Penn's Mutual Life Ins. v. Barnett's Adm'r.

124 Ky. 266 | Ky. Ct. App. | 1907

Lead Opinion

Opinion op the Court by

Judge Nunn

Affirming.

On- the 6th day of April, 1885, the appellant issued a’ policy of insurance for the sum of $5,000 upon the life of Jonathan T. Barnett; the annual premium due thereon being $189.60. The assured paid the presenrums regularly to the number of 12, but failed to pay the thirteenth, when, according’ to its terms, the policy lapsed. The policy in question contains, among others, the following provisions: “(11) That if this policy shall become void, all payments previously made upon it shall be forfeited to the company, but if the lapse shall occur by non-payment of premium after two full annual premiums have been paid, the company will, subject to the other conditions of the policy: First, extend, without participation, the full amount insured by this policy for as many years and days as the full reserve, by the actuaries 41-2 per cent table of mortality, at the time of such lapse (less any indebtedness upon this policy under the company’s rules), will carry the same at- the present established rates of the company, but if death shall occur within three years after such lapse by non-payment of premium, and during such extension of insurance, there shall be deducted from the amount payable the sum of all the accrued premiums (less surplus), with interest thereon; or, second, upon written application by the owner of this- policy, and the surrender of all claims thereunder to the company at its home office within 60 days after such lapse, will grant nonparticipating paid-up insurance payable at death, for an equitable amount; but if, at the time of such lapse, five full years’ premiums have been paid on this policy, then the paid-up policy shall be for as many twentieth parts of the said sum insured as there shall have been full annual premiums paid thereon; provided all outstanding liability under this policy be first paid off. ’ ’

On the 26th day of September, 1896, Barnett executed a note to the appellant for $1,000. He only received $940, the remaining $60 was advanced in the payment of interest on the note for 12 months. He assigned his policy as collateral security for the repayment of the sum to the company. The note contained the following provision: “* * # it is agreed that, if said loan he not ,paid at maturity, the company is hereby authorized, with or without notice to the undersigned, to ascertain (according to - its rules for the purchase of policies), the cash value of said policy, to cancel and annul the same:, and, with the cash surrender value thereof, pay this loan note and any interest and costs that may be due on the same, and with the balance, if any, purchase and pass to the credit of said policy, on the books- of the company, as- much paid-up non-participating insurance (payable as the policy is, payable), as the amount will purchase at the then age of the insured; or apply the said balance according to the terms of the policy. ’ ’ The premium due April 6, 1897, was not paid, and by its terms, as said before, the policy lapsed. It is admitted that, at that time, the reserve fund on the policy due the insured amounted to $1,506.25, and the appellant, without notice to the insured, appropriated $33.75 of this fund to carry the policy to September 27th, the day the note fell due. On that day the company,'without the knowledge or consent of the insured, made a settlement of the matter in this way: It first arbitrarily deducted 25 per cent of the total reserve, leaving $1,138.34; from this it deducted $33.75, the charge for carrying the policy from April 5 to Sep-, tember 27, 1897, and $1,000, the amount applied to payment of the note, which left, according to its calculation, $104.59 with which to purchase- 'non-participating insurance payable at his death. (Barnett was then 51 years of age, and the company 'reported to him that the balance of the reserve 'to his credit would purchase a policy for $215. (The insured died in the year Í903, whereupon the 'appellant company offered to pay to his administrator $215, which he refused to accept, and instituted this action for an adjudication of his rights under the policy. Appellee claims that, under the terms of the policy, his decedent, on the 6th day of April, 1897, when the policy lapsed, was entitled to paid-up insurance for twelve-twentieths of $5,000, which amounted to $3,000. This was controverted by appellant, claiming that the terms of the note, which was executed for $1,000, changed the terms of the policy. The lower court adopted appellee’s view, and rendered judgment in his favor for the $3,000, subject to a credit of the note for $1,000, with interest, leaving the judgment in favor of appellee for $1,802.

