Insurance Policy is a Contract: No Paid Premiums, No Benefits

By William Peacock, Esq. on March 12, 2013 | Last updated on March 21, 2019

Natasha Dallas made multiple mistakes when filling out the auto-draft payment form for an American General life insurance policy for her father. Alas, the insurance company never received her initial premium. Her father passed away a couple of weeks later. Dallas, who is also an insurance agent for American General, tried to retroactively make the premium payments. Her efforts were rebuffed and her claims denied.

Though we sympathize with her, Dallas' legal case is pretty clear-cut. Basic contract law requires consideration. Insurance policies are contracts. If consideration is never received, there is no contract. Case closed.

Of course, this is an appeals case. No appeals case can be that simple, right?

The policy documents state "[i]f a premium, other than the initial premium, has not been paid ... Your Policy will remain in force for ... 31 days."

The auto-pay or ABC agreement states, "no payment shall be deemed to have been made unless and until [insurer] receives actual payment in its Home Office. [This agreement] shall in no way alter or amend the provisions of the policy as to premium payment ... [N]o insurance ... will become effective unless [insurer] issues a policy from the application for this policy, the first premium is paid, and any other terms and conditions of the policy are met."

Language seems pretty clear, yes? The policy kicks in when the payment is received by the insurer.

Dallas insisted that conditions in that final sentence were conditions subsequent, meaning that their occurrence could cancel the policy upon notice. The court classified her argument as this: the policy is sold on credit and if payment is not made, it will then become cancelled.

Unfortunately, this creative argument has been tried before, to no avail.

Even if her argument hadn't been foreclosed, the court held that the language clearly indicates that payment is a condition precedent. That means the policy docs can be issued, but the insurance doesn't kick in -- and legal obligations do not accrue -- until payment has been made.

Or, using our original classification of the case, "anything in the nature of consideration is, in general, a condition precedent."

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