Clement v. New York Life Ins. Co.

• Decision Date: 10 March 1898
• Citation: 46 S.W. 561,101 Tenn. 22
• Parties: CLEMENT et al. v. NEW YORK LIFE INS. CO.
• Court: Tennessee Supreme Court

46 S.W. 561

101 Tenn. 22

CLEMENT et al. v. NEW YORK LIFE INS. CO.

Supreme Court of Tennessee.

March 10, 1898

Appeal from chancery court, Obion county; John C. Cooper, Judge.

Suit by R. H. Clement and others against the New York Life Insurance Company. From a decree dismissing the bill, complainants appeal. Affirmed.

Caldwell & Lowe, for appellants.

Turley & Wright and Moore & Wells, for appellee.

WILKES J.

This is an action upon a policy of insurance for $8,000, upon the life of Mattie Lee Wright. The policy was issued on the 11th of October, 1893, and was payable to the executors administrators, and assigns of the insured. On the 19th of October, 1893, it was assigned to R. H. Clement and W. B Kerr, upon consideration that they pay the premiums as they should accrue, as well as the premiums upon a policy of $2,000 issued simultaneously by the assured, upon his life for the benefit of his wife, and the further consideration of $25 paid to the assured himself. The assured died December 27, 1894, or one year, two months, and sixteen days after the policy issued, he being about 26 years of age. After his death, W. B. Kerr assigned $2,228.10 of his part and interest in the policy to the Jerome Hill Cotton Company, to satisfy an attachment which had been levied upon it, and afterwards but before this suit was instituted, assigned the remainder of his interest under the policy to his two sons, the complainants W. A. and E. B. Kerr. Upon the hearing of the cause in the court below, upon a voluminous record and a vast volume of proof, the chancellor was of opinion that complainants were not entitled to recover upon the policy, nor to any relief; and dismissed the bill at their cost, and they have appealed and assigned errors.

The learned chancellor, in his decree, set out in full his finding of facts and conclusions of law thereon. We are satisfied from an examination of the entire record as it is presented that the chancellor was in the main correct in finding the facts, as follows: When the policy was issued, the insured was not a fit and suitable subject for insurance, because of ill health and bodily infirmities, of a serious character, which was well known to him, and concealed by him in making his application, and he procured the policy by fraudulent misrepresentations as to his physical condition. It also appears that prior to the delivery of the policy, and doubtless to the application, the said R. H. Clement and W. B. Kerr had agreed with the insured that, for the consideration heretofore stated, he would transfer the policy for $8,000 to them; and the policy was procured in conformity to and in pursuance of such agreement, said Clement and Kerr paying the cash to the agent, but not until after the transfer was made and the policy delivered to them. The terms of the transfer recite that Clement and Kerr were creditors of the insured; but such does not appear to be the fact from the record, except so far as that relation may be said to have arisen out of the agreement referred to; nor were they in any way related to him, nor did they have any insurable interest in the life of the deceased, but had knowledge of his physical condition. The chancellor was therefore of opinion that the transaction was a gambling or wagering contract upon the life of the insured; that to recognize or enforce it would be contrary to sound public policy; and that the subassignees or transferees of W. B. Kerr could stand upon no other or higher ground than he could.

Unquestionably, the findings of the chancellor are correct, and his conclusions correct, upon the record as presented to us, unless they are controlled and neutralized by the provisions of the policy in regard to the right of the company to contest its liability in case of death. The provision referred to is as follows: "Incontestability. After this policy shall have been in force one full year, if it shall become a claim by death, the company will not contest its payment provided the conditions of the policy as to payments of premiums have been observed." The rights of the parties are made thus to turn upon the force, effect, and extent of this provision in the policy. It must be apparent from the outset that this provision was intended to have some material effect, and not inserted as a matter of form. No more tempting provision to an applicant could be introduced into a policy of life insurance than this one, which guarantied to the applicant that his policy should not be contested after the expiration of one year, provided the premiums were paid. Premiums upon a life policy are often paid at a great sacrifice, and one of the most disturbing and unsatisfactory features of the insurance contract is the fact that after these sacrifices and payments have been made for a number of years, and the insured has died, so that his testimony and perhaps that of others has been rendered unavailable by the lapse of time and the occurrence of death, instead of receiving the promised reward, the beneficiary will be met with a contest and a lawsuit to determine whether the insurance ever had any validity or force. Hence it has become an almost universal practice with insurance companies to provide against any contest or forfeiture of their policies after a certain length of time, greater in some cases, and less in others. The provision in this case is very broad in its terms. There is only one condition upon which the validity of the policy can be questioned after the lapse of a year, and that is the nonpayment of premiums. The meaning of the provision is that, if the premiums are paid, the liability shall be absolute under the policy, and that no question shall be made of its original validity. No reasonable construction can be placed upon such provisions other than that the company reserves to itself the right to ascertain all the facts and matters material to its risk and the validity of its contract, for one year; and if within that time it does not ascertain all the facts, and does not cancel and rescind the contract, it may not do so afterwards upon any ground then in existence. "The practical and intended effect of the stipulation is to create a short statute of limitation in favor of the insured, within which limited period the insurer must, if ever, test the validity of the policy."

It has been held that an agreement limiting the time within which an action may be brought upon a policy of insurance by the beneficiary is not against public policy, and may be enforced, though less than the usual time imposed by law has been fixed. If this be so, it is difficult to see why a similar limitation upon the right of the insurer to contest should be against public policy, and why it should not be enforced by the courts. It is said, however, that fraud appearing in the origin of the contract must, as in any other case, render it null and void from the beginning. It is true that fraud vitiates all agreements and undertakings based upon it, and they may be set aside at the instance of the party defrauded. So, in this case, fraud in obtaining the policy would vitiate it at the option and upon the motion of the party defrauded; but, under the provision in question the party must within the year exercise his right to repudiate and rescind it. The effect of this agreement not to contest is to put the company in the attitude of being unable to set up any fraud or false swearing in obtaining the policy, or any other defense to it, save the one excepted, so far as its original validity is concerned. Unless the language be thus construed, it is unpractical to put any reasonable interpretation on it. Unless it is the object and purpose of the provision to cut off all defenses arising out of the false statements of the applicant to obtain it, it is difficult to see what practical benefit the insured is to derive from it. It has been well said: "The effect of the provision is to prevent the insurer from interposing as a defense the falsity of the representations of the insured, which is fraud. But it does not prevent an abandonment, rescission, and cancellation of the contract for such fraud provided the action for that purpose is brought within a year." It is virtually saying to the insured that "I will take one year in which to ascertain whether your representations are false or not, and whether you have been guilty of any fraud in obtaining the contract; and if, within that period, I cannot and do not detect such falsity and fraud, I will obligate myself to make no further inquiry in the matters, and to make no defense on account of them." It has also been properly said: "Such a stipulation ought to be an incentive to the insurer to exercise vigilance and good faith in investigating the truth or falsity of the representations upon which the policy is issued, while the matter is fresh, and thus it operates fairly between the parties. The witnesses are all alive, and the exact truth can, if ever, be ascertained; and the stipulation prevents the insurer from lying by and receiving the premiums during the life of the insured, and after his death, when the good...