
    BLUE CROSS-BLUE SHIELD OF ALABAMA v. Timothy R. CAUDLE.
    Civ. 2672.
    Court of Civil Appeals of Alabama.
    Aug. 19, 1981.
    Rehearing Denied Sept. 16, 1981.
    
      Clark Carpenter of Dixon, Wooten, Boy-ett, Thornton, Carpenter & O’Brien, Tal-ladega, for appellant.
    James M. Sizemore, Jr., of Sizemore & Rea, Sylacauga, for appellee.
   WRIGHT, Presiding Judge.

Caudle sued Blue Cross-Blue Shield (Blue Cross) claiming benefits under a hospital policy. Judgment was for plaintiff. Blue Cross appeals. We reverse.

The dispositive issue is whether an applicant for an insurance policy with coverage conditioned upon payment of the initial premium within thirty days thereof is entitled to credit for the premium from benefits accruing from a claim arising during said thirty days.

Pertinent facts are: Caudle was an insured under a Blue Cross group policy until March 24, 1976. The group policy provided that upon termination of employment, an employee could apply for an individual policy within thirty days of termination. On March 20, 1976, Caudle applied for an individual policy. On or about April 5, Blue Cross sent Caudle a certificate of insurance effective March 25, 1976, with notice of premium due March 25. The notice provided that unless the premium was paid within thirty days from March 25, 1976, coverage would terminate as of the due date.

Caudle’s wife entered the hospital on March 25 and was discharged on March 27, with covered charges of $503.70, if the policy applied for was in force on the dates of her hospitalization. Caudle never paid the initial premium but contends that he was entitled to have®so much of the benefits accrued applied as necessary to the payment of the premium due.

The case was submitted to the trial judge upon pleadings, stipulations and exhibits. The judgment therefore is not subject to the presumption of the ore tenus rule. State v. Tri-State Pharmaceutical, 371 So.2d 910 (Ala.Civ.App.), cert. denied, 371 So.2d 914 (Ala.1979).

It is clear that the obligations of Blue Cross to Caudle as insurer, if any, do not arise from the group policy which was automatically terminated when Caudle left his employment on March 20, 1976. There remained from that policy only the right of Caudle to apply for an individual policy within thirty days from its termination and pay the initial premium as required by Blue Cross. If there is coverage it must be from the new individual policy.

The trial court and appellee rely on the case of Blue Cross-Blue Shield of Alabama v. Colquitt, 42 Ala.App. 471, 168 So.2d 251, cert. denied, 277 Ala. 696, 168 So.2d 256 (1964). That case held that in order to prevent forfeiture of a policy for non-payment of premiums, if a loss occurs within the grace period, which results in an obligation for payment of benefits under the policy in a sum at least equal to the unpaid premium then due, such benefits may be applied to payment of the premium and the policy continued in force.

This court in the case of Blue Cross-Blue Shield of Alabama v. Craig, 46 Ala.App. 352, 242 So.2d 398 (1970), held that there was specific language in the policy which prohibited the application of the rule espoused by Colquitt and that such provision was permissible as a part of the contract of insurance. The language of the policy approved in Craig is contained in the policy in this case. It is as follows:

V.3. No benefits shall be provided hereunder with respect to:
3. Hospital services rendered or received during the grace period provided by V1.3 if actual payment of fees then due is not received by the corporation within such grace. Receipt by a member of Hospital Services during the grace period shall not constitute payment of fees.

Section V1.3, as pertinent, states:

A grace period of thirty (30) days shall be allowed within which the subscriber may make payment ... of any fees except the initial fee. . . .

It is to be seen that if the provisions of the policy as quoted apply to the facts of this case, Craig would apply and there would be no coverage since there was no payment of premium.

However, we conclude that the thirty-day period given to Caudle for payment of premium was not a grace period as referred to in the policy. A “grace period” in insurance policies such as this one is required by statute in this state. §§ 27-19-3, -6, Code (1975). It is therein defined as follows:

A. Grace Period: A grace period of . . . (insert a number not less than “7” for weekly premium policies, and “10” for monthly premium policies and “31” for all other policies) days will be granted for the payment of each premium falling due after the first premium, during which grace period the policy shall continue in force. (Emphasis ours.)