It seems to us that the appellant was entitled to have a settlement of the policy when it lapsed; it was not obligated to await the death of the insured before adjusting the same; by so doing the interest on the note might have exceeded the value of the policy, and it would have lost money as a result. The rights of the parties were not changed by reason of the fact that the insured died within a few years thereafter. A true basis for the settlement is to ascertain the actual cash value of the policy at the time it lapsed, April 6, 1897, considering the age of the insured and his expectancy of life under the mortality table; from that sum deduct the debt of $971.50, owed by the decedent, reduced by reason of payment of interest in advance. The balance would have been due to the assured. However, as the parties have treated this case upon another principle, and, as the result reached is practically the same, we will determine it upon the method fixed in the pleadings and proof. We do not think appellant had the right to deduct 25 per cent of the reserve of $1,506.25; nor did it have the right to apply the $33.75 for the purpose of continuing the policy. This reserve, which belonged in full to the insured, after deducting the amount due on the note at the time the policy lapsed, April 6, 1897, would have purchased a non-participating policy, payable at the death of Barnett, for the sum of $1,104.50, and for this sum appellee is entitled to a judgment, with interest from the 10th day of September, 1903, until paid.

Eor these reasons, the judgment is reversed, and remanded, for further proceedings consistent herewith1.

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Rehearing

Response to Petition eor Rehearing by

Ciiiee Justice O’Rear.

Appellant asks a modification of the opinion delivered herein on November 2, 1906, on the ground that the court while applying principles of law not further disputed, was, in error in the application o'f the facts. The petition states as a fact, and quotes with assurance, certain testimony noted below, the practice of appellant and “all other standard life insurance companies,” in applying the reserves of lapsed policies to the purchase of paid-up insurance, that the companies retain 25 per cent of the reserve as a surrender charge, and apply only the 75 per cent remainder, less indebtedness to the company, in buying paid-up insurance. It is also stated, in the petition for rehearing and in the testimony alluded to, that this practice is warranted by and in line with the Kentucky Statutes on this subject. In the original opinion it was said that this deduction of 25 per cent .of the reserve was irregular and unauthorized. It is argued in response that the court is in error in .ignoring a practice by appellant which the statutes of 'this State warrant.

The testimony alluded to is the deposition of Mr. Jesse J. Barker in the record, as follows: “Here it seems necessary to explain what is meant by ‘reserve’ and ‘cash- surrender value,’ as used in the policy and note. The Penn Mutual Life Insurance Company, in common with all other standard life insurance companies, pursues the following course in regard to its policies: A- level premium is charged to the insured throughout the period of the life of the policy. As the risk of death is constantly increasing, the level or average premium during the earlier years of the policy exceeds the amount of risk run by the company in any given year. During the latter years of the life of the policy the premium is' less than the amount of risk in any given year. The difference between the premium charged in any one of the earlier years and the actual amount of risk run in that year is carried by the company into its ‘reserve,’ and thus a fund is created to meet the years, when the premium is less than the risk. When a policy ceases to be in force, either by virtue of a surrender or lapse by reason of non-payment of premiums or otherwise, it may happen that under the terms of the contract the insured is entitled either to receive a cash value for his policy or to paid-up insurance of such amount as said cash value will purchase. In order to ascertain the sum which will be paid to the insured in cash, the entire reserve derived from premiums paid under the policy in question is first ascertained, and of the sum thus ascertained 75 per cent is paid to the insured. The remaining 25 per cent is retained by the company as part of its general reserve fund. The reason for retention is that, if the full reserve were to be paid in cash to each policy holder upon demand (as few, if any, impaired risks would retire on these terms), there would be a disturbance of the average which lies at the whole business of insurance, and a consequent deficiency in the fund for the protection of the policies which remain in force. The deduction or retention of 25 per cent of the principal just stated is a reasonable retention, and is about 8 per cent less than the retention authorized by the non-forfeiture statute of the State of Kentucky. In case it is the right of the insured to receive a paid-up policy, it is the custom of the company to apply to the purchase of such paid-up insurance the full reserve, less a deduction of only 20 per cent; such deduction being found on the experience of the company to be sufficient for the protection of other policies. "Where the company has made an advance to its policy holder upon the security of his policy, it may happen, in accordance with the terms of the policy as modified by the contract of loan, that the policy lapses either by reason of-failure'to pay the loan or by reason of the failuré to pay a premium. In the event of such a lapse, it is the custom of the company to divide the reserve into two parts. One part is such a sum that 75 per cent thereof is sufficient to meet the obligation of the insured upon its note, and and the other part represents the balance of the reserve; and of said balance 80 per cent is applied to the purchase of paid-up insurance for the benefit of the policy holder. The cash surrender value is thus not less than 75uper cent of the reserve. ’7

