Edwards v. Northwestern Mut. Life Ins. Co.

• Decision Date: 05 June 1944
• Docket Number: No. 20448.,20448.
• Citation: 183 S.W.2d 359
• Parties: EDWARDS et al. v. NORTHWESTERN MUT. LIFE INS. CO.
• Court: Missouri Court of Appeals

183 S.W.2d 359

EDWARDS et al. v. NORTHWESTERN MUT. LIFE INS. CO.

No. 20448.

Kansas City Court of Appeals. Missouri.

June 5, 1944.

Appeal from Circuit Court, Jackson County; Paul A. Buzard, Judge.

Action by Nellie B. Edwards and Fred Will against the Northwestern Mutual Life Insurance Company on life policy. From a judgment for defendant, the plaintiffs appeal.

Judgment reversed and cause remanded with directions.

Paul T. White, Lester McRoberts, and Harry A. Hall, all of Kansas City, for appellants.

E. R. Morrison, W. B. Cozad, and Morrison, Nugent, Berger & Johns, all of Kansas City, and G. M. Swanstrom and Wm. E. Jones, both of Milwaukee, Wis., for respondent.

SPERRY, Commissioner.

This is a suit on a life insurance policy issued by Northwestern Mutual Life Insurance Company, defendant, on the life of Verne D. Edwards, now deceased, insured. Nellie B. Edwards, beneficiary, assigned her interest to Fred Will and they are plaintiffs. The case was tried to the court, and findings and judgment were for defendant. Plaintiffs appeal.

The policy was issued January 21, 1919, is a Missouri contract, and the face amount thereof is $5000. February 10, 1923, insured assigned the policy and secured a policy loan. Various policy loans were made thereafter, each new loan absorbing the previous loan, together with unpaid interest thereon at 6% compounded, until February 26, 1930, when the last loan was made, in the sum of $1019. Thereafter, no further loans were made nor did insured make any payments on said loan. On April 21, 1938, the policy lapsed for nonpayment of premium and was placed on extended insurance.

The rate of interest that the loan bore was 6%. The only question involved is whether interest is to be computed as simple interest or whether it is to be compounded. Defendant computed the interest at the rate of 6% and compounded it on an annual basis. Plaintiffs contend that only simple interest accumulations may be added to the principal of the note in arriving at the amount due on the loan on the date of insured's death. If the loan bore simple interest only, it is conceded that there was sufficient reserve value in the policy at the time it lapsed to have carried it in full force until after insured's death, but if the loan bore compound interest, as defendant contends, the reserve was only sufficient to carry the policy until May 31, 1938, and it had expired before insured died.

The question presented is one of first impression in Missouri; and it is of vast importance to this defendant and, no doubt, to many other life insurance companies doing business in this state, as well as to many thousands of policyholders.

The policy contained the following provision:

"At any time while this Policy is in force except as extended term insurance, and without the consent or participation of any beneficiary not irrevocably designated, the Company will on receipt of this Policy properly assigned advance on the sole security hereof any amount up to the limit secured by its cash surrender value. The sum advanced shall bear interest at a rate of not to exceed six per cent per annum and may be repaid at any time while this Policy is in force except as extended term insurance. Failure to pay either the sum advanced or interest thereon shall not avoid this Policy unless the total indebtedness to the Company on account hereof shall equal or exceed the then cash surrender value, nor until thirty-one days after notice shall have been mailed to the last known address of the Insured or any Assignee." (Italics ours.)

It also contained the following provision:

"This policy and the application therefor (a copy of which is attached to this policy when issued) constitutes the entire contract between the parties hereto. * * *"

When insured secured loans under his policy he was required to, and did, execute an assignment agreement in the following form:

"In Consideration of the loan to the undersigned by the Northwestern Mutual Life Insurance Company, of the sum of ______ Dollars, payable at its Home Office in the City of Milwaukee, Wisconsin, with interest at the rate of six (6) per cent, per annum, payable annually, the undersigned, as security for the payment of said loan with interest, hereby assign, transfer and set over to the said Company at Milwaukee, Wisconsin, Policy No. ___ issued by the said Company on the life of ______ including all present and future additions thereto.

