Opinion
14619
February 15, 1938.
Before JOHNSON, J., Abbeville, November, 1936. Affirmed.
Action by Mrs. Mary Miller Pressly against the Pilot Life Insurance Company on a life insurance policy. From an adverse order the defendant appeals.
The order of Judge Johnson follows:
This is an action brought by Mrs. Mary Miller Pressly against Pilot Life Insurance Company upon a policy of insurance issued by the defendant upon the life of her husband, Dr. John E. Pressly, of Abbeville, S.C. on October 19, 1926. By consent of all the parties, this matter was fully argued before me at the November term of Common Pleas Court at Greenwood, S.C. following which I reserved my decision until this date. There is no dispute as to the facts, the parties having entered into a stipulation, agreeing upon the facts and submitting the question of law to the Court for its decision.
The policy involved is an ordinary life policy in the sum of $3,000.00 and became effective on October 19, 1926. Thereafter, on or about the 7th day of April, 1931, the insured, Dr. John E. Pressly, borrowed from the defendant upon the security of the policy the sum of $223.00; on January 19, 1932, interest of $3.34 on the loan became due and at the same time there became due a quarterly premium of $23.22. The insured did not pay the interest on the policy loan nor did he pay the quarterly premium due on January 19, 1932, and the policy lapsed upon the expiration of the grace period on February 19, 1932. Dr. Pressly died on June 8, 1932, and thereupon the company tendered to the beneficiary the sum of $248.00, which it contended was in full settlement of any liability under the policy. After this tender was refused, the plaintiff brought this suit upon the theory that the policy was in full force and effect at the time of the death of the insured and that the amount due the beneficiary was the sum of $3,000.00, less the amount of the outstanding loan of $223.00, and interest thereon. The principal issue involved in this case revolves around an interpretation of certain provisions of the policy, called "Nonforfeiture Privileges," which are as follows:
"After three years' premiums shall have been paid in full, if default shall be made in the payment of any subsequent premium, this Policy will be entitled to the following privileges:
"Cash Surrender Value : — The Insured on legal surrender of this Policy to the Company at its Home Office within thirty-one days after the due date of such premium may receive the Cash Surrender Value (The value for each $1,000.00 of insurance is given in Column I of the table below); provided, that the Company reserves the right to defer such payment of Cash Surrender Value, in whole or in part, with interest at six per cent per annum, for a period not exceeding six months from the date that written request therefor is filed with the Company at its Home Office, in case the Company should judge such course to be necessary for the protection of the other policyholders; or
"Paid-Up Endowment Insurance: — In lieu of such Cash Surrender Value provided there is no prior indebtedness hereon, the insured may elect, by written request filed at the Home Office, within the same period, and accompanied by this Policy for proper endorsement, to have this Policy continued from said date as Paid-up Non-Participating Endowment Insurance for a reduced amount, according to the number of years' premiums paid. (The amount for each $1,000.00 of insurance is given in Column II of the table below); or
"Automatic Extended Insurance: — If no election of Paid-up Endowment Insurance or Cash Value is made by the Insured within the period designated the Insurance hereunder shall automatically be continued, from the date of default as Non-participating Term Insurance, for a period indicating in Column III of the Table below, corresponding to the number of years' premiums paid. This Policy, so continued, may be surrendered at any time for its full reserve value at the time of surrender.
"Basis of Reserves and Values: — Reserves will be maintained on this Policy, based on the American Experience Table of Mortality, Modified Preliminary Term, with interest at the rate of three and one-half per cent per annum. The guaranteed values in the accompanying table are based on the reserves, less a surrender charge of not more than two and one-half per cent. of the face amount of this policy. Payment of part of a year's premium, not less than a regular quarterly instalment, shall ratably increase the values.
"Table above mentioned for each $1,000.00 of insurance Conditioned upon there being no indebtedness hereon;
After all Column I premiums Cash Surrender Column II Column III are paid value Paid-up End. Extended Term Insurance for Loan Value[*] Insurance (Automatic) ________________________________________________________________________ Years Years Mos. 3 $ 38 $ 78 3 3 4 57 116 4 8 5 77 154 6 0 6 98 191 7 1 7 118 226 8 1 8 140 262 8 10 9 161 295 9 7 10 183 328 10 1 11 205 360 10 6(Note: The balance of the table up to 20 years is omitted because it has no bearing on this case.)
[*] The Maximum loan value is obtained by deducting interest in advance, from the values here given to the end of the current policy year.
"If this Policy is continued in force beyond twenty years, the above table will be extended on request.