As a matter of fact the policy in suit in this case was issued at a time when there was no statute of this State requiring life insurance companies to' allow or provide for issuing paid-up , insurance upon lapsed policies. Section 659, Ky. Stat., 1894, a part* of the act of 1891-93, provided: “All policies hitherto issued by any domestic life insurance company shall be subject to the provisions of law applicable and in force at the date of such issue. No policy of life or endowment insurance hereafter issued by any such company shall become forfeited or void, for non-payment of premium after,, in ordinary insurance two, and in industrial insurance five, full annual premiums in cash have been paid thereon; but in casé of default in the payment of any subsequent premium, then, without any further stipulation or act except as herein provided, such policy shall be binding upon the company for the amount of paid-up insurance-which the then net value of the policy and all dividend additions thereon, computed by the rule of section 653, less any indebtedness to the company -On account of said policy, and less the surrender charge provided herein, will purchase as a net single premium for life, or endowment insurance maturing or terminating at the time and in the manner provided in the original policy contract; and such default shall not change or affect the conditions or terms of the policy,- except as regards the payment of premiums and the amount payable thereon: Provided, That policies of industrial life companies shall be surrendered to the company, and application for said paid-up1 policy be made in writing within eight weeks after said default, on blanks obtainable from the company for that purpose. Said surrender charge shall be eight per cent of the insurance value of the policy at the date of default, which insurance value is the present value of all the normal future yearly costs of insurance which by its terms and policy is exposed to pay in case of its continuance, computed upon the rate of mortality and interest assumed in section 653. Every such policy subject to the conditions as to policies of industrial life companies as hereinbefore prescribed, after the payment of, in ordinary insurance two, and .in industrial insurance five, full annual premiums thereon, in cash, shall have a surrender value, which shall be not less than two-thirds of its net value, computed by the rule of section 653, less any indebtedness to the company on account of the said policy; and its holder may, upon any subsequent anniversary of its issue, surrender tire same and claim and recover from the company such surrender value in cash. Upon the surrender, on any anniversary of its issue, of a policy which has become paid up-, by force of the statute upon default in payment of premiums, after two full annual premiums have been paid, the holder shall be entitled to not less than two-thirds of its then net value, computed by the rule of section 653. On policies of industrial insurance, on which the weekly premmiums are not more than fifty cents each, the surrender value in all Cases shall be payable in cash. Upon the surrender, on any anniversary of its issue, of a policy which has become paid up, after the payment of five full annual premiums, by force of the statute upon default in payment of premium, the holder shall be entitled to not less than two-thirds of its net value, payable in cash. Any condition or stipulation in the policy, or elsewhere,. contrary to the provisions- of this section, and any waiver of such provisions- by the assured shall be void.”

It is suggested that the settlement in this case was had under this statute. But this is an error. For the statute is restricted in its application to policies issued subsequent to its enactment. So is the amendment of section 659, Ky. Stat. .(the act of 1902), found in the edition of 1903, Carroll’s Statutes. That section, as now amended, reads:

“All policies hitherto issued by any domestic life insurance company shall be subject to- the provisions of law applicable and in force at the date of such issue.

