Equitable Life Assur. Soc. v. Deem

• Decision Date: 06 August 1937
• Docket Number: No. 4185.,4185.
• Citation: 91 F.2d 569
• Parties: EQUITABLE LIFE ASSUR. SOC. OF UNITED STATES v. DEEM.
• Court: U.S. Court of Appeals — Fourth Circuit

91 F.2d 569 (1937)

EQUITABLE LIFE ASSUR. SOC. OF UNITED STATES v. DEEM.

No. 4185.

Circuit Court of Appeals, Fourth Circuit.

August 6, 1937.

Robert G. Kelly, of Charleston, W. Va. (Brown, Jackson & Knight, of Charleston, W. Va., on the brief), for appellant.

S. A. Powell, of Harrisville, W. Va., for appellee.

Before PARKER and NORTHCOTT, Circuit Judges, and CHESNUT, District Judge.

CHESNUT, District Judge.

The proper interpretation of an excepting phrase in the incontestable clause of a life insurance policy is the matter for decision in this case. In addition to the promise of the insurer to pay $10,000.00 to the insured's beneficiary on his death, the policy, issued April 9, 1929, contained provisions for the payment of double indemnity in the event of the death of the insured from accident, and also for the payment of benefits of $100.00 a month to the insured in the case of his total and permanent disability, and for the waiver of subsequent premiums in that event, "subject to the conditions of such provision." On February 21, 1936, the insured filed suit against the insurer in the district court to recover disability benefits accruing from January 1, 1932. The insurer defended on the ground of certain specified false and fraudulent representations alleged to have been made by the insured in his application for the policy. The plaintiff's demurrer to this defense was sustained by the district court and at the trial of the case evidence in support of the defense offered by the defendant was rejected by the court, with the result that the plaintiff obtained a judgment for disability benefits under the policy in the sum of $5,962.50, from which the defendant has prosecuted this appeal.

The district court rejected the insurer's defense on the view that it was precluded by the incontestable clause of the policy which read as follows:

"This policy, except as to the provisions relating to Disability and Double Indemnity, shall be (a) Incontestable after it has been in force during the lifetime of the Insured for a period of one year from its date of issue, provided premiums have been duly paid, and (b) free from restrictions on travel, residence, occupation, or military or naval service." (Italics supplied.)

The italicized phrase is the subject matter for interpretation in this case. The contention of the insurer is that the phrase clearly excepts from the operation of the incontestable clause that portion of the whole policy relating to disability and double indemnity; while that advanced on behalf of the insured is that the phrase should be construed to read "except as to the conditions of the provisions relating to disability and double indemnity," and when so read it is said the clause does not permit a contest, after one year from the date of the policy, of the liability of the insurer to pay disability benefits, if they are otherwise payable on the conditions specified in the policy; or, in other words, the only permissible contests are limited to a determination whether the conditions have been met.

There is no uncertainty as to the rule of construction which must here govern. The subject matter is one of general law to which the federal courts are authorized to apply their own rules of decision, and indeed must do so in this case, there being no pertinent statute or decision in West Virginia, in which State the insured resided and the case was tried. It does not clearly appear from the record in what State the contract was made. The policy was executed and the proceeds made payable in New York but it is perhaps inferable that it was delivered and became effective in West Virginia as the application for the policy was dated at Parkersburg. Mutual Life Ins. Co. v. Johnson, 293 U.S. 335, 55 S.Ct. 154, 79 L.Ed. 398; Northwestern Mut. Life Ins. Co. v. Johnson, 254 U.S. 96, 41 S.Ct. 47, 65 L.Ed. 155.¹ The well established federal rule as to the construction of insurance policies generally, applicable as well to the incontestable clause of life policies, is that where the language and meaning is clear and unambiguous it is to be understood in its plain, ordinary and popular sense; but in case of ambiguity, that construction is to be adopted which is most favorable to the insured. Imperial Fire Ins. Co. v. Coos County, 151 U.S. 452, 463, 14 S.Ct. 379, 38 L.Ed. 231; Mutual Life Ins. Co. v. Hurni Packing Co., 263 U.S. 167, 174, 44 S.Ct. 90, 68 L.Ed. 235, 31 A.L.R. 102; American Life Ins. Co. v. Stewart, 300 U.S. 203, 215, 57 S.Ct. 377, 81 L.Ed. 605; Stroehmann v. Mutual Life Ins. Co., 300 U.S. 435, 57 S.Ct. 607, 81 L.Ed. 732.

