Court Opinion

ID: 4497010
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:12.219883+00
Date Added: 2024-06-11T12:07:56.991958
License: Public Domain

Disney,
dissenting: The problem here is whether subsection 302 (g) of the Kevenue Act of 1926 shall be so construed as to vitiate and nullify subsection (c) in this proceeding. The majority opinion has so construed it, erroneously, in my opinion. The gist of the reason for such construction by the majority opinion is the fact that the deceased received from an insurance company a form denominated a “Single Premium Life Policy. Insurance Payable At Death.” The contention is, in effect, that because therein the words “insurance” and “insured” were used, that they must be construed in the usual acceptation of the terms, regardless of other language used, and that therefore the situation falls under subsection 302 (g), rather than under subsection (c). Faced by the fact of the issuance of the so-called life insurance policy simultaneously with and “in conjunction with” an annuity policy, without which the “insurance” would not have been written, the majority opinion in words agrees that the two policies must be construed in connection with each other, but in fact in the next breath insists upon a separation, upon the theory that although the two policies formed one contract, the insurance policy feature and the annuity feature were divisible elements, that the whole transaction was not an entire, but a severable or divisible contract, and that the annuity policy was a mere condition precedent to the insurance policy.
This is, I think, basic error. That two such policies issued together do form one contract is almost, if not quite, elementary — and as above stated, this is not denied in the majority opinion. See Urwan v. Northwestern Life Insurance Co., 103 N. W. 1102; Schreiber v. German-American Mail Insurance Co., 45 N. W. 708; Timlin v. Equitable Life Assurance Society of United States, 124 N. W. 253. Moreover, language in a contract or deed is primarily and ordinarily to be con*1063strued as a term or covenant thereof and not as a condition precedent. Woodruff v. Woodruff, 16 Atl. 4; 44 N. J. E. 349; Detroit Union Railroad Depot & Station Co. v. Fort St. Union Depot Co., 87 N. W. 214.
In the face of this general principle of construction, there is no justification, I think, for holding that the annuity feature was a condition precedent, rather than an indivisible part of a contract. The citation by the majority of Legg v. St. John, 296 U. S. 489, is on its face inapplicable, for it states (referring to the “supplementary contract” unsuccessfully sought to be incorporated into the principal contract) : “But for all other purposes it is a separate obligation.” This refers to other language of the decision which specifically points out that the supplementary contract was, as to the feature at issue, covered by language of the policy that: “hTo other provision of said policy shall be held or deemed to be a part hereof.” Other citations as to cases involving “separate features which are clearly severable” are of course not in point here where the annuity feature was, on the contrary, clearly inseparable. That it is indivisible, inseparable from the life insurance feature, is demonstrated by the most effective of facts — that the life insurance feature would not have been written without the annuity feature. The company joined the two features. We can not with good logic treat them otherwise. It is impossible for me to discern how these two features can be severable, as the majority sever them. The annuity feature is no condition precedent, but a term, provision, or part of what the majority must perforce and does conclude is to be interpreted as a single contract. The doctrine of conditions means just what it says, that is, it entails a condition, a state of affairs or a fact upon which the existence of the contract depends, but an attempt to make one contract depend upon another contract as a condition precedent is merely to admit that the contracts form one, that additional provisions are agreed upon, and are to be construed together. One is not separate and a condition of the other, but each loses identity in the completed agreement. Thus, we see that there is no condition precedent entailed here, but a mere question of the proper interpretation of two terms of a contract, which under the ever prevalent rule must be considered as a whole to ascertain the intent of the parties. Welch v. Union Central Life Insurance Co., 78 N. W. 853; Mutual Life Insuranee Co. v. New, 51 So. 61. But if we read the contract as a whole, how can it be said that the insurance feature is independent when it depended completely upon the inclusion of the annuity feature without which the insurance company would not enter into a contract? Had the consideration or the annuity failed, such as by dishonoring of a check, can there be any doubt that the insurance company would have immediately contended that the contract was an integer, indivisible and inseparable, and that *1064they could not be held to the insurance feature alone? Yet to answer the query in the affirmative is to admit that this contract as a whole was not insurance, but was a hybrid, not to be construed merely as an insurance policy — which is what the majority opinion does by the expedient of separating the “insurance” policy and regarding it only. If joint construction of the two policies, as a whole, is required, however, obviously what has been said by us in Old Colony Trust Co., Executor, 37 B. T. A. 435, and upon the affirmation thereof by the Circuit Court., 102 Fed. (2d) 380, and in the authorities there cited, applies fully, and we have before us nothing different in essence and fact from the annuity with payment at death, involved therein, and involved in Chemical Bank & Trust Co. et al., Executors, 37 B. T. A. 535, for when the essential nature of the different situations is examined, the controlling fact in each is seen to be that an amount of money was placed with an insurance company with income reserved to the decedent and without the feature of true and usual insurance risk carried by the insurance company — for which reason such contracts were found not to be applicable to subsection (g).
