Case 15 — 'Action by N. L. Cubby *&*Beo. against New York Life Insurance Company fob Redemption of Collateral Security.

March 11.

#### New York Life Insurance Company v. N. L. Curry & Bro.

APPEAL FROM MERCER CIRCUIT COURT.

Judgment for Plaintiff and Defendant Appeals.

Affirmed.

Loan from Insurance Company — Policy as Collateral — Default—-1 Forfeiture.

Held: 1. A provision in a contract of loan from an insurance company for which its paid-up policy is pledged as collateral, that on default in payment of interest for thirity days the policy shall, at the company’s option, he surrendered to it at the customary cash surrender value then allowed hy the company for the surrender of policies of that class, is void.

HUMPHREY, BURNETT & HUMPHREY, attorneys for appellant.

On March 24, 1894, George J. Anderson borrowed from appellant $130, and executed a loan agreement by which he pledged to the company his policy for $630 in said company, payable 'at his death. Prior to August 1, 1899 Anderson sold and assigned his policy to N. L Curry *&*Bro., and obligated himself to pay the interest on his $130 loan on each recurring 1st of August.

By the terms of the loan agreement, in the event of default of any payment of said interest or of said loan or of any premium on said policy for thirty days after they shall respectively become due, said policy shall he deemed to he in effect at the option of the first party, surrendered to the first party at the customary cash surrender value then allowed hy the first party for policies of this class, etc.

On August 1, 1899, the interest was not paid nor offered to be paid, for more than thirty days thereafter. On March 24, 1900, Curry & Bró. offered to pay the interest due up to August 1, 1899, which the agent received and gave a receipt therefor, upon condition recited therein, that the company or its general officers in New York might determine whether the policy might he reinstated. The company, on being advised, agreed to rein*101state, provided Anderson would furnish the company a certificate of good health as provided in the policy. This, Curry & Bro. declined to procure, and the company then- announced that the policy could not be reinstated, and tendered to Curry & Bro. the cash surrender value of the $630; paid-up policy less the unpaid loan and interest which had accrued up to. August 1, 1899, and also tendered to them the interest which had accrued up to August 1, 1899, which had been paid to appellant’s agent.

Thereupon the appellees instituted this suit, in which they pray “for a judgment against the defendants, compelling them to reinstate the said policy and cancel the loan note, and that they be compelled to deliver said policy to the plaintiffs as a binding policy, and if this can not be done, then for the value of the policy.”

A demurrer was sustained to the answer of defendant, and declining to plead further judgment was rendered by the court ordering and requiring the company to reinstate said policy and deliver it to plaintiff upon the payment of the principal and interest of the loan of $130 made by the company to Anderson, and from this judgment this appeal is prosecuted.

There is nothing in this record to show the age of Anderson nor his expectancy of life, and we submit that the action of the trial court in adjudging, as it did, that the allegations of the answer as to the then present value of the $630 policy were demurrable, was such a high-handed, arbitrary ruling as we believe this court will not approve.

We insist that the regulations of the company requiring a health certificate after the lapse of the policy before reinstating it are reasonable and were understood and consented to by the parties to the agreement, and are not opposed by any phase of public policy.

Unless this court will follow the lower court and inject into this contract new and independent conditions, it seems to us that the judgment in this case ought to be reversed.

GAITHER & VANARSDALL, for appellee

As to the time the annual interest was due on the loan note, whether payable August 1, 1899, or March 24, 1900, we think the averments and denials are of no importance, as time is not the essence of the contract; neither do we regard the date of tender of interest by appellees as of any concern in determining the sufficiency of the answer, as both petition and answer show that a tender was made before the filing of the suit.

We likewise regard as not essential, the avérment as to tender of the entire debt and interest, in the determination of ap*102pellee’s rigkt to a reinstatement, as this right depends solely upon the payment of the interest.

The averment in the answer that the policy was worth $12.47 at the date of cancellation, would furnish grounds for overruling the demurrer to the answer, were it not for the fact that the relief sought, primarily, is not the value of the policy, but the policy itself, and if this relief is granted, the issue as to value becomes unimportant.

We contend that the policy in a Question was a paid-up policy and could not lapse, whilst it has been held that a forfeiture made be had upon a stipulation in the policy for failure to pay the *premium,*or at least the company in such case may-exact a health certificate in order to a reinstatement, but no such forfeiture or exaction has ever been permitted or upheld in any court within the scope- of our investigation for *failure to pay interest on a loan, or even interest on a premium note.*

AUTHORITIES CITED.

Mutual Life Ins. Co. v. Jarboe, 19 R., 1501; Northwestern Mutual 'Life -Ins. Co. v. Port’s Admr., 82 Ky., 269.