It will be an aid to the interpretation to bear in mind the origin and development of the incontestable clause. Life insurance policies, in common with other contracts, were subject to attack for fraud or material misrepresentation in their procurement. From the nature of the subject matter such an attack usually came only after the death of the insured who was ordinarily the chief witness to defend the integrity of the policy. As the volume and importance of life insurance increased, and its economic function as a long term investment and credit aid, as well as its primary purpose of security for dependents, became more widely understood, the need was felt for some assurance against such possible attacks on the validity of the policy. In consequence, many companies began thirty or more years ago to insert the incontestable clause in their policies, and today the inclusion of the clause is very general, and is now required by the statutes of many States.² In the earlier cases applying the clause, there was some diversity of opinion as to its operation and in some cases an apparent failure to clearly distinguish between "a denial of coverage and a defense of invalidity." "It means only this, that within the limits of the coverage the policy shall stand, unaffected by any defense that it was invalid in its inception, or thereafter became invalid by reason of a condition broken." Metropolitan Life Ins. Co. v. Conway, 252 N.Y. 449, 452, 169 N.E. 642, 643 (per Cardozo, C. J.) For illustration, where the policy clearly excluded liability for death by suicide, some decisions held that the insurer was nevertheless liable by reason of the incontestable clause. But now, by the federal decisions without any noted exception, and in many State courts, the clause does not bar a contest over claims for loss not within the coverage of the policy.³

It is now generally held that, subject to the limits of coverage and clearly excluded risks, and with particular exceptions not here material, such as necessity of proof of claim and possible defense based on public policy, the clause bars all contests not excepted by its terms. In consequence it is now customary to insert specified exceptions in the clause. In its earliest form the clause generally excepted only the required payment of the premium. But, due in part to the uncertainty as to the operation of the clause in conflict with excluded risks, and to meet new conditions arising in the business of life insurance, other exceptions have been added from time to time, and in some states the statutes have specifically authorized them. Thus in New York the earliest form of the clause as required by statute contained as the only exception the nonpayment of premiums (Insurance Law Laws 1892, c. 690 § 101 as added by Laws 1906, c. 326, § 37). In 1909 the statute was amended to add the exception of "violation of the conditions of the policy relating to military or naval service in time of war" (Insurance Law § 101, subd. 2, Laws 1909, c. 301, § 7); and in 1921 (Laws 1921, c. 407, § 1) there was further added the exception that the policy must have been in force during the lifetime of the insured for (one or) two years; and finally in 1923 (Laws 1923, c. 28, § 1, section 101, subd. 2, Insurance Law) the statute was again amended to allow, at the option of the insurer, exception from the clause of "provisions relative to benefits in the event of total and permanent disability and provisions which grant additional insurance specifically against death by accident." (Consol.Laws, c. 28). This latter statute and its particular wording is obviously of significance here as the defendant insurer is a corporation of the State of New York and directly subject to its laws, to which its policies must conform. (Italics supplied.)

As indicated by this history of the New York statute, the exception as to disability and double indemnity benefits is of comparatively recent origin. When the incontestable clause was first adopted, it was not customary for life policies to include provisions for accident and health insurance, and it was therefore not until that added form of protection became fairly general, for an additional premium, that the necessity for the exception arose. It may also be noted, as a matter of common knowledge, that in assuming these extra risks, the life insurance companies came into competition with the companies writing accident and health insurance, whose policies were generally written for a yearly period only and did not contain the incontestable clause. But whatever the reason for the now customary exception, "No reason appears to doubt the power of the insurer to except from the ordinary Incontestability Clause all policy provisions relating to Disability Benefits. Chapter 28, Laws N.Y. 1923 (Insurance Law Consol.Laws, c. 28, § 101); Steinberg v. New York Life Ins. Co., 263 N.Y. 45, 188 N.E. 152, 90 A.L.R. 542." Stroehmann v. Mutual Life Insurance Co., 300 U.S. 435, 439, 57 S.Ct. 607, 609, 81 L.Ed. 732. (Italics supplied). And in interpreting the excepting phrase, the only question is whether the wording used discloses a purpose definitely so to do.

In our opinion it does. This is the effect of the words used in their plain meaning. There is no ambiguity or uncertainty in the phrase. The wording is naturally that which comes to mind to...