"Indebtedness Reduces the Value of the Above Options: — Any indebtedness to the Company existing at the time of default in premium payment shall be deducted from the full Cash Surrender Value, and the amount of Extended Term Insurance or Paid-up Endowment Insurance, granted in such case, shall be reduced in the proportion such indebtedness bears to the full Cash Surrender Value."
It is conceded by both parties that the net value of the policy at the time of lapse, after deducting the total indebtedness against the policy, including principal and interest thereon, was $20.41. It is also conceded that the insured made no election under the terms of the policy. The defendant company takes the position that because there was an indebtedness against the policy that the extended insurance was reduced in the same proportion as the indebtedness bears to the cash surrender value and that, applying the corresponding method of calculation, the extended insurance amounted to $248.00, for which amount the defendant claims the policy was extended from the time of lapse until April 19, 1938. There is no question as to the correctness of this figure, if the defendant's contention as to the construction of the policy provision is upheld. The plaintiff contends, however, that the provision of the policy entitled "Indebtedness Reduces the Value of the Above Options" provides for the automatic extension of term insurance for the full amount of the policy, less the indebtedness, the period for which the same was extended being reduced in the same proportion as was the indebtedness to the cash surrender value. It is agreed by both parties that if the plaintiff's contention is correct, that the equity of $20.41 in the policy would have kept the full face of the policy, less the indebtedness, in force until July 19, 1932, or beyond the date of the insured's death. In other words, the plaintiff argues that the terms "amount of extended term insurance" refers to time and not to dollars, while the defendant takes the opposite view. The plaintiff further contends that the words "amount of extended term insurance" would properly mean the amount of time for which the insurance was extended, as this is what term insurance naturally means; but the defendant claims that the clause simply means that the extended insurance would be reduced in terms of dollars in the same proportion as was the indebtedness to the cash surrender value.
Without discussing this particular point at length, I think it is sufficient to state that I feel bound by the decision of our Court in Dwyer v. Metropolitan Life Insurance Company, 132 S.C. 10, 129 S.E., 84, and later cases, that the policy provision providing for a reduction in the "amount of extended term insurance," in the event the insured be indebted to the company at the time of the lapse, means, as applied to "extended term insurance," a reduction in the amount of money to become payable to the insured or his beneficiary and not a reduction in the period of time for which the policy will be extended for its full face value, less any indebtedness thereon. I, therefore, agree with the position that the defendant has taken as to the first question presented.
The plaintiff further contends that if her first position be overruled, the policy shows on its face that the provision thereof, quoted hereinabove, reducing the amount of money payable to the insured who has borrowed on his policy, or to the beneficiary of a borrowing policyholder, is contrary to public policy and void because it is an unfair discrimination against an insured who has borrowed on his policy, as compared with a policyholder who has not borrowed; that the debt that such an insured owes to his company is first deducted from the cash value of the policy, and, when that is done, the insured should stand in the same position as an insured who has not borrowed; and, further, that in such case the company certainly could have no complaint because the loan, with interest, has been fully repaid and the insured has had only such protection as the net cash value in his policy would buy in terms of extended insurance. If the company be allowed, by such provision, not only to collect its debt and interest, but also to reduce the amount of insurance to be paid, then it has exacted from the borrower more than the lawful debt and interest, or, in any event, he has not been afforded the same kind of protection for his money as was afforded to a nonborrowing policyholder.
As stated above, it is admitted that, after the company had been repaid the full amount of its loan, together with interest thereon, the net cash equity of the insured in his policy was $20.41. There is no question but that, if the insured in this case had not been also a borrower on his policy, an equity of $20.41 would have kept the policy in full force for a period of time extending about six weeks beyond the date of his death. If, in that case, the policy was in full force, it seems to me that the insured, or his beneficiary, should not have been penalized because he was a borrower, and that after payment of his loan, and interest, from the gross value of his policy, he should have the same protection, to the extent of the net value of his policy, as a nonborrowing policyholder. Why should there be any distinction between benefits automatically provided for borrowing and nonborrowing policyholders, except as determined by their equity in the policy? It seems to me, therefore, that the plaintiff's contention on this question is sound.
