Fox v. Mutual Ben. Life Ins. Co.

• Citation: 107 F.2d 715
• Decision Date: 28 November 1939
• Docket Number: No. 11451.,11451.
• Parties: FOX v. MUTUAL BEN. LIFE INS. CO.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

107 F.2d 715 (1939)

FOX v. MUTUAL BEN. LIFE INS. CO.

No. 11451.

Circuit Court of Appeals, Eighth Circuit.

November 28, 1939.

Walter A. Raymond, of Kansas City, Mo. (G. W. Duvall, of Kansas City, Mo., on the brief), for appellant.

Richard S. Righter, of Kansas City, Mo. (Horace F. Blackwell, Jr., of Kansas City, Mo., Edward O. Stanley, Jr., of Newark, N. J., and Lathrop, Crane, Reynolds, Sawyer & Mersereau, of Kansas City, Mo., on the brief), for appellee.

Kenneth E. Midgley, of Kansas City, Mo. (Henry I. Eager and George J. Winger, both of Kansas City, Mo., on the brief), for amici curiae.

E. R. Morrison, Homer H. Berger, and Douglas Stripp, all of Kansas City, Mo., filed brief as amici curiae.

Harry A. Hall, of Kansas City, Mo., as amicus curiae.

Before THOMAS, and VAN VALKENBURGH, Circuit Judges, and DEWEY, District Judge.

THOMAS, Circuit Judge.

This is an appeal from a judgment denying recovery on a policy of life insurance. The appellant is the widow of the insured, Frederick A. Fox, and the beneficiary named in the policy.

The facts are as follows. On February 7, 1927, the company issued its ordinary life policy No. 1,285,009 in the face amount of $5,000 to the insured at age 40. The policy provided for a level quarterly premium of $40.20. Dividends were to be used in reduction of premiums. The premiums for the first four quarters were paid in cash and thereafter by dividends, loans and part cash until the premium due February 7, 1930. This premium was not paid when due or within the grace period of 31 days. On March 31, 1930, or some days after the expiration of the period of grace, the policy was reinstated by arrangement of the parties. The subsequent premiums were paid by means of dividends, loans and a small amount of cash until the premium due May 7, 1931. According to a stipulation of facts the policy lapsed by its terms for failure to pay the premium due on that date. Following the terms of the contract, the company calculated the cash surrender value of the policy on May 7, 1931, deducted the net indebtedness of $312.68 and assigned it a net value of $39.23. Under the directions of the policy this sum was used to purchase extended insurance for a period of 290 days from May 7, 1931. The insured died on May 7, 1932.

The trial court found that the policy had lapsed for non-payment of the premium due May 7, 1931, and that after deducting the outstanding indebtedness the net value of the policy on that date was $39.23, or an amount sufficient to purchase extended insurance for 290 days. As a conclusion of law the court held that all liability under the policy had ceased prior to the insured's death because the duration of the period of extended insurance to which the insured was entitled on the date of lapse was not sufficient to carry it beyond the date of death whether calculated according to the method provided in the policy or that provided by the Missouri nonforfeiture statute, section 5741, R.S.Mo.1929, Mo.St.Ann. § 5741, p. 4388.

The appellant contends: (1) That the Missouri nonforfeiture statute required the company to use the gross rather than the net premium in computing the net value of the policy on May 7, 1931, and that so computed the policy had a net value sufficient in amount to purchase extended insurance beyond the date of the insured's death; (2) that even by the use of the net premium the policy, by its terms, had a net value on February 7, 1930, adequate to accomplish this result and that the nonforfeiture statute imposed a mandatory obligation on the company to place such extended insurance in force on that date. The appellee contends that neither the policy nor the statute require the use of gross premiums in computing net value. It further contends that the appellant is not entitled to urge, on this appeal, that the policy lapsed on February 7, 1930.