Opinion of the court by

JUDGE O’REAR

Affirming.

George J. Anderson was the holder of a paid-up policy of insurance upon Ms life for $630, issued by the .appellant, amd payable upon the death of the insured to his estate. Anderson borrowed $130 from appellant, and executed to it a writing, called a “Loan Agreement,” by which he pledged to appellant the policy to secure the repayment of the loan. Interest on the loan was payable on August 1st of each year (that being the anniversary of the insurance), so long as the principal was owing. The loan agreement contained the following: “It is agreed that interest at the rate of five (5) per -cent, per annum shall be paid upon .said loan at the anniversary of the insurance next succeeding, and annually thereafter, at the office of said party of the first part. It is agreed that although it is not intended that said party of the first piart shall demand payment of said loan until the first day of August, 1909, on which date said loan shall become and be due and payable, or until the death of the *103party whose life is insured under said policy, said party of the first part reserves the right to demand repayment provided said interest is not duly paid.” It is further provided as follows: “It is agreed that in the event of the default of any payment of said interest or of said loan'd of .any premium on said policy for thirty days after they shall respectively become due said policy shall be deemed to be and shall be in effect at the option of said party of the first part, surrendered to .said party of the first part ,at the customary cash surrender value then allowed by said party of the first part for the surrender of policies of this class, said party of the first part in that case being liable to said party of the second part for the return of the balance only of said cash surrender value after deducting said loan and interest .and any expenses incurred thereon.” And further: “It is agreed that said party of the second part has deposited said policy and its accumulations with said party •of the first part as collateral security for said loan, on the terms and conditions of this agreement, and covenants and agrees to and with said party of the first part to abide by and perform all and singular the stipulations and agreement •contained in this agreement.” And further: “It is agreed that all the conditions, limitations and requirements of said policy except as herein expressly modified, remain in full force.”

On the 1st of August, 1899, when the interest on tine $130 loan became due and payable according to the terms of the contract, it was not paid; nor was it paid for more than thirty days thereafter; nor was it offered to be paid until nearly eight months after its maturity. Appellant then refused to receive it and reinstate; the insurance (which it had canceled as forfeited because of the nonpayment of interest as provided in the agreement above copied), unless *104the insured would furnish a certificate of his then good health. That he did not do so, and, possibly, could not have done. As a matter of fact appellant admits that the “accumulations” hypothecated with this policy as collateral' to its loan of $130 were, when included in the “cash surrender value then allowed” by appellant on this class of policies, some $12.47 more than the principal and interest owing appellant when the default occurred. Before the interest above named became due, Anderson had assigned the policy for value to appellees, his creditors, of which appellant had notice at the time. Being apprised of the appellant’s claim of the forfeiture of the policy, appellees tendered the interest and principal of Anderson’s loan, and offered to redeem the policy for their benefit as assignees and creditors. Being refused, this suit was brought to compel appellant to reinstate the policy, or to pay its value above the .amount of appellant’s debt and interest, to appellees. That excess of value was alleged to be $300. Appellant, by answer, relied on the surrender and cancellation of the policy under the contract and conditions above stated. ' The circuit court sustained a demurrer to the answer, and adjudged that upon the payment to appellant of the $130 and interest that it reinstate the policy.

This appeal involves the validity of the clause of the above agreement providing for the surrender or practically for the forfeiture of the policy, if the interest on the loan was not promptly paid when due. By the terms of this writing, if the loan, or its interest, was not repaid when due under the loan agreement, the policy was to be “surrendered” to the insurer “at the customary cash surrender value then allowed by said party for the surrender of policies of this class.” That is, pure and simple, a provision for the forfeiture of the policy upon such terms as the payee of the *105note may require, and at its option. The difference between this and the ordinary unqualified forfeiture lies alone in the extent of the forfeiture. It operates as an enforced conversion without further notice to, or consent of, the borrower, of his collateral, if he fails to promptly pay the interest upon his debt.

The contract of insurance between appellant and Anderson had been fully executed so far as Anderson was concerned. He had paid all that he was required to pay to be entitled to receive from appellant the- full sum stipulated to be paid — $630—at his death. The $130 was borrowed from appellant since that completion of the contract.

The courts have uniformly held in favor of the insurer that agreements for the forfeiture of the policy When premiums were not paid when due are valid, and their enforcement is upheld. This is said to be because “on the prompt payment of the premiums depends the mutuality of the contract and the ability of the insurance company to meet its obligations.” But both the reason and the rule are restricted to the matter of premiums alone. Forfeitures are disfavored in law. When they are mere penalties for •the nonpayment of borrowed money, they are not allowed. They lead to, and themselves are, unconscionable oppressions of the unfortunate.