“Subdivision 2. No policy of life or endowment insurance upon the ordinary plan hereafter issued by any domestic life insurance company shall become forfeit or void, for non-payment of premiums, after three full years’ premiums, in cash, have been paid thereon; but, in case of default in the payment of any premium thereafter, then, without any further stipulation or act, except as herein provided, such policy shall be binding upon the company for the amount of paid-up insurance, which, according to the company’s published tables of single premiums, the net value of the policy on such anniversary, and all dividend additions thereon, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes, will purchase as a net single premium for life or endowment insurance maturing and terminating at the time and in the manner provided in the original policy; and such default shall not change or affect the condition or terms of the policy, except as regards the payment of premium and the amount payable thereon: Provided, however, That any company may contract with its policy holders to furnish, in lieu of the paid-up insurance provided for in this section, any other form of life insurance lawful in this - commonwealth, of not less value.

“The reserve of such paid-up insurance shall not be less than two-thirds of the reserve of the original policy; but any outstanding indebtedness on the account of said policy shall operate to reduce the said paid-up insurance, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes.

“Every such policy after the payment of three full years’ premium thereon, in cash, shall have a surrender value, which shall not be less than seventy per cent of the reserve that would be required- for the aforesaid paid-up insurance, after deducting any indebtedness as above provided, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes-.

“Subdivision 3. No policy of life or endowment insurance upon the industrial plan hereafter issued by any domestic life insurance company shall become forfeit or void, by non-payment of premiums, after five full years’ premiums, in cash, have been paid thereon, but in case of default on above mentioned or subsequent anniversary in the payment of any premium thereafter, then, without any further stipulation or act, except as herein provided, 'such policy shall be binding upon the company for the amount of paid-up insurance, which, according to the company’s published table of single premiums, the net value of the policy on such anniversary, and all dividend additions thereon, computed by the rule of section 116 of the act, to which this is amendatory, and which section is section 653, Kentucky Statutes, will purchase as a net single premium for life or endowment insurance, maturing or terminating at the time and in the manner provided in the original policy; and such default shall not change or.affect the conditions or terms of the policy, except as regards the payment of premiums and the amount payable thereon: Providéd, That any company may contract with its policyholders to furnish, in lieu of the paid-up^ insurance provided for in this section, any other form of life insurance lawful in this commonwealth, of not less value. And provided, further, that on industrial policies defaulting and surrendered to the company on their fifth, or any succeeding anniversary, application for said paid-up policy shall be made in writing within eight weeks after said default, on blanks obtainable from the company for that purpose.

“The reserve for such paid-up insurance shall not be less than two-thirds of the reserve of the original policy; but, any outstanding indebtedness on account-of said policy shall operate to reduce said paid-up insurance in proportions to its ratio to the reserve for such paid-up insurance, computed by the rule of section 116 of-the act, of which this, is amendatory, and which section is section 653, Kentucky Statutes.

“Every such policy, subject to conditions as to paid-up surrender values, after the payment of five full years’ premiums thereon, shall have a surrender value which shall not be less than seventy per cent of the reserve that would be required for the aforesaid paid-up insurance, after deducting for all indebtedness as above provided, computed by the rule of section 116 of the act, of which this is amendatory, and' which section is section 653, Kentucky Statutes.

“On policies of industrial insurance, where the weekly premiums are less than fifty cents each, it shall be optional with the company issuing said policy, to pay either the cash surrender value or issue a paid-up policy of insurance, and upon such payments, the company shall be absolutely released from all further claims or demands whatsoever under or -by reason of said policies, which shall then be canceled.

“The provisions of this section shall not apply to policies issued on the lives of persons under ten years of age, until five years after attaining that age.

“Subdivison 4. In construing the provisions of this act, ordinary insurance, or insurance upon the ordinary plan, shall be considered to be insurance which may be paid for by annual premiums, or by semiannual, or quarterly, or other installments thereon at the option of the company, and industrial insurance shall be considered as insurance purchasable solely by weekly premiums.

