Opinion ID: 1742786
Heading Depth: 1
Heading Rank: 4

Heading: right of beneficiary

Text: Whenever the question has arisen concerning the right of subrogation of a beneficiary under a life insurance policy, the proceeds of which have been used to apply to a debt as a risk, almost invariably it has involved insurance on the life of the debtor himself, not one secondarily liable as in this case. This Court has addressed the former situation in Seitz v. Seitz, 238 Miss. 296, 118 So.2d 135 (1960). In that case, Wiley Nash Seitz was a debtor of a bank. To secure his debt he assigned as collateral security an insurance policy on his life in which his mother was a beneficiary. From time to time he renewed the note evidencing the debt, and expressed the intention of paying the debt from proceeds of his crop harvest. Seitz died intestate; his sole heir at law was his widow. The insurance company paid the proceeds of the policy to the bank, completely extinguishing the debt. The mother sued Seitz's estate claiming a right of subrogation against the estate because the proceeds of the life insurance policy had paid Seitz's debt. The Court found in favor of the mother, and we affirmed. We held a beneficiary is entitled to subrogation to the claim of a creditor against an insured's estate where nothing appeared from the assignment of the policy indicating an intention on the part of the debtor that the insurance proceeds should be the primary source of payment, and that the determining factor was the intention of the insured debtor. We found that Seitz did not intend to make the policy the primary source of payment for his debt, but only as collateral security for his personal obligation, and that the insurance policy was not primarily liable for the debt, but Seitz's estate was. We further held that the mother's right as a beneficiary was inchoate while Seitz lived, but it became vested at his death, subject only to the collateral liability for the payment of the debt. It was the view of the chancellor that Seitz controlled in DeFoe's claim for subrogation against Hosemann's estate, and as noted, no appeal has been taken by the estate, and we are not called upon to decide whether the chancery court erred in granted a judgment against this estate. The chancellor did not consider whether the fact that Hosemann was only secondarily liable may have distinguished this case from Seitz. Seitz announced the majority rule prevailing in the states where this question has arisen. In Smith v. Coleman, 184 Va. 259, 35 S.E.2d 107, 160 A.L.R. 1376 (1945), Heflin collaterally assigned his life insurance policy in which his sister was the beneficiary to secure a note due by him to a bank. Upon his death the assignee bank received the proceeds of the policy and applied them to paying off the note in full. Thereafter, the executor of the estate of his sister (who had also died) sued Heflin's estate to recover the sum paid the bank. This instructive case states some basic principles to which we adhered in Seitz,: The beneficary, during the life of the insured, had no vested interest in the policy. She had a mere expectancy quite similar to that of a legatee during the life of the testator. However, if no change was made in the policy, upon the death of the insured, the right of the beneficiary became fixed and vested. The right of the insured to the contract of insurance was absolute. He could have defeated the expectancy of the beneficiary in many ways. He could have exercised the power of appointment and named another beneficiary; he could have surrendered the policy for its then cash value; he could have designated the pledgee, the bank, as beneficiary pro tanto; or he could have made the proceeds of the insurance policy a primary fund out of which to discharge his indebtedness. The insured exercised none of these rights. He simply assigned the policy with other assets owned by him as collateral security to pay an obligation for which he was otherwise primarily bound. Collateral means secondary or subsidiary. Such security is to be resorted to only in the event that the pledgor fails to perform the principal contract. A pledge as collateral security ex vi termini excludes the idea that the thing pledged is designed as the primary source from which payment is to be made. Barbin v. Moore, 85 NH 362, 159 A 409, 415, 83 ALR 63, 73. 