The question in this case, in collateral form, has been before this court several times.

In St. Louis Mut. Life Ins. Co. v. Grigsby, 10 Bush, 310, a policy provided that if the interest upon premium notes given by the insured was not promptly paid when due it should work a forfeiture of the policy, including all that had been paid on it. Said the court (per Lindsay, J.) : “We are satisfied from the nature of the contract that the forfeiture was intended as a penalty, to secure, not the ulti*106mate, but the prompt, payment of the interest to become due; and as the default is only in time, and as the company can be given all that it stipulated to receive, a case is presented in which relief can and ought to be afforded.”

In Montgomery v. Phoenix Mutual Life Ins. Co., 14 Bush, 51, the question was whether a failure to surrender the old policy and to demand a paid-up policy for the lesser sum in case of default after paying a certain number of premiums, forfeited the insurer’s rights. This court (per Cofer, J.) held that time was not of the essence of the undertaking; that the clause •for a forfeiture was repugnant to the policy of the law, and was contradistinguished from 'conditions precedent The court quoted approvingly the following section from. Story’s Equity, section 1314: “Wherever a penalty is inserted merely to secure the performance or enjoyment of a collateral object the latter is considered as the principal intent of the instrument, and the penalty is deemed only as accessory, and therefore as intended only to secure the due performance thereof, or the damage really incurred by the nonperformance. In every such case the true test by which to ascertain whether relief can be had in equity is to consider whether compensation can be made or not.”

In North Western Mutual Life Ins. Co. v. Fort’s Admr., 82 Ky., 269, 6 R., 271, the question was whether the failure of the insured to pay promptly the interest on certain premium notes voided the policy under a provision which declared, “which interest shall be paid annually or the policy be forfeited.” The court (per Lewis, J.) held: “Here the default, if any has occurred, is not of the substance of the contract, but in the time of the payment of interest, and the oom|>any can be given all that it stipulated to receive. On the other hand, to forfeit the whole policy on account of *107default in time of payment of the interest, which formed hut a small part of the consideration, and which the company is secured in the full payment of, if not already paid, would impose upon the assured the .entire loss of the premiums actually paid. A forfeiture under such circumstances would he extremely oppressive, and if provided for between individuals concerning any ordinary business transaction be held as in the nature of a penalty.”

The later case of Mutual Life Ins. Co. v. Jarboe, 102 Ky., 80, 19 R., 1505, 42 S. W., 1097, 39 L. R. A., 504, 80 Am. St. Rep., 343, was quite similar to Montgomery v. Phoenix Mut. Life Ins. Co., *supra.*It was there reasserted (per Guffy, J.) : “Time is not generally of the essence of contracts. Story’s Equity, sec. 776. It may be so when the contract is executory on both sides, or when the nature of the transaction or the stipulation of the parties shows it was so intended by them. But When the defendant has received the entire consideration for performance on his part, and has no other defense except that the plaintiff did not come within the stipulated time to demand performance, we are not acquainted with any authority or legal principle upon which such a defense can be upheld in a court of equity.”

Also, see Manhattan Life Ins. Co. v. Patterson (109 Ky., 624, 22 R., 1282), 60 S. W., 383, 53 L. R. A., 378; Washington Life Ins. Co. v. Miles (23 R., 1705), 66 S. W., 740.

In all of these cases the failure relied on as a forfeiture was connected with the existence of the original contract of insurance. It was not always easy to distinguish between the legal principles governing the right to provide for forfeiture because of nonpayment of premium notes and the nonpayment of interest on premium notes. The evident aim of the insurers was to bring the interest upon *108the notes within the principles governing the notes themselves. The court, however, noted a distinction, and applied it.

In the case at bar there is no perceivable reason why the insurance company lending the money is, or can be, in a different position from any other lender of the money had the policy been assigned to the latter as collateral, and a default in payment of the interest had occurred. If it loans money on its policies held by its. policyholders, its rights as lender are exactly what they would be if, instead of the policies, the borrower pledged stocks, bonds, or policies in other companies, or gave a chattel or real estate mortgage to secure the loan. There is nothing in appellant’s business, or charter rights, so far as we are advised, which entitles it to privileges when loaning its money not enjoyed generally by banks, trust companies, and other corporations and individuals.

We are of opinion that the provision in the loan agreement for a surrender or forfeiture of the policy upon the nonpayment of the interest upon the loan is void.

The judgment of the circuit court is therefore affirmed.

Petition for rehearing by appellant overruled.