“Any condition or stipulation in the policy of insurance, or elsewhere, contrary to the provisions of •this section, and any waiver of such provisions by the assured, shall be void. ’ ’

Appellant’s contention is, sharply, that it had the right, and under the statutes quoted above the same right is given, to deduct a surrender charge of not more than one-third of the reserve when a paid-up policy is issued upon a lapsed policy. To this we are unable to agree. As there was no statute on the subject in Kentucky when the policy in this case — the original contract — was issued, and as no statute of the parent State of the corporation is relied on, the contract set out in the policy is the sole measure of the parties'’ rights concerning paid-up insurance. It will be seen from the quoted clauses found in the original opinion that, after five full premiums had been paid, the insured was entitled to a paid-up policy for as many twentieths of the original' sum insured as there were premiums paid, “provided all outstanding liability on this policy is paid off.” As 12 premiums had been paid, the insured would have been entitled to twelve-twentieths of $5,000 (the original insurance), if there had been no indebtedness. The only real question then was, where should the indebtedness be credited? On the reserve, which was used in buying the paid-up insurance; or, on the amount of paid-up insurance? We held that it should be credited on the reserve as of the date of the lapse. The policy, in this provision, deals with the application of the reserve to the purchase of the paid-up insurance. The reserve is that part of all the premiums paid on the policy, which, when increased by compound interest at 41-2 per cent, Actuaries’ Table of Mortality, would be sufficient to pay tbe assured or his estate the full amount assured when the policy matures. The principle is discussed at some length in the recent opinion of U. S. Life Ins. Co. of N. Y. v. Spinks, 126 Ky. — , 96 S. W. 889, 29 Ky. Law Rep. 960. In this policy there is no provision for a surrender charge in issuing a paid-up policy under paragraph 11, quoted in the original opinion. The agreement wias to apply the “full reserve” of this policy to buying for the assured either extended or paid-up- insurance. "The assured elected to take, and the company to issue, paid-up insurance. The “full reserve” of this policy bought of paid-up insurance, under the provisions of clause 2 of section 11, above quoted, as many twentieths of $5,000 as the number of premiums paid bore to the total number to be paid (20), after deducting from such reserve the indebtedness of the assured. As the assured had, by borrowing from Ms insurer a certain sum and not paying it back, already anticipated and consumed that much of his “reserve,” it would be manifestly unjust to allow him to get it again- by making the insurer account for it as so much money due him, in giving him paid-up insurance. Had the insured then paid back in cash the loan, he- would have been entitled to a paid-up policy for such sum as his “full reserve” would have bought under the agreement in the policy. The language of the policy does not admit of any other construction. There is no suggestion in it that the company would exact or retain a surrender charge. On the contrary, the “full reserve” is to be accounted for in paid-up insurance.

But the witness Barker says that it was and is the custom with appellant company and all other -standard insurance compaMes to deduct 25 per cent o-f the reserve as a surrender charge. If such was the custom, then by the contract in this policy an exception is indicated. To apply the custom to this policy would be to take from the assured $375 which belonged to him, and apply it contrary to the contract. Appellant complains at the expression in the opinion, “This reserve which belonged in full to the insured.” The reserve does belong in full to the insured, in the sense that it is. the security, and in reality the only security, he had for the fulfillment by the insurer of its undertaking to him. He had contributed it in the payment of his premiums, and it is. required <a.s the very basis of all sound life insurance, and now by our statute (section 653), to be maintained and kept intact in order to make good the obligation to him. It cannot be applied to anything except his policy without impairing its security. In the statutes of some of the States it. is allowed, and in the section 659 as it was originally this. State recognized the rig’ht of, the insurer to deduct a surrender charg’e upon issuing a paid-up policy in lieu of one lapsed. Rut the present statute (section 659, supra) does not so provide now. and we .perceive no reason for so providing. There is a reason for allowing a surrender charge in case a cash surrender is allowed. The reason is expressed in one form by Mr. Barker in his testimony quoted' above. But it cannot apply to the case of issuing a paid-up' policy; for then the policy holder does not withdraw anything from the company’s assets. He does not “disturb the average” upon which the insurance was calculated. He stays in, and his money stays in, for the original purpose of the contract.