"In case of the non-payment of any interest on said loan as above provided, such interest shall be added to and become a part of the principal of said loan and shall bear interest at the rate aforesaid. Whenever the total indebtedness to the said Company on account of said loan and accrued interest shall equal or exceed the cash surrender value of said policy, and thirty-one days after notice shall have been mailed to the last known address of the insured, and of any assignee of said policy, the said policy shall, without other action on the part of the said Company, become void and be deemed surrendered in consideration of the cancellation of said loan."

Much testimony was offered by defendant and the trial court made findings therefrom; a part of such findings so made are as follows:

"Insured executed eight such Assignment Agreements during the years 1923 and 1930, inclusive. The Policy Loan was continuously in force during the period from 1923 to 1938, and written notice was given by defendant to the Insured prior to each date that interest was due thereon that if the interest were not paid when due, it would be added to principal. Beginning with February 26, 1931, to and including February 26, 1938, the Company gave Insured written notice that the interest had not been paid when due and that the unpaid interest had been added to principal. * * *

"All of the Assignment Agreements securing policy loans were fully executed and performed more than a year prior to the death of the Insured; the interest was computed by the Company, in accordance with the provisions of the Assignment Agreement, and the Insured was informed thereof; the interest, as so computed, was treated as an asset by the Company and added to income and Insured given the benefit thereon in determining the amount distributable as dividends on his Policy; at the time of premium default, the net value of the Policy was determined, in accordance with the provisions of the Assignment Agreement, and the indebtedness was cancelled, as provided in said Agreement, and the Policy sued on herein was returned to the Insured. * * *

"It was at all times the universal, uniform, notorious and open custom, usage and practice of all life insurance companies to make all computations affecting insurance policies and insurance contracts, which involved interest or interest assumptions, on the basis that interest will be so paid annually and immediately reinvested and compounded, and all actuarial computations relating to life insurance policies were at all said times based upon the compounding of interest annually.

"It was at all times that said Policy was in force the uniform custom and practice of the defendant to provide for addition of unpaid interest to principal and to provide for payment of interest thereon in all Assignment Agreements securing loans on policies containing provisions like, or similar to, those contained in the Policy sued on herein, and such custom and practice was openly and notoriously followed by life insurance companies generally at all said times, and at all said times it has been the uniform, open and notorious custom of defendant, and all life insurance companies, to require payment of interest annually on all policy loans. * * *

"Assignment Agreements in substantially similar form providing that interest unpaid when due shall be added to principal, were used by defendant in the making of all policy loans since July, 1906, and several hundred thousand loans to policyholders were made on such forms upon policies containing loan provisions substantially identical with those in the Policy sued on herein; for more than 25 years, the validity of such agreements, as applied to such policies was not questioned in a single case brought by any interested party."

The findings of facts as above set forth are fully supported by the evidence.

It also appeared from the evidence that:

"The validity of the form of Assignment Agreement executed by the Insured when used to secure loans upon the form of Policy issued herein, and the validity of interest on unpaid interest which has been added to principal thereunder, as an asset of the defendant company, was passed upon and approved by the duly authorized examiners of the Insurance Department of the State of Missouri, both prior to the issuance of the Policy sued on herein and subsequent to the issuance thereof."

Determination of the question presented must rest upon a construction of the language used in the insurance contract. The policy itself specifically states that the policy and the application therefor constitute the entire contract between the parties. One of the valuable rights purchased by insured, one of the promises made to him by defendant and by it solemnly set out in the policy sold to him, under the section designated as and devoted to "Nonforfeiture and Loan Provisions", was the right to borrow money on the sole security of the policy "properly assigned," and "The sum advanced shall bear interest at a rate not to exceed 6% per annum * * *."

What the last quoted expression means must be determined by application of the usual and ordinary rules of construction which are uniformly applied to the construction and interpretation of insurance contracts in this state. The fact that this may be a case which will be more far reaching, and affect more insurance companies and policyholders than are affected in other cases, cannot afford justification for varying the rules of construction. Rules of...