35 S.E.2d at 112. [T]he cases are practically unanimous in declaring that the intention of the insured is the controlling factor in determing rights of the parties. Id. at 113. The principal obligation is the amount owed the Farmers and Merchants State Bank of Fredericksburg, as evidenced by the promissory note executed by Elmer G. Heflin. The life insurance policies were transferred and used as a collateral or secondary means to insure its payment. While the bank had a right to use the collateral in payment of the obligation due it, the exercise of this right did not deprive the beneficiary named in the policy of her right to subrogation as it was her money that was used to discharge an obligation for which the Heflin estate was primarily obligated. Id. at 113-114. See also, Re Gallagher's Will, 57 N.M. 112, 255 P.2d 317, 37 A.L.R.2d 149, 165-167 (1953), and cases cited under Footnote 89 of 83 C.J.S. Subrogation, § 44. It is, of course, entirely possible for the owner of the policy by language of the assignment to remove any right to subrogation. Such a case was Kash v. Kash, 260 Ky. 508, 86 S.W.2d 273 (1935). Another case in which it was clear that the insured did not intend for the beneficiary to have any subrogation right against his estate was In re Cohen's Estate, 23 Ill. App.2d 411, 163 N.E.2d 533 (1960). In Chaplin v. Merchant's National Bank of Aurora, 186 F. Supp. 273 (N.D.Ill. 1959), the court stated: To defeat the right of a beneficiary it must appear that the insured, by the wording of the instrument assigning the policy or evidencing the loan, or by testamentary disposition, accomplishes such a result. As we have observed, this is not a case where the owner of the policy assigned it to secure his own debt, but a debt made by another and on which his liability was secondary. Great Southern, under the terms of the note, security agreement, guaranty and the assignment, had the absolute right to receive the proceeds of the policy and apply it to United Petroleum's debt. Does the fact, however, that Hosemann may have only been secondarily liable under the United Petroleum note diminish in some way DeFoe's right of subrogation to the bank's claim against that corporation? To the contrary, it would appear that if there were nothing about the instrument which would have removed a right of subrogation if Hosemann, not United Petroleum, were the primary debtor, then certainly there would be a right of subrogation against United Petroleum. We have found two cases which address this question of secondary liability, and both held there was a right of subrogation against the primary debtor. In Ulery v. Asphalt Paving Co., Inc., 119 So.2d 432 (Fla.App. 1960), the Florida Court of Appeals upheld a widow's right of subrogation against a corporation in which her husband was president and a shareholder for a bank's debt against the corporation, and for which debt the husband had collaterally assigned a life insurance policy as security. Also, in Falk v. Vreeland Trading Corp., 284 S.C. 201, 325 S.E.2d 333 (App. 1985), the South Carolina Court of Appeals held a widow was entitled to subrogation for a bank's debt against a corporation whose note had been guaranteed by a separate guaranty against the deceased husband, who had also assigned his life insurance policy as collateral security. That court concluded its opinion with the following paragraph: Finally, the respondents emphasize, as did the master, that the estate is not primarily indebted to the SBA and received no benefit from the payment of the insurance proceeds to the creditor. While we recognize that the issue involved in this case usually arises where a debt of the deceased insured is paid by the assignment of an insurance policy [ see Annot., 91 A.L.R.2d 496 (1961)], we regard as irrelevant the fact that the deceased insured was not the primary debtor here. Again, the intention of the insured ordinarily determines whether a beneficiary of a life insurance policy pledged by the insured as security for a debt enjoys a right of subrogation. Seitz v. Seitz, supra ; Smith v. Coleman, supra ; In re Gallagher's Will, supra. 325 S.E.2d 365-366. We also adopt the view of the states in which the question has been presented that there is no right of subrogation against a party only secondarily liable, and that the chancellor was correct in rendering summary judgment in favor of Champlin. See Quality Wood Chips, Inc. v. Adolphsen, 636 S.W.2d 94, 97 (Mo. App. 1982); Tschider v. Burtts, 149 N.W.2d 710 (N.D. 1967); Street v. Lincoln National Life Ins. Co., 347 S.W.2d 455 (Mo. App. 1961). As stated in this last case: The burden is upon the party seeking subrogation to establish clearly and convincingly that as between himself and another party, the latter, in equity, should bear the loss. Fundamentally, the right of subrogation exists only against the principal debtor and does not extend against a person who is merely secondarily liable. Id. at 459. This record is clear that the debt in this case was primarily the debt of United Petroleum. Although the language of the guaranty executed by Champlin (as well as the guaranty executed by Hosemann) may have been broad and inclusive, this does not remove this paramount equitable consideration. This was, after all, United Petroleum's debt. We therefore reverse and remand this cause for hearing to determine whether DeFoe has any right of subrogation against United Petroleum. The chancellor after a full hearing, and consistent with the views expressed herein, should determine what right of subrogation, if any, DeFoe has against United Petroleum by virtue of the application of the life insurance proceeds to that corporation's debt.