This statutory definition clearly indicates that a first premium is not subject to nor a part of the “grace period.”

Therefore, neither Colquitt nor Craig controls in this case. The rules of contract apply. There is involved here the basic precept of the formation of an insurance contract. That is the payment of a premium and the assumption of a risk. The payment of the required premium is essential to formation of the contract. Whether the payment of the first premium is a condition precedent to the insurer’s obligation depends upon the language of the contract. It was said in Pacific Mutual Life Insurance Co. v. Watson, 223 Ala. 571, 573, 137 So. 414 (1931):

The payment of premiums, the consideration upon which the insurer takes the risk, is of the essence of contracts of insurance. That the risk shall be carried only for the period for which the premium is paid may be incorporated as a valid term of the contract. Time is an element of the risk.

The payment or agreement to pay the premium by the insured is a condition precedent to or at least concurrent with, the assuming of any liability by an insurance company. Royal Insurance Co. v. Eggleston, 19 Ala.App. 638, 99 So. 828 (1924).

Blue-Cross offered Caudle a policy of insurance in return for payment of a premium. The offer was that the policy would become effective or risk assumed as of March 25, 1976, if Caudle paid the premium therefore within thirty days from March 25. If such premium was not paid no risks were assumed. If the premium was paid, the policy would be retroactive and benefits paid thereunder. Caudle did not pay the premium—the condition precedent to assumption of risk by Blue Cross. The offer was not accepted. The policy was never in effect. Security Life and Trust Co. v. Galin, 280 Ala. 325, 193 So.2d 766 (1966); Reliance Life Insurance Co. of Pittsburgh v. Lowry, 229 Ala. 258, 156 So. 570 (1934); Cherokee Life Insurance Co. v. Brannum, 203 Ala. 145, 82 So. 175 (1919); 1 Couch on Insurance 2d, § 9.1 at 370.

To view the matter as contended by Cau-dle would permit him to receive benefits without benefit of a contract or payment of a premium.

We reverse and remand for entry of judgment for defendant.

REVERSED AND REMANDED.

BRADLEY, J., concurs.

HOLMES, J., dissents.

HOLMES, Judge

(dissenting):

I respectfully dissent.

This case was originally assigned to the author of this dissent. The majority of this court did not agree with my proposed opinion. My proposed opinion expresses my view of this appeal and is as follows:

The dispositive issue is whether an insurer must apply unpaid benefits due its insured to the payment of an overdue premium to prevent the loss of coverage.

The record reveals the following facts:

Through his employer Caudle contracted with Blue Cross for group hospitalization and major medical insurance. The group policy provided for automatic termination in the event Caudle quit his job. Caudle quit work and the group insurance contract terminated on March 24, 1976.

The group policy also provided that, upon termination of the contract, the employee could apply for an individual hospitalization and major medical insurance policy. This application had to be made within thirty days of the termination of the group contract.

On March 29, 1976, before the expiration of the thirty day period, Caudle applied for individual coverage. Sometime around April 5, 1976, Blue Cross sent Caudle an identification card and a copy of a contract for individual insurance coverage. . The identification card stated that the effective date of coverage was March 25, 1976. Blue Cross also sent Caudle a notice of non-payment of premiums. This notice stated that $139.86 was due on March 25,1976, and that unless Blue Cross received payment within thirty days after March 25, Caudle’s insurance contract would terminate automatically as of the due date.

Meanwhile, on March 20, 1976, Caudle’s wife entered the hospital. She was discharged on March 27, 1976.

At trial the parties stipulated that Mrs. Caudle would be covered by the individual policy if that policy was found to be in force and that, if the policy was in force, her covered charges were $503.70.

A claim for the charges was properly filed and the claim was paid. Blue Cross subsequently obtained a refund of the payment from the hospital and the hospital then collected from Caudle.

No premium payments have ever been received by Blue Cross from Caudle for coverage beyond March 24, 1976.

At the outset, 1 note that the instant case was submitted to the trial court sitting without a jury on the basis of the pleadings, stipulations of fact, and exhibits. Under such circumstances, the findings of the trial court do not carry any presumption of correctness, and the appellate court must consider the evidence de novo in light of applicable legal principles. State v. Tri-State Pharmaceutical, 371 So.2d 910 (Ala.Civ.App.), cert. denied, 371 So.2d 914 (Ala.1979).

