assumed that a loss during the grace period created a 'credit' for retroactive premium payment, a view later rejected in *Blue Cross-Blue Shield of Alabama v. Craig*, which clarified that no such credit existed at the time of delinquency. The Alabama Supreme Court has never endorsed *Colquitt*, and subsequent legislative actions do not imply support for its interpretation of grace periods. The court emphasized that it should not perpetuate a rule that is unjust, leading to the overruling of *Colquitt*. Consequently, based on the evidence presented, Legg's claim for breach of contract could not succeed legally.

Coverage for Legg was contingent upon timely payment of monthly premiums to John Alden Life Insurance Company. Legg failed to submit the premium due by October 29, 2003, by the due date or by the end of a 10-day grace period as specified in the policy. Consequently, since the premium was not received by the end of the grace period, the defendants rightfully considered the insurance certificate to have lapsed on that date, and any medical procedures performed on October 31, 2003, were deemed uncovered. The trial court’s summary judgment in favor of the defendants regarding Legg's breach-of-contract claim was upheld. Additionally, since Legg could not demonstrate entitlement to benefits under the policy, his bad-faith claim was also dismissed, as established by Alabama case law. The summary judgment favoring John Alden and Fortis on Legg's claims was affirmed, with the concurrence of judges Thompson, Bryan, Thomas, and Moore. The defendants were justified in returning Legg's late premium payments, adhering to Alabama law regarding lapsed insurance coverage.