Court Opinion

ID: 7135318
Source: CourtListenerOpinion
Date Created: 2022-07-24 15:23:18.863757+00
Date Added: 2024-06-11T16:14:33.592960
License: Public Domain

Judge Hobson
delivered the following dissenting opinion:
It is conceded that by the terms of the contract the policy ceased when Sudduth failed to pay the note or the premium due on July 30, 1899. But back of this is the question whether the contract to this effect is such as the courts of this State will enforce. A distinction must be made between the rights of appellant as insurer and its rights as money lender. If there had been no *775loan on the policy, it would have continued in force, notwithstanding the nonpayment of the premium, something over eleven years. It has been held in a number of cases that the court will not enforce a penalty for the nonpayment of a debt, and thus bring about a forfeiture of the policy. In St. Louis Mutual Life Ins. Co. v. Grigsby, 73 Ky., 310, Grigsby’s life was insured in the sum of $10,000 by a policy issued August 16, 1867, in consideration of the payment annually for ten years of a premium of $690.60. It was stipulated that, if default was made in the payment of any premium, such default should not work a forfeiture of the policy, but it should be reduced to such proportionate part, of the sum insured as the sum of the annual payments made bore to the sum of the ten annual payments stipulated for. It was also provided that, if Grigsby failed to pay annually in advance the interest on any unpaid note or loan on account of any of the annuál premiums, the policy should cease and determine. Grigsby paid the initial premium of $690.60 in 1867. He also paid one-half the premium for 1868 and 1869, and executed his notes for the other half. He failed to pay the premium for the year 1870, or the interest on his notes. In November, 1870, by a. written contract, the policy was renewed and continued in force for the commuted amount of $3,000 until August 16, 1871. Grigsby then paid the amount required of him by the company, and executed notes for the remainder, but he failed to pay the interest due on his notes on August 16, 1871, and after this died on January 2, 1872. The court enforced the policy. It said: “We are satisfied from the nature of the contract that the forfeiture was intended as a penalty to secure not the ultimate but the prompt payment of the interest to become due, and, as the default is only in time, and the company can be given all that it stip*776ulated to receive, a case is presented in which relief can and ought to be afforded.” In Northwestern Mutual Life Ins. Co. v. Fort’s Adm’r, 82 Ky., 269, 6 R., 271, where the failure to pay the interest on a premium note was likewise relied on- to defeat a recovery on the policy, the court, referring to the case above cited, said: “Here the default, if any has occurred, is not of the substance of the contract, but in time of the payment of interest, and the company can be given all that it stipulated to receive. On the other hand, to forfeit the whole policy on account of default in time of payment of the interest, which formed but a small part of the consideration, and which the company is fully secured in the ultimate payment of, if not already paid, would impose upon the insured the entire loss of the premiums actually paid. A forfeiture under such circumstances would be extremely oppressive, and, if provided for in a contract between individuals concerning any ordinary business transaction, be held as in the nature of a penalty. And, as we are unable to perceive any reason for changing or relaxing the rule in respect to contracts about the business of life insurance, the forfeiture provided for in this case must be likewise so held.” In New York Life Ins. Co. v. N. L. Curry et. al., 24 R., 1930, 72 S. W., 736, the assured held a paid-up policy for $630. He borrowed $130, pledging the policy to secure the loan, and signed a writing to the effect that, if he failed to pay the interest on the loan, the policy should be surrendered to the company at its customary cash surrender value, and in that case it should be liable to him for the balance only of the cash surrender value after deducting the loan and interest and any expenses incurred. The interest was not paid. The company claimed that the policy was terminated, and after eight months refused to reinstate the policy upon the payment of the debt. The court *777said: “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.’ This is pure and simple a provision for the forfeiture of the policy upon such terms as the payee of the note may require, and at its option. The difference between this and ordinary unqualified forfeiture lies alone in the extent of the forfeiture. It operates as an enforced conversion without further notice to or consent ol the borrower of his collateral if he fails to meet promptly the payment of interest upon his debt. . . . Appellant, as a money lender, stands under the law precisely as any other lender of money. Its charters and privileges as a life insurance company can not affect its other quality as a money lender. If it loans money on its policies held by its .policy holders, its rights as lender are exactly what they would be if, instead of the policy, the borrower pledged stocks, bonds, or policies in other companies, or gave a chattel or real estate mortgage to secure the loan.” Along the same line, and resting upon the same principle, are Montgomery v. Phoenix Mutual Life Ins. Co., 77 Ky., 51; Mutual Life Ins. Co. v. Jarboe, 102 Ky., 80, 15 R., 1901, 42 S. W., 1097, 39 L. R. A., 504, 80 Am. St. Rep., 343; 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.