Section 5741 of the Missouri nonforfeiture statute provides as follows:

"No policies of insurance on life * * * shall, after payment upon it of three or more annual payments, be forfeited or become void by reason of non-payment of premiums thereon, but it shall be subject to the following rules of commutation, to-wit: The net value of the policy, when the premium becomes due and is not paid, shall be computed upon the actuaries' or combined experience table of mortality with four per cent interest per annum, and after deducting from three-fourths of such net value the unpaid portion of any notes given on account of past premium payments on said policy and any other indebtedness to the company secured by said policy, * * * the balance shall be taken as a net single premium for temporary insurance (extended insurance). * * *"

The policy is a Missouri contract and the construction given the statute by the courts of Missouri is conclusive. New York Life Insurance Co. v. Cravens, 178 U.S. 389, 20 S.Ct. 962, 44 L.Ed. 1116; Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487; Turner v. New York Life Ins. Co., 8 Cir., 100 F.2d 193; New York Life Ins. Co. v. Levin, 8 Cir., 102 F.2d 403. Whether the appellee was right in using the net premium as a basis for evaluating the policy on the date of lapse or whether the nonforfeiture statute required it to base the computation on the gross premium actually paid must turn upon the interpretation placed upon the words "net value" by the Missouri decisions. The respective contentions as to the meaning of the expression as used in the statute may be more clearly outlined by a brief reference to certain of the general principles governing the computation of life insurance premiums. These principles are not in dispute and a more complete discussion of them may be found in the Missouri cases cited hereafter.

The gross premium, or the amount charged in the contract of life insurance, ordinarily includes two elements, that is, the net premium and the loading. The loading, or the amount arbitrarily added to the net premium, is intended to cover the expenses of the company. In a stock company it may also be a source of profit and in a mutual company, a source from which dividends may be paid to the insured. Disregarding this loading charge for the time being, we may turn to a consideration of the net premium element. It is well known that net premiums for life insurance are calculated by means of a mortality table and an interest rate. If computed as a single payment at the beginning of the insurance period it is termed a net single premium and is that premium which, if exacted from a group of policyholders and immediately invested at the assumed rate of interest, will yield in the aggregate a sum exactly sufficient to pay all death claims as they mature providing the mortality rate is in accord with the table used. Ordinarily it is not convenient for the individual insured to pay the insurance charge in a single payment at the beginning of the period. If, however, the company should compute the amount of the natural premium, or the actual sum necessary to meet maturing death claims each year, and should charge each policyholder only his proportionate share of the burden, the amount of the annual premium of each individual insured would increase as the mortality risk increases with advancing age. In the later years of life the cost of the insurance would be prohibitive to a large class of policyholders whose earning power had decreased with old age. To avoid this situation the insurance companies compute the amount of a net level annual premium, which, if exacted from a group of policyholders and increased by interest, will yield a sum sufficient to satisfy all death claims. The result is generally referred to as the net, or net level, premium of the policy. Necessarily the net premium exceeds the natural premium or the amount required to meet the mortality risk in the early years of the life of the policy and is less than the amount needed in the later years. The income derived from this source must therefore be carried forward and the accumulated surplus, augmented by interest, must be kept as a reserve to meet the increasing obligation of the mortality risk in the future.

It is at this point that the present dispute arises. The company contends that the net value of the policy at any particular time is simply the reserve that has been accumulated in the early years of the life of the policy as a result of the excess of the net premium over the natural premium, or the actual sum necessary to meet the mortality risk. Without attempting to set forth the actuarial method of computing it this is the result of the net premium method of determining the net value of a policy on any particular date. It of course ignores the loading added to the net premium in fixing the gross premium charged in the policy.

The appellant contends that the gross premium charged by the terms of the contract must be used as the basis for determining the net value of the policy. The actuary called as a witness for the appellant testified that the "net value" of a policy and the "reserve" are not necessarily one and the same. He defined the reserve as "that accumulation over and above the net natural premium deducted from a net level premium formulation, according to a form or class of policy." This is substantially the generally accepted meaning of reserve as we have outlined it. The witness further testified that if the actual premium charged by the company is...