Source: https://supreme.justia.com/cases/federal/us/296/489/
Timestamp: 2019-04-19 18:35:45+00:00

Document:
1. The right of a bankrupt to receive future disability payments under a contract with an insurance company having no cash surrender value is not insurance within the meaning of § 70(a) of the Bankruptcy Act, and, if not exempted by the state law, passes to his trustee in bankruptcy. P. 296 U. S. 493.
Provision for the payment of disability benefits in connection with life insurance was not introduced in the United States until about twenty years after the passage of the Bankruptcy Act.
attached to, a policy of insurance on the obligee's life did not make them life insurance. P. 296 U. S. 494.
3. The right to receive such disability benefits in the future, having accrued before bankruptcy, is not after-acquired property, but is, in essence, an annuity purchased and paid for, which, like other property of the bankrupt, passes to the trustee unless exempted by the law of the bankrupt's domicile. P. 296 U. S. 495.
4. Such disability benefits are not exempted by the statutes of Tennessee. P. 296 U. S. 496.
Certiorari, 295 U.S. 728, to review the affirmance of an order confirming a report of a referee in bankruptcy.
The question for decision is whether the bankrupt or his trustee is the person entitled to future monthly disability benefits payable under a contract entered into before the adjudication.
"1. Waive the payment of each premium falling due under said Policy and this Supplementary Contract, and,"
"2. Pay to the insured, or a person designated by him for the purpose, or if such disability is due to, or is accompanied by, mental incapacity, to the beneficiary of record under said Policy, a monthly income of $10 for each $1,000 of insurance, or of commuted value of instalments, if any, under said Policy."
by the Circuit Court of Appeals. In re Legg, 76 F.2d 841. This Court granted certiorari, conflict in decisions being alleged. 295 U.S. 728.
The bankrupt contends that the "Supplementary Contract" covering disability is not a separate and distinct contract, but an integral part of the life insurance policy; that the obligation to pay disability benefits is insurance within the meaning of § 70a of the Bankruptcy Act; that it did not pass to the trustee, since that feature has no cash surrender value, and that, if it be held that the contract for disability benefits has a cash surrender value, its amount should be ascertained and the bankrupt be given the opportunity, by paying such value to the trustee, to hold the obligation free from the claims of creditors. The bankrupt contends further that any future disability payments are in the nature of future earnings or after-acquired property, and hence do not pass to the trustee. Finally, he insists that the obligation of the company to pay disability benefits is property exempt under the law of Tennessee. All of these contentions are, in our opinion, unsound.
"When any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum so ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the trustee as assets. "
"8456. Insurance on husband's life, effected by himself, goes to wife and children. -- Any life insurance effected by a husband on his own life shall, in case of his death, inure to the benefit of his widow and children, and the money thence arising shall be divided between them according to the statutes of distribution without being in any manner subject to the debts of the husband."
"8458. Life insurance or annuity for or assigned the wife or children, or dependent relatives is exempt from claims of creditors. -- The net amount payable under any policy of life insurance or under any annuity contract upon the life of any person made for the benefit of, or assigned to, the wife and/or children, or dependent relatives of such person, shall be exempt from all claims of the creditors of such person arising out of or based upon any obligation created after the effective date of this Code, whether or not the right to change the named beneficiary is reserved by or permitted to such person."
it is a separate obligation. The hazards covered by the two instruments are obviously different. The beneficiaries differ also. The payment under the life policy was to be made to the wife; [Footnote 4] the disability benefits are to be paid to Legg himself. A separate and different premium was exacted for the obligations assumed in each instrument. It was provided that forfeiture of the life policy would terminate all right arising from disability, but the supplementary contract could be terminated by Legg without affecting otherwise his life policy.
domicile. [Footnote 5] The principle declared in Local Loan Co. v. Hunt, 292 U. S. 234, is not applicable here.
under a so-called health insurance policy. Cravens v. Robbins, 8 Tenn.App. 435, 437.
The Legg policy contained a table of cash surrender values. This related to the separate obligation to pay the face of the policy on death. It had no relation to the company's obligation under the "Supplementary Contract" for disability benefits.
Compare In re Kern, 8 F.Supp. 246. As early as 1910, some companies had inserted in their policies a provision that, if the insured became "totally and permanently" disabled, payment of premiums would be waived so long as such disability continued. See New York Life Insurance Co. v. Edwards, 271 U. S. 109, 271 U. S. 117-118. A little later, some companies introduced the provision that, in case of total and permanent disability, the face of the policy would be paid in annual installments beginning after the accrual of disability; the amounts so paid to correspondingly reduce the final amount of the policy payable at death, so that the entire liability under the policy could be extinguished even without death. Policies issued under the War Risk Insurance Act, October 6, 1917, c. 105, 40 Stat. 398, provide, in addition to payments of (say) $10,000 on death, monthly benefit payments up to $57.50, the aggregate to be deducted from the face of the policy. It was not until about 1920 that provision was made for the payment, in consideration of an additional premium, of monthly disability benefits in addition to the full face of the policy at death. See Hunter and Phillips, "Disability Benefits in Life Insurance Policies," Actuarial Study No. 5, 2d ed., part 1, ch. I (1932); Arthur Hunter, Papers on Disability Benefits, Eighth International Congress of Actuaries (1927), p. 83.
"The Supplementary Contract shall be deemed to be a part of the above numbered Policy and the provisions of said Policy concerning declarations and representations by the insured, restrictions, payment of premiums, change of beneficiary, and assignment are hereby referred to and by such reference made a part hereof. No other provision of said Policy shall be held or deemed to be a part hereof except (a) the provision of said Policy as to incontestability shall apply hereto, but shall not preclude the Company from requiring as a condition to recovery hereunder, due proof of such total and permanent disability as entitles him to the benefits hereof. (b) The provision of said Policy as to reinstatement shall apply hereto, except that this Supplementary Contract shall not be reinstated unless said Policy is in force and no premium is in default thereon, or unless said Policy is reinstated at the time of reinstatement of this Supplementary Contract."
Later, Legg changed the beneficiary to his children, reserving the right to change the beneficiary thereafter.
See In re Wright, 157 F. 544; In re Burtis, 188 F. 527; In re Matschke, 193 F. 284; In re Evans, 253 F. 276. Compare In re Baudouine, 96 F. 536; Mutual Life Ins. Co. of New York v. Smith, 184 F. 1, 5; In re Balsier, 215 F. 134.
See Dawson v. National Life Ins. Co., 156 Tenn. 306, 300 S.W. 567; In re Stansell, 8 F.2d 363; Grade, Exemption of Life Insurance Policies Under Tennessee Statutes, etc., 11 Tenn.Law Rev. 34. Compare Lunsford v. Nashville S. & L. Corp., 162 Tenn. 179, 35 S.W.2d 395.

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