Cooley on Insurance, vol. I, p. 80, says:
Prom what has been said it is evident that the primary requisite essential to the existence of every contract of insurance is the presence of a risJc of loss. The insurer, in return for a consideration paid to him by the insured, assumes this risk, and wherever such risk exists and is assumed by one of the parties to the contract, whatever form a contract may take, it is in fact a contract of insurance. Risk is essentially the subject of the contract. If there be no risk there can be no contract, and until the risk commences the contract does not attach. (Hart v. Delaware Ins. Co., 11 Fed. Cas. 683.)
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The risk which is essential to a contract of insurance must not be so great as to be prohibitory of the enterprise in which it is encountered. There must, in order that there may be successful insurance, be a sufficiently large number exposed to the same risk to make it practicable and advantageous to distribute the loss falling upon a few. As indemnity against loss is at the foundation of insurance, the business must be regarded as a system of distributing losses upon the many who are exposed to the common hazard. (Nye v. Grand Lodge A. O. U. W., 9 Ind. App. 131, 36 N. E. 429.) Out of the co-existence of many risks arises the law of average, which underlies the whole business of insurance. This is true, whether the insurance is on property or on lives. Life insurance especially is founded on the law of averages. The average rate of mortality is the basis on which it rests, and by spreading their risks over a large number of cases the companies calculate on the average with reasonable certainty and safety. (New York Life Ins. Co. v. Statham, 93 U. S. 24, 23 L. Ed. 789.)
Curry v. Washington National Insurance Co., 194 S. E. 825, says:
The definition of a contract of insurance imports the assumption of a risk by the insurer and the payment of a consideration therefor by insured.
The above clearly states the essential nature of life insurance. A contract which, instead of the insurance company assuming the risk *1065of death of the insured, provides that the insured himself carries that risk, is patently violative of the above essential principle of insurance. Yet here that situation is plainly found. The applicant was not insurable because of age — so completely not insurable that a physical examination was immaterial and was not required. The facts found recite “* * * provided satisfactory evidence of insurability is furnished a life insurance policy may be issued in the absence of an annuity contract.” [Italics supplied.] In that situation the applicant in effect said: “I will carry the risk. I will pay you, the insurance company, a sum of money over and above the single premium for the ‘insurance policy,’ sufficient that you, provided only that you invest the money paid you at your usual rates of return, will at all times have the funds with which to pay me an ‘annuity’ and upon my death pay my beneficiary a certain sum.” It can not be denied, I think, that the applicant was carrying the risk, for the annuity contract was required “due to the amount of risk involved, namely, the difference between the consideration and the death benefit.” The applicant plainly supplied the money to absorb the risk, the difference between $17,941.80 single premium, and $20,000 death benefit, when she paid $21,200. The $195.42 payable semiannually was less than 2 percent upon the $21,200, and the company took not the slightest risk, except the risk that it might conceivably not earn so much as 2 percent upon the $21,200 — but that is patently an investment risk, and not the risk of having the “insured” die before paying in enough premiums to make the company safe. That is the insurance risk, which an insurance company assumes for the insured and can carry more safely than can he, because of the broad spread over many people. Contrary to the situation involved in true insurance, it was in nowise affected by an early death of the applicant, for the $20,000, and the money above that amount, was already paid in, ever present in amount sufficient to pay the $20,000 and the annuity income agreed upon, dependent only upon rate of earning exceeding the small percentage required for the annuity payments. The very base and plinth of the whole theory of life insurance denies that life insurance risk is entailed therein. (The dividends which might be paid are immaterial, since they would be paid only upon earnings after reservation of a percentage greater than that required to pay the annuity income, and initial expenses, such as commissions paid, are immaterial, for they are no part of the risk assumed for the insured by the company. The same applies to the fact of surrender value in the “insurance” feature, for the amount remaining for protection of the annuity is decreased only proportionately with the decrease in liability thereon, since the same basis of mortality table applies to both features. The annuity contract, standing alone, involved risk, but when made one with the “insur-*1066anee” feature — which is what the company insisted Upon — its risk was mathematically absorbed by the moneys paid in under the name of single premium.) j
The ratio decidendi of Old Colony Trust Co. et al., Executors, supra, and the cases correlated therein was the lack in the contracts considered of the essential element of life insurance risk, as above set forth, and the lack of such expressions as “insurance” or “insured”, though mentioned, was not the crucial point. Terms do not control and a phrase can not contradict reality. Stearns Co. v. United States, 291 U. S. 54. “The nature of the contract must be determined from its contents and not by its terminology.” Physicians' Defense Co. v. O'Brien, 111 N. W. 396.