I am also of opinion that the provision of the policy, hereinabove referred to, is a violation of Section 1921 of the Code of 1932, which section in its first sentence prohibits "any distinction * * * between insurants (the insured) of the same class and equal expectation of life in the amount of * * * dividends or other benefits payable thereon, or in any other of the terms and conditions of the contracts it makes." It may be argued that an insured who borrows from the company is in a different "class" from an insured who does not borrow on the security of his policy, but in my judgment the word "class," as used in the statute, and as it refers to insurants, has reference to the nature and character of the risk — it refers to applicants for insurance of the same age, state of health, character of employment, and general insurability. At any rate, I feel sure that the statute prohibits a penalizing of a borrowing policyholder by depriving his beneficiary of practically all the insurance simply because he has borrowed on his policy. In any event, when the insured who has borrowed from the company has repaid his loan, with interest, as he must first do when a settlement is to be effected, he has fully discharged every obligation due by him to the company and he is certainly at that time, and immediately before final settlement is made with him or with his beneficiary, of the same "class" as any other insured who has not borrowed from the company, and entitled to the same benefits.
It may be reasonably assumed that in taking out this policy Dr. Pressly did so for the protection of his wife and family. The time at which this protection would be most greatly needed would be in time of financial stringency, when a person may be, and often is, in bad health and unable to work and earn a living for his wife and family, and is consequently unable to pay the premiums on his insurance. If the contention of the defendant company is to be allowed to prevail, the result would be that at the very time the policyholder is forced to borrow on his policy in order to meet premium payments, this protection, then so badly needed, is taken away and the value of the policy so drastically reduced as practically to afford no protection whatever. I feel that the discrimination in such circumstances against a borrowing policyholder as against one who has not borrowed is clear and that the policy provision in question is void both as against public policy and as being in violation of Section 1921 of the Code of 1932.
A case very much in point in which this principle was applied is that of Emig v. Mutual Benefit Life Insurance Company, 127 Ky., 588, 106 S.W. 230, 232, 23 L.R.A. (N.S.), 828. In discussing this question of discrimination, the Court had this to say:
"It is true the contract gave it the right to make the character of settlement it did, but it remains to be seen whether or not the provisions of the contract under which the company elected to settle with Emig are valid and enforceable or void as against public policy. In brief, the question is, will provisions of a policy be upheld that give an insurance company the right to settle on a different plan with a borrowing policy holder from that adopted with the policy holder who is not a borrower, thereby enabling it to exact more than its debt and legal interest? Under the contract, if Emig had not been a borrowing member, after he had paid two full annual premiums the entire net reserve by the American experience mortality and interest at four per cent. yearly would be applied by the company as a single premium at the company's rates to the purchase of nonparticipating insurance for the full amount insured by the policy, or, upon his written application for the reserve would have been applied to the purchase of a nonparticipating paid-up policy, or, at his election the company would pay as the cash surrender value of the policy its entire net reserve by the American experience mortality with interest at 4 1/2 per cent. yearly, less a surrender charge equal to one per cent. of the sum insured by the policy. But, if a policy holder happened to be at the same time a borrower from the company, and had defaulted in the payment of a premium, then the company under the contract had the right to deduct the indebtedness out of the cash surrender value and pay the balance in cash, or allow a value in the form of extended or paid-up insurance, the amount of such value to be applied to the purchase of such insurance being correspondingly reduced in the ratio of the indebtedness to the full cash value. It will thus be seen that the borrowing and the nonborrowing members are not treated alike; that the nonborrower has advantages and privileges that are not allowed the borrowing member."
Following the decision in Emig v. Mutual Benefit Life Insurance Company, supra, the Alabama Supreme Court held in the case of New York Life Insurance Company v. Scheuer, 1916, 198 Ala., 47, 73 So., 409, that the insurer would not be permitted, in computing the surrender value applicable to extended insurance, to discriminate against policyholders who have borrowed on their policies by a provision that in case of default in payment of premiums where there was an indebtedness to the insurer there should be only such extended insurance as three-fourths of the reserve over the indebtedness would purchase.
The question here decided, against the validity of the provision, was not before our Court in the Dwyer case referred to above, or in the other cases decided by our Court, and, consequently, as to this question, these cases are not controlling.
In reaching the conclusions herein expressed, I feel that no injustice or undue hardship has been worked upon the insurance company. It simply means that the borrowing policyholder, under the terms of his policy, has had the same protection, to the extent of the net value of his policy, as a nonborrowing policyholder had, and the company has been fully paid for the protection it has given.
Upon full consideration, it is therefore ordered that the plaintiff have judgment against the defendant in the sum of $3,000.00, less the amount of the loan of $226.34, with interest thereon computed from January 19, 1932, to June 8, 1932, the date of the death of the insured.
