Case Name: Penn's Mutual Life Ins. Co. v. Barnett's Adm'r.
Court: Kentucky Court of Appeals
Jurisdiction: Kentucky
Decision Date: 1907-01-15
Citations: 124 Ky. 266
Docket Number: 
Parties: Penn’s Mutual Life Ins. Co. v. Barnett’s Adm’r.
Judges: 
Reporter: Kentucky Reports
Volume: 124
Pages: 266–287

Head Matter:
CASE 34. — ACTION BY J. T. BARNETT’S ADM’R AGAINST THE PENN MUTUAL LIFE INSURANCE COMPANY. Original opinion filed November 2, 1906; second opinion,
January 15, 1907.
Penn’s Mutual Life Ins. Co. v. Barnett’s Adm’r.
Appeal from Jefferson Circuit Court, Chancery Branch (Second Division).
Samuel B- Kirby, Judge.
Judgment for plaintiff. Defendant appeals.
Reversed.
Insurance — Life Policy — Lapse—Paid-up Insurance. — After payment of twelve annual premiums there was a lapse of a life policy providing that if it lapsed after payment of two annual premiums the company would extend the full amount insured by the policy for such time \as the full reserve would carry it, or would grant paid-up insurance, payable at death, for an equitable amount; and if such lapse was after payment of five annual premiums, the paid-up policy should be for as many twentieth-parts of the sum insured as there had been annual premiums paid. Before the lapse insured borrowed money of the insurer on his- note, giving the policy as collateral security, the note providing that if it was not paid at maturity the insurer could ascertain the cash value of the policy, and cancel it, and with the cash surrender value pay the loan, and with the balance credit insured with as much paid-up insurance as such balance would purchase at the then age of insured. Held, that on settlement of the policy, which should be at the time of its lapse, insured had the right to a paid-up policy for twelve-twentieths of the original policy, and the insurer had no right to deduct from the amount with which a paid-up policy should be bought, 25 per cent, of the reserve, and - enough to continue the original policy till the note was due and interest thereafter to accrue, in addition to the princi pal of the note and the interest thereon to date.
ON REHEARING.
1. Insurance — Paid-up Policy — Surrender Charge — Carroll’s Ky. Stats., 1903, section 659, provides, in relation to life insurance, that in case of default of any premium on a life policy, after three years’ premiums have been paid, the policy shall be binding on 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 the dividends thereon computed by the rule pointed out by the statute • will purchase as a net single premium for insurance maturing and terminating at the time and in the manner provided in the original policy, provided that the reserve of such paid-up insurance shall not be less than two-thirds of the reserve of the original policy. He'ld, that the statutes do not warrant an insurer charging ia surrender charge in issuing paid-up insurance on a defaulted policy; a contention that one-third of the reserve is not to be applied to the purchase of paid-up insurance being untenable.
2. Usury — Notes.-—Where insured in a life policy borrowed money of the insurer on his note, giving the policy as collateral security, and the note provided that, if it was not paid at maturity, the insurer might ascertain the cash value of the policy and cancel it, and with the cash surrender value pay the loan, and with the balance credit insured with as much paid-up insurance as the balance would purchase, the note, in so far as it attempted to allow the insurer to charge a surrender charge in issuing the paid-up insurance, was usurious.
THOS. W. BULLITT and A. SCOTT BULLITT for appellant.
POINTS AND AUTHORITIES.
1. The stipulation in Barnett’s $1,000 note, viz.: that if the note was not paid at maturity the policy should be canceled, the note paid out of the cash surrender value and the balance applied to the purchase of paid-up insurance, never became operative. It is, therefore, wholly immaterial to this controversy whether it is valid or void.
2. The note for $1,000, to secure which Barnett assigned his policy to the Penn Mutual, was an “outstanding liability under the policy,” and Barnett was not entitled to exercise the “option” given by the second non-forfeiture clause unless nor until that note should have been “first paid off.”
3. By the express terms and within the true intent of the second non-forfeiture clause, Barnett was not entitled to exercise the “option” given therein, because he did not “within sixty-days” after the lapse of his policy make “written application" therefor and “surrender all claims” thereunder," including anv claim for extended insurance under the first non-forfeiture clause.
4. Even if the “sixty days”' limit, prescribed in the second non-forfeiture clause of the policy, be construed, not as fixing the time within which an “option” is to be exercised, but as giving a “reasonable time” within which to make the “written application” and “surrender” therein provided for, yet Barnett did not comply with that condition, and thereby lost any supposed right under said clause to demand paid-up insurance payable at death.
5. The “assignment” by Barnett to Penn Mutual of his policy, as collateral security for the payment of his $1,000 note, did not relieve him from the duty of making written application and a surrender of all other claims thereunder, as a “condition precedent” to receiving paid-up insurance, payable at death, for twelve-twentieths of the face of the policy.
6. The Penn Mutual did not “elect” for Barnett to give him paid-up insurance in the sum of $3,000, nor in any manner “waive” its right to insist that, as a “condifm precedent” to receiving such insurance, Barnett should first have made “written application” therefor, and have “surrendered” his right to “extended insurance” under the first non-forfeiture clause.
7. A valid agreement was made between the Penn Mutual and Jonathan T. Barnett in September, 1897, whereby, in settlement of all rights under the policy, Barnett accepted a release from his note of $1,000 and received paid-up insurance payable at death for $215.
8. The stipulation m the note for its payment out of the cash surrender value of the policy is not void as usurious or as involv ing a forfeiture, but the same is valid, being in strict accord with the policy of the statute law of Kentucky.
