Opinion ID: 3002114
Heading Depth: 2
Heading Rank: 2

Heading: Disproportionate Forfeiture

Text: Officer argues that, if the exclusion is not ambiguous, then Indiana courts would find that it was a disproportionate forfeiture or an illegal penalty. He asserts that there is no rational relationship between the harm Chase suffered by the breach of the suicide clause and the $999,460 loss he will suffer by being repaid only the premiums. Officer cites several cases in which liquidated damages clauses were included in the parties’ contracts. Liquidated damages refers to “a specific sum of money that has been expressly stipulated by the parties to a contract as the amount of damages to be recovered by one party for a breach of the agreement by the other, whether it exceeds or falls short of actual damages.” Time Warner Entm’t Co. v. Whiteman, 802 N.E.2d 886, 893 (Ind. 2004). While liquidated damages clauses are enforceable, they are treated as unenforceable penalties where they are “grossly disproportionate to the loss that may result from a breach of con- 8 No. 07-2826 tract.” Id. at 894. To determine whether this clause results in an unenforceable penalty, Officer contends that we should “weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk from which he sought to be protected and the degree to which that protection will be lost if the non-occurrence of the condition is excused to the extent required to prevent forfeiture.” Restatement (Second) of Contracts § 229 cmt. b (1981). Officer asserts that the only purpose of the two-year suicide provision is to prevent fraud. Here, the fraud purpose had been 95% fulfilled, since Theresa died thirtyfour days prior to the expiration of the exclusion; therefore, he argues, a forfeiture of $999,460 is grossly disproportionate. The district court concluded that the exclusion was enforceable because Chase was seeking to perform the policy as written; it was not demanding a forfeiture. Officer is correct that insurance companies often include suicide provisions in life insurance policies to prevent fraud by the insured. See Commonwealth Life Ins. Co., 432 N.E.2d at 1391. Preventing fraud is not the only purpose of such an exclusion, however. See, e.g., Kunse, 90 N.E. at 91 (enforcing a suicide clause and noting that insurers may choose “not to assume a risk of a certain mode of death, and presumably the premiums are calculated on the elimination of that risk”).1 Regardless of the purpose of 1 Officer assets that Chase has waived any argument that the exclusion could serve a purpose other than fraud. Chase, (continued...) No. 07-2826 9 Chase’s suicide limitation, forfeiture and liquidated damages are not appropriate concepts to apply to a suicide exclusion in an insurance contract. Officer cites cases dealing with lending arrangements, health services contracts, and land sale contracts—notably, he does not cite any cases dealing with insurance contracts. Exclusions are generally enforceable in insurance contracts because “[i]nsurance companies are free to limit their liability in a manner not inconsistent with public policy as reflected by case or statutory law.” Allstate Ins. Co. v. Boles, 481 N.E.2d 1096, 1098 (Ind. 1985). The Indiana Supreme Court has upheld (or, absent issues of fact, indicated that it would be likely to uphold) insurance exclusions where the insured injures a member of his own household, id. at 1101, exclusions for intentional acts, Allstate Ins. Co. v. Herman, 551 N.E.2d 844, 846 (Ind. 1990), and exclusions for business activities in a homeowner’s policy, Frankenmuth Mut. Ins. Co. v. Williams ex rel. Stevens, 690 N.E.2d 675, 680 (Ind. 1997). The court has also approvingly discussed suicide exclusions on many occasions. See, e.g., Sovereign Camp of Woodmen of the World v. Porch, 110 N.E. 659 (Ind. 1915) (the burden is on the insurer to prove suicide); Hazelett, 4 N.E. at 587 (suicide clause not applica- 1 (...continued) however, maintained in its summary judgment brief, summary judgment oral argument, and appellate brief that insurance companies define the risks that they insure and determine the premium rates by the exposure to those risks. Chase has not waived any argument with respect to the purpose of the suicide exclusion. 10 No. 07-2826 ble where death was caused by accident). “If a plainly expressed exception, exclusion or limitation in an insurance policy is not contrary to public policy, it is entitled to construction and enforcement as expressed.” Boles, 481 N.E.2d at 1098 (emphasis added). Chase is not seeking to escape its obligations under the policy; it tendered a check to Officer for the amount it owed. The suicide exclusion is not an unenforceable penalty and is subject to enforcement as expressed.