Messrs. Mays Featherstone, for appellant, cite: Extended insurance: 132 S.C. 10; 129 S.E., 84; 31 Fed. 2d 862; 5 F.2d 481; 257 Fed., 265; 183 U.S. 25; 46 L.Ed., 64; 263 U.S. 167; 68 L.Ed., 235; 31 A. L.R., 101; 93 U.S. 24; 23 L.Ed., 789; 172 S.C. 165; 173 S.E., 307; 90 S.C. 1; 72 S.E., 498. As to provisions in policy being void as against public policy: 23 L.R.A. (N.S.), 828; 73 So., 409; 73 S.W. 1020; 96 S.W. 598; 99 S.W. 228; 61 L.R.A., 268; 103 A.S.R., 297; 72 S.W., 736; 89 S.E., 178; 74 S.W. 1066; 70 S.W. 175; 111 A.S.R., 269; 62 F.2d 341; 284 U.S. 489; 76 L.Ed., 416; 44 F.2d 540; 117 U.S. 411; 29 L.Ed., 960; 162 N.W., 786; 51 So., 191. Construction of contracts: 182 S.C. 162; 188 S.E., 784; 284 U.S. 489; 151 U.S. 452; 38 L.Ed., 231; 104 U.S. 88; 26 L.Ed., 662; 93 U.S. 24; 23 L.Ed., 789. Failure to pay premiums: 4 S.C. 321; 93 S.C. 88; 76 S.E., 29; 107 S.C. 536; 93 S.E., 197; 166 S.C. 181; 164 S.E., 609; 173 S.C. 87; 174 S.E., 900; 61 L.R.A., 269; 103 A.S.R., 297.
Messrs. Grier, McDonald Todd and W.D. Tinsley, for respondent. cite: Construction of provisions of policy: 133 S.C. 472; 161 S.C. 314; 172 S.C. 435; 158 S.C. 394; 165 S.C. 481; 125 S.C. 320; 175 S.C. 182; 179 S.C. 138; 141 S.C. 64; 165 S.C. 33; 172 S.C. 42; 177 Fed., 842; 69 S.W. 1. Public policy: 120 S.C. 93; 14 R.C.L., 25; 25 R.C.L., 1079; 106 A.L.R., 1532; 294 P., 585; 248 P., 841; 35 F.2d 122; 23 L.R.A. (N.S.), 828; 172 A., 172; 49 S.W.2d 679; 37 C.J., 511; 121 A. S.R., 471; 177 S.C. 148.
February 15, 1938. The opinion of the Court was delivered by
This is an action on an insurance policy issued by the defendant company on the life of one Dr. John Pressly. As questions only of law were involved, there being no dispute as to the facts, the case was tried before Judge Johnson without a jury. The issues had to do with the interpretation of certain provisions of the policy called "nonforfeiture privileges," and made, as argued here, substantially the following questions: (1) Does the reduction provided for by the policy, where there is an outstanding loan, apply to the extended term of the policy or to the amount? (2) If to the amount, is such provision void under Section 1921 of the Code of 1932 and as against public policy?
At the hearing below, the contention of the plaintiff was that the provision in question "referred to time as applied to extended insurance." Judge Johnson, however, held contrary to that view, and the respondent now asks this Court to say that he erred in so holding, and that the judgment of the Circuit Court be sustained upon the additional ground stated in respondent's contention. The second question was answered in the affirmative, and the defendant by its appeal challenges the correctness of such answer.
We think the Circuit Judge, under the decisions cited by him, correctly disposed of the first question. As to the second, his conclusions thereabout are sound and are supported by the great weight of authority. See Ringstad v. Metropolitan Life Insurance Company, 182 Wn., 550, 47 P.2d 1045, 106 A.L.R., 1532, and annotation beginning at page 1537. The decision in the Ringstad case is clearly in point. The provisions of the policy of insurance before the Washington Court were, in effect, the same as those in the policy here. Also, it is agreed that the Washington statute held by the Court to be applicable and governing was practically the same as our own statute. While there are some cases in which a different conclusion is reached, the following from the annotation referred to correctly states the trend of the decisions: "Provisions in life insurance policies which discriminate between borrowing and nonborrowing insurants, as regards options allowed, have, in most cases where the question has arisen, been held to be invalid, either in that they violate a statute prohibiting discrimination between insurants of the same class, or because such discrimination is deemed opposed to public policy."
Judge Johnson's order, which we approve and adopt, will be reported.
The judgment of the Circuit Court is affirmed.
MESSRS. JUSTICES BONHAM, BAKER and FISHBURNE concur.
MR. JUSTICE CARTER did not participate on account of illness.