AUTHORITIES.
(Cited or reviewed.)
Goodman v. Mass. Mutual, etc., 73 N. Y., 480; Worthington v. Charter Oak Ins. Co., 41 Conn., 416; Mutual Benefit Life v. First National Bank, 24 Ky. Law Rep., 580; Mutual Benefit Life v. First National Bank, 115 Ky., 757; Mutual Life óf New York v. Jarboe, 102 Ky., 80; Washington Life Ins. Co. v. Miles, 112 Ky., 743; New York Life v. Warren, 25 Ky. Law Rep., 325; Mutual Life of Kentucky" v. O’Neil", 25 Ky. Law Rep., 983; 21 Encyc. of Law, 9?1; Stembridge v. Stembridge, 87 Ky., 91; Mc'Goffin v. Holt, 1 Duvall, 95; 19 Encyc. of Law, 84; Hexter v. U. S. Life Ins. Co., 91 Ky., 357; Northwestern Mutual v. Barbour, 92 Ky., 427; New York Life v. Curry, 115 Ky., 100; Crutchfield v. Union Central Life, 113 Ky., 53; Ky. Statutes, sec. 659.
JAMES T. A. BAKER and JOHN ROBERTS, attorneys for appellant.
PROPOSITIONS DISCUSSED.
1. The proposition as to a paid-up policy after five payments, in effect, is a covenant to pay Barnett’s estate three thousand dollars upon his death. See: (Montgomery v. Phoenix Mutual Life Insurance Company, 14 Bush, 58.)
This is made clear without the presumption of law against the insurance company, but this court, in case of Sun Life Insurance Company v. Taylor, 22 Law Reporter, page 38, throws the weight of presumption against the company. “Provided” when inserted in a deed, may be either a condition or ia covenant. (American & English Encyclopedia, vol. 17, page 298. And a chancellor will not enforce a forfeiture when compensation can be made. St. Louis Mutual Life Insurance Company v. Grigsby, 10 Bush, 307; Montgomery v. Phoenix Life Insurance Company, 14 Bush, 58.)
2. The company in the case at bar, as in these cases, had always in its possession ample security to pay the note for which the policy was pledged.
3. It will be insisted that the note for which the policy was pledged to secure payment did not change the policy. The provisions of the note looking to the ascertainment and application of the policy were absolutely void, because the assignment of the policy made a mortgage which left an equity of redemption in the assignor, of which he could not be deprived, without sale by decree of court or by private sale upon notice. (Hart v. Burton, 7 J. J. Marshall, 322; Honoré v. Hutchings, 8 Bush, 690: Curry & Bro. v. New York Life Insurance Company, 24 Ky. Law Rep., 1930; Alexander v. Rodriquez, 12 U. S. Reports.)
4. The stipulation in the policy to pay when so many as five annual premiums are paid the proportion that the payments bear to twenty payments is a contract in writing and is barred by the limitation of fifteen years. Therefore, there is no room for the chancellor to interfere to adjudge what is a reasonable time.
5. It is only when the time provided for is shorter than the provision in the statute of limitations that the chancellor will qr can interpose to declare that the stipulated time is unreasonable, and having the power to decide that the time stipulated is too short he has the 'correlative power to determine what is a reasonable time, always provided that he cannot repeal or change the statute of limitations.
When the policy in the case at bar lapsed it became a dead policy. (Mutual Life Insurance Company v. Jarboe, 102 Kentucky. 80; Washington Life Insurance Company v. Miles, 23 Ky. Law Rep., 705.) .
6. There was nothing left of it except the covenant to pay three thousand dollars. In September, 1897, there existed no policy whose cash value could be ascertained and applied. There was no ratification in the case at bar. Ratification must be upon full information and knowledge. (Owens v. Hull, 9 Peters, 628; Kerr on Frauds and Mistakes, 300.)
“If one dealing with another is misled by him respecting his legal rights, he will have relief in equity.”
Same author, page 90. The policy never was cancelled. To cancel a writing is to cross and deface it, to cancel or destroy it by cross marks or other alterations or by burning or tearing the material on which the writing is. (American & English Encyclopedia, 718, 719.)
The case of Mutual Benefit Insurance Company v. First National Bank, 24 Ky. Law Rep., 580, is not applicable to the case at bar.
It was proper in the adjustment of thie equities to allow interest to each party.
AUTHORITIES CITED.
Montgomery v. Phoenix Mut. Life Ins. Co., 14 Bush, 58; Sun Life Ins. Co. v. Taylor, 22 Ky. Law Rep., 38; Am. & Eng. Encyc., vol. 17, 298, 718 and 719; Sa Louis Mut. Life Ins. Co. v. Grigsby, 10 Bush, 307; Hart v. Burton, 7 X J. Mar., 322; Honoré v. Hutchings, 8 Bush, 690; Curry & Bro. v. N. Y. Life Ins. Co., 24 Ky. Law Rep., 1930; Alexander v. Rodriquez, 12 Wallace, --— U. S. R.; Mut. Life Ins. Co. v. Jarboe, 102 Ky., 80; Washington Life Ins. Co. v. Miles, 23 Ky. Law Rep., 705; Owens v. Hull, 9 Peters, 628; Kerr on Frauds and Mistakes, 800, 90, Mut. Benefit Ins. Co. v. First National Bank, 24 Ky. Law Rep., 580; Outstanding Liability, Webster’s Dictionary.

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 presen rums 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.