The case before us differs from those cited in the following particulars: (1) Here there was a default in the payment of a premium, as well as of the note. There the default was only in the payment of a note. (2). Here the amount of the note was equal to the cash surrender value of the policy as fixed by the company. This does not appear *778in any of the cases cited. (3) Here the agreement as to' the termination of the policy is contained in the same contract that provides for the extended insurance, and not in a supplementary contract. (4) In those cases the assured held or was entitled to a paid-up policy.
1. While there was a default, both in the payment of a premium and of the note, if the note had been paid the default in the premium would not have affected the policy, for, if there had "been no loan, the policy would have been extended for something over eleven years. It was not, therefore, the failure to pay the premium that terminated the policy, for this would not have mattered but for the nonpayment of the note.
2. In some of the cases nothing is said about the cash surrender value or its amount. But, aside from this, the cash surrender value is fixed by the company as the amount at which it will take the policy under any circumstances on the application of the insured. The policy may be of much greater value, for the cash surrender value does not purport to be the real value of the policy. By statute in this State policies are valued under the American Experience Mortality, with interest at 4 per cent. Kentucky Statutes, 1899, section 653. It must be presumed that policies are ordinarily worth this. On this basis thé policy in contest was of cash value $718.30-. Under special circumstances they are often worth practically their face value, as where the health ' of the insured has failed. If Sudduth had paid his note of $617.30 on July 30, 1899, his policy would have been extended over 11 years. The failure to pay the note, if it gave the company an absolute right to terminate the policy by ap. plying its cash surrender value to the payment of the note, can not be distinguished from a like contract as to any other collateral pledged to secure a debt with a provision in the *779contract that, if the debt is not paid, the collateral shall vest in the creditor at a price fixed by the contract in advance.
3. It is settled by 'the cases above cited that, where the right to continued insurance has been acquired, a contract for the termination of the policy on the nonpayment of a debt will not be enforced. The reason for the rule is that the law will not suffer the lender to impose on the borrower. The form of the transaction is immaterial. The court will not allow any disguise or mere form to defeat the rule. Here Sudduth had acquired a right to continued insurance on March 24,1896, when the substituted contract was made; and by the terms of that contract when he had paid in July, 1897, the full annual premium for ten years, as there was then no loan on the policy, he had the right to extended insurance without paying anything more for ten years and thirty-eight days. In July, 1898, when he originally negotiated the loan, he had the right to continued insurance, by the terms of the contract, for ten years and 312 days, as there was until then no loan on the policy. This right to continued insurance for over ten years, which he had acquired before the loan was made, he continued to have until his death, unless he lost it by the bare fact that he after-wards secured a loan on the policy. When the loan matured, he did not elect to take up his note and surrender the policy to the company. The following correspondence took place between them looking to Sudduth’s paying part of the premium and giving a new note:
“July 30, 1899.
“The undersigned, the .party assured under policy No. 137,661 in the Mutual Benefit Life Insurance Company, hereby requests that the cash due July 30, 1899, be settled by premium loan. Watson A. Sudduth.”
*780“Louisville, Ky., August 28, 1899.
“Mr. W. A. Sudduth, Fifth & Court Place, City — Dear Sir: Upon return of policy No. 187,661, the inclosed certificate of loan signed' by yourself and the outstanding assignment to the First National Bank of Louisville, canceled by the bank, the company will now increase the policy loan from $599.32 to $633.30, applying the increase in part payment of the premium due the 30th ult., provided the remainder of the premium, $31.85 be paid in cash. The seal of the bank should be attached to the cancellation of its assignment.