Nor do our statutes, warrant a contrary view. In the old section, the expression, “the holder shall be entitled to not less than two-thirds, of its then net value computed by the rule of section 653,” had reference to cash surrender values alone. The present section 659 also deals with “cash surrender” values, and allows a. charge to he reserved in such case; hut as to paid-up insurance the present statute requires the whole of the reserve of the defaulted policy to be applied to the purchase of paid-up insurance, unless the parties agree to a cash surrender in lieu thereof. Appellant construes this expression in the section of the statute, ‘ ‘ The reserve for such paid-up insurance shall not he less than two-thirds of the reserve of the original policy,” as indicating that one-third of the original reserve is not to be applied to the purchase of the paid-up insurance. This is a complete misconception of the office of that phrase. Section 653, Ky. Stats., 1903, requires all life insurance companies to maintain a certain reserve for all their policies. That reserve is such part of all the premiums paid on each of the policies in force as will, when put at compound interest at the per cent, and upon the mortality tables named in section, he sufficient to redeem each of the policies as they mature. Pursuing that course, the “reserve” — which may he likened to a redemption fund or sinking fund for the policies — can he ascertained at any date as to any policy of the respective classes issued by the‘company. Now section 659, Ky. Stats., requires that after certain premiums have been paid there shall not he a forfeiture of that policy’s reserve because of future nonpayment of premiums, but that by virtue alone of such previous' payments, and subsequent failure to pay any premium when due, the reserve — the whole 0f it — belonging to that policy shall he applied as a single premium in buying for the assured paid-up insurance of the same kind, and so forth. Applied how? By treating it as so much cash, and applying it upon the company’s published rate of a “single net premium for life. ’ ’ That, expression is technical. No one nowadays ever pays a single net premium for life in buying life insurance. At least it may be safely assumed that it is extremely rare, if ever done.

We know that all premiums are based upon three items: One, and always the first, the proportion of it necessary at interest compounded, based upon the expectancy of the life insured, to pay the .assured the sum insured when the policy matures; two, the proportion necessary to pay its part of death losses oecuring in its class (these two are the net premiums); and, three, enough more to pay its share of expenses and incidental losses in the business. The latter is called “loading.” There is no limit to the amount of loading a company may do. It all depends on whether the insured will pay it. If he does, unless that which is charged in excess of actual expenses and losses is> returned' to him in “dividends,” he never gets any benefit from it. So, after one is already in, and his policy has lapsed for default in premium, the statute automatically converts his reserve (and “dividend additions”) into a fund to buy paid-up insurance. But the sentence last herein quoted from the statute is to keep the insurer from consuming too much of the insured’s reserve by loading it to death. It is therefore required that this single premium, as published, must in all events buy such insurance as that its reserve (for all sane and safe life insurance must have a reserve) shall not be less than tw'o-thirds of the original reserve. In other words, the “single premium,” alluded to in the statute, must not consume more than one-third- of the defaulting policy holder’s reserve for any other purpose than that, of finally redeeming that identical policy. We have gone thus fully into a discussion of our statutes to show that there is no warrant for saying that they recognize that the insurer may charge an independent arbitrary surrender charge in issuing- paid-up insurance upon a defaulted policy.

Finally, the note in this case, in so' far as it attempted to allow such a charge was usurious. N. Y. Life Ins. Co. v. Curry & Bro., 115 Ky., 100, 72 S. W., 736, 61 L. R. A., 268, 103 Am. St. Rep., 297. Where the original opinion uses the expression, “A true basis for the settlement is to ascertain the actual cash value of the policy at the time it lapsed,” it was meant the “net value” of the policy.at that date; net value being equivalent to “reserve.” There is a distinction between the “net value” and the “cash surrender value” of a life insurance policy.

Petitions for rehearing and for modification of opinion are overruled.