The issue, as I perceive it, is whether the individual insurance policy was in force on the dates of Mrs. Caudle’s hospitalization. I would note that Caudle’s contract with Blue Cross for group insurance coverage terminated by its own terms on March 24, 1976, after Caudle quit his job. Therefore, any claim against Blue Cross can only arise under the individual insurance contract.

There is evidence in the instant case that Blue Cross extended individual insurance coverage to Caudle and his wife on a conditional basis and that the conditional coverage went into effect on March 25, 1976. Specifically, the identification card sent to Caudle stated that coverage became effective on March 25, 1976. The premium notice stated that the premium was due on March 25,1976, and that coverage would be terminated as of the due date if the premium was not paid within thirty days. Stated differently, if the premium was paid within the thirty day period, coverage would be extended retroactively to March 25, 1976. If the premium was not paid within that time period, there would be no coverage.

It is clear from the record that Caudle did not pay the premium within the thirty day period. However, Caudle and his wife did receive hospital services within that period.

In Blue Cross-Blue Shield of Alabama v. Colquitt, 42 Ala.App. 471, 475, 168 So.2d 251, 254, cert. denied, 277 Ala. 696, 168 So.2d 256 (1964), the court opined that “[o]ur courts are committed to the rule that when a loss occurs within the grace period, giving rise to an obligation by the underwriter to the insured for an unencumbered sum at least equal to the unpaid premium, then the premium is deemed to have been paid ...” so as to avoid the loss of coverage.

I find the instant case to be governed by this rule. A loss did occur during the thirty day period. Caudle’s wife was hospitalized. Blue Cross was obligated to pay the loss, if the premium was paid within the thirty day period. As indicated, the benefits conditionally due Caudle equaled $503.70. The premium was $139.86. Under Colquitt, Caudle was entitled to have the benefits contingently due him applied to the payment of the premium in order to avoid the loss of coverage. Therefore, I find that the individual policy was in force on the dates Mrs. Caudle was hospitalized and that Cau-dle is entitled to receive $363.84, the difference between the total benefits due and the premium, as benefits under the policy.

Blue Cross, through able counsel, contends that two provisions of the insurance contract and the holding of Blue Cross-Blue Shield of Alabama v. Craig, 46 Ala.App. 352, 242 So.2d 398 (1970), preclude application of the Colquitt rule in this case. Section VI-3 of the policy states:

“A grace period of thirty (30) days shall be allowed within which the Subscriber may make payment ... of any fees except the initial fee. ... ”

and Section V-3 provides that:

NO BENEFITS SHALL BE PROVIDED HEREUNDER WITH RESPECT TO:
3. Hospital service rendered or received during the grace period provided by Section VI-3 if actual payment of fees then due is not received by the Corporation within such grace period. Receipt by a Member of Hospital Service during the grace period shall not constitute payment of fees. (Emphasis supplied.)

In Craig, supra, the court held that the above emphasized language expressly precluded the use of any part of benefits supposedly accruing under the policy for the payment of an overdue premium. In other words, where this language appears in connection with a grace period the Colquitt rule does not apply.

However, I find that the language of Section V-3 does not preclude recovery in the instant case. As stated above, the group insurance contract between Caudle and Blue Cross terminated and ceased to exist on «March 24, 1976. The individual insurance contract between Caudle and Blue Cross was, therefore, a new contract. The $139.86 due on March 25, 1976, was the first premium due under that new contract. Section VI-3 states that a grace period shall be allowed for the payment of any fee “except the initial fee.” The premium due March 25, 1976, was clearly the initial fee under the new contract. Therefore, I find that the thirty day period that Blue Cross allowed for the payment of the first premium was not the grace period provided by Section VI-3. The exclusionary language of Section V-3, by its own terms, applies only when hospital services are received during a Section VI-3 grace period. Since the hospital services received by the Cau-dles were not received during a Section VI-3 period, the exclusionary language of Section V-3 does not prevent application of the Colquitt rule in the instant case.

For the reasons stated above, I would affirm the trial court.  