“Yours truly, K. W. Smith & Co.”
The letter of Smith & Co. was written in accordance with instructions from the home office, to which in the meantime the application of Sudduth had been sent. Sudduth did not comply with this proposition, and, though there were some other propositions made subsequently, they were not accepted by him, and matters stood as they were until he was taken sick in November following, when the bank offered to pay both the premium and the note, but the company refused to accept the money. If a bank had made a contract with Sudduth to lend him $617.30, and had provided in it that, if the note was not paid, it should have the policy absolutely, or the entire benefit of it, there, would be no doubt that the contract would not be enforced. The fact that the insurance company made the loan to one who held a policy in the company on his own life can not put it in a better position than if the policy had been in another company, and had been hypothecated for the loan. The substance of the transaction is that the insurance company lent its policy holder $617.30 on his policy. When the note matured, and was not paid, the relation of debtor and creditor existed between them on the note, and the policy was *781the collateral securing the obligation. A stipulation in a contract that in this event the insurance company should have the right to cancel the policy if the note was not paid, could not be enforced. But that is, in substance, the case we have; for, if the amount of the note is subtracted from the cash surrender value, nothing is left, and, if the cash surrender value is paid by the company in the cancellation of the note, the policy is at an end.
4. In the cases cited the assured had paid for insurance during his life. Here the assured, when the loan was obtained, had paid for insurance for a term of years. No sound distinction can be made between this case and those, because the insurance there had been paid for during the life of the assured and here for a term of years, which might exceed the limit of his life; for in either case the assured had a definite right to insurance — a vested right— which continued far beyond Sudduth’s death, unless it was divested in his lifetime. It was suggested on the argument that he consumed the fund which he had thus provided for extended insurance, and in illustration it was said that one can not keep his cake and eat it, too. But the difficulty is that Sudduth ate no cake. He only got a loan. If the company had paid him a sum of money absolutely in ex-tinguishment of his right to continued insurance, the argument for appellant would apply. But this it did not dolt only lent him the money, and he was under obligation to pay the money back, with interest at 6 per cent. The interest on the money is the only consideration which our statute allows to be paid for its use. All contracts for a greater consideration for the use of money, direct or indirect, are declared void. Kentucky Statutes, 1899, section 2219. The purpose of the statute is to prevent lenders from making-hard contracts with borrowers, and 'the agreement by Sud*782duth to forego his right to extended insurance, which he had then absolutely for a term of years extending beyond the time of his death in consideration of the loan, besides the lawful interest on the money, was both within the letter and mischief of the statute. When the note matured, the company had a legal demand against Sudduth for the amount of the note, and this it could enforce. He could, at his election, cancel his policy at its surrender value, and apply the proceeds to the payment of his note. But this he did not do. The company continued to hold the note until his death, and therefore continued to hold the demand against him for the money. His assignee, the First National Bank, held the policy. Sudduth had a right to pay his note, and save his policy, for the election was in him to cancel at the surrender value or not. The company, did not tender the note or. demand the policy. It therefore stood simply as a lien creditor, and it could not, on the non-payment of the note, appropriate the debtor’s property at a price fixed by it in advance; for it can not be¡ permitted to impose more onerous conditions upon its policy holders who borrow from it and fail to pay, than other lenders of money may impose upon their debtors.
It is, however, provided in the contract that, if the death of the assured occurred within one year after the nonpayment of a premium, and during the term of extended insurance, there should be deducted from the amount payable such premium, as well as the amount of any indebtedness of the assured to the company on the policy. This was a reasonable provision, for otherwise one who was in bad health might risk his not surviving the year, and thus profit by his own violation of the contract. The amount of the premium due July 30th was not subtracted in the judgment. *783This was error. ' The credit should have been given as well ■for the premium and interest from the time it was due as for the note.
With this modification, the judgment complained of seems to me correct. I therefore dissent from the opinion of the court.
Judges Nunn and O’Rear concur in this dissent.
Petition for rehearing by appellees overruled.