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Mailbox Rule, as Applied to Web Banking Transaction, Provided for the Timely Reinstatement of a Life Insurance Policy Prior to the Death of the Insured

U.S. Life Ins. Co. in the City of New York v. Wilson
No. 2544 (Md. Ct. Spec. App. 2011)
by By Colleen K. O’Brien, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

The principal issue in this case was whether a life insurance policy was in effect as of the date of death of the decedent. The Court of Special Appeals held that it was, and affirmed the judgment of the trial court. The disposition of this case mainly involved principles of contract law.

The insured took out a life insurance policy underwritten by U.S. Life in 1998. As in all life insurance policies, if the insured passed away while the policy was in force, then the insurer would pay the beneficiary the scheduled benefit. The policy had a grace period provision, allowing the policy to remain in force for 31 days after failure to pay the premium, unless the grace period was extended by written notice.

The insured maintained the policy until 2007, when he began obtaining quotes from other insurers for similar coverage. Around this time, he failed to pay the premium due on May 15, 2007. The third-party administrator of the policy, AMA Insurance Agency, Inc. (“AMAIA”), sent him a “reminder notice” stating that the premium must be received no later than sixty (60) days after the due date. Approximately a month later, AMAIA sent the insured a “lapse notice” stating that coverage lapsed after the 31-day grace period, and that to reinstate, he must complete an application for reinstatement and provide proof of insurability. Rather than completing the reinstatement form, on July 23, 2007, the insured paid the premium online through a web bank account. The check was sent by the bank on July 25, 2007 and received by the AMAIA on July 30, 2007. Tragically, the insured was killed in an accident on July 28, 2007. When AMAIA declined to pay on the policy, the insured’s wife filed a breach of contract suit.

In finding in favor of the insured’s surviving spouse, the Court ruled that the “reminder notice” served as sufficient “written notice” under the policy to extend the 31-day grace period of coverage to 60 days. Therefore, the grace period was extended to July 15, 2007, at which time it lapsed because the premium payment had not been made. At that point, coverage could only be reinstated under the policy’s reinstatement clause (not per the terms of the “lapse notice” letter). The reinstatement clause allowed reinstatement if the premium payment was made within 31 days after the end of the grace period, and mentioned no proof of insurability or requirement for other forms to be completed. The Court concluded that the requirements for reinstatement detailed in the “lapse notice” failed to unilaterally alter the unambiguous terms of the insurance policy, and that under the policy, the insured had until August 15, 2007 to merely pay the overdue premium to reinstate the policy, which he did.

The twist, however, was whether the insured perfected “payment” prior to his death. The Court rejected the insurer’s argument that “payment” meant negotiation of the check by the insurer, which would have been on July 30, 2007, which came after the insured’s death. The Court applied the “mailbox rule” from contract law to conclude that payment was made on July 25, 2007, when the insured’s bank remitted payment to AMAIA by sending it a check. The Court held that the Policy was reinstated effective July 25, 2007, three days before the insured died, and therefore, was in force when he died. Consequently, the trial court properly granted summary judgment in favor of the beneficiary.