It seems to me that therein lies the basic error in the majority opinion, for because of the existence of the expressions “insurance” and “insured” in one part of the indivisible contract involved, the majority believe that we should find that insurance is involved. It is true that reliance is placed in a sound principle of a statutory interpretation, to wit, the use of words in their ordinary sense. The majority opinion therefore says, in effect, that section 302 (g), because of reference to “insurance”, involves any policy which bears the name of insurance. That principle of statutory construction however is patently subject to the other, just above expressed, that terms alone do not control, and the facts must be examined. Moreover, another principle of construction, coordinate if not more important, seems to be neglected by the majority opinion — the principle that legislative intent must be ascertained. No examination of that question appears in the majority opinion, yet in the interpretation of section 302 (g) in Commissioner v. Jones, 62 Fed. (2d) 496, we find the following:
* * * It seems to us that the provisions of subdivision (g) relied upon by the Commissioner are to he interpreted in the light of the purpose to be effected in excluding from the gross estate insurance in the amount of $40,000 receivable by beneficiaries other than the estate * * *.
It seems obvious that the purpose of Congress in exempting $40,000 of life insurance payable to beneficiaries other than the estate was the same as the public policy involved in the statutes of many states exempting insurance in general for the wife or family; iii other words, that Congress recognized a beneficent public policy in providing that insurance should form an estate for dependents and that by insurance, therefore, one could build up such an estate. Equally obvious, however, such public policy was not necessary in the case of one who did not need to build up an estate but already had funds with which he could not only pay for a single premium life insurance policy, but could, if not insurable became of age or physical condition, pay in such an additional amount of money in a combination of life *1067insurance and annuity that the company would deal with him because it was financially safe, he having paid “the amount of the risk involved, namely, the difference between the consideration and the death benefit.” Yet under the majority opinion the benefit of section 302 (g) is extended to him and his estate escapes estate tax because he for a consideration costing more than insurance had obtained as a part of a contract the form of a life insurance policy, a contract which the company would not enter, requiring a different and broader agreement. The insurance company added a feature which the majority will not add.
I can hot bring myself to believe that one subsection of this section of the revenue law should here be interpreted so as to render ineffective the other, but feel rather that the two subsections should be harmonized if possible and that we should arrive at a conclusion that subsection (g) is applicable only if subsection (c) is not violated in the facts, and not apply it merely because we find the word “insurance” in a contract which is, and was intended by the parties, as investment, as a contract of transfer of property with retention of income for life, of the very nature forbidden by subsection (c). Insurance does not have such effect. The contract here involved does, and I conclude that it is not insurance, but is a transparent device to use, in order to escape estate tax, the expression “insurance”, though it is a part, and a part only, of a contract which, in the cases above cited, has been refused recognition as basis for exemption. It is apparent that in this contract, as stated in Old Colony Trust Co. et al., Executors, supra, “the obligations of the company were such that the investment feature predominates and gives character to the contract.”
That the revenue act distinguishes between policies involving mere investment and those entailing insurance is shown in Helvering v. Illinois Life Insurance Co., 299 U. S. 88. Therein was considered “reserves required by law”, as deductions, in part, from gross income under section 203 (a) (2) of the Revenue Act of 1928, and it was held that such reserves must directly pertain to life insurance, and do not include “survivorship investment funds” accumulated from premiums on 20-payment life policies, to be paid to surviving policyholders; and the Court stresses the fact that under the latter feature of the policy “the company’s liabilities on account of the investment funds are independent of these attributable to life insurance risks.” In other words, investment risks are not within the category of life insurance for the purpose of the revenue act, even though covered by a policy labeled one of insurance. Such a contract, involving sur-vivorship investment funds, is called insurance, ordinarily known as tontine insurance. The Court relied upon its previous decision to the *1068same genera] effect in Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686. Commenting upon Helvering v. Illinois Life Insurance Co., supra, Paul and Mertens, Law of Federal Income Taxation, § 36.11 (supplement) says: “A broad definition of tbe term Ufe insurance was rejected by the Court in reversing the lower court * * Both cases are noticed by the Circuit Court in Old Colony Trust Co. et al., Executors, supra.
TURNER, Mellott, Hud, and Order agree with this dissent.