Freeport Sulphur Co. v. Aetna Life Ins. Co.

• Decision Date: 15 September 1953
• Docket Number: No. 14356.,14356.
• Citation: 206 F.2d 5,41 ALR 2d 762
• Parties: FREEPORT SULPHUR CO. v. AETNA LIFE INS. CO. AETNA LIFE INS. CO. v. FREEPORT SULPHUR CO.
• Court: U.S. Court of Appeals — Fifth Circuit

41 ALR 2d 762, 206 F.2d 5 (1953)

FREEPORT SULPHUR CO. v. AETNA LIFE INS. CO.

AETNA LIFE INS. CO. v. FREEPORT SULPHUR CO.

No. 14356.

United States Court of Appeals Fifth Circuit.

July 24, 1953.

Rehearing Denied September 15, 1953.

Monte M. Lemann, Monroe & Lemann, New Orleans, La., Nicholas Callan, New Orleans, La., and Thomas R. Vaughan and

Pearson E. Neaman, New York City, of counsel, for Freeport Sulphur Co.

Eugene Saunders, Milling, Saal, Saunders, Benson & Woodward, New Orleans, La., George S. Brengle, Bigham, Englar, Jones & Houston, New York City, W. Braxton Dew, Hartford Conn., for Aetna Life Ins. Co.

Before HUTCHESON, Chief Judge, and RUSSELL and STRUM, Circuit Judges.

STRUM, Circuit Judge.

This action was instituted by Freeport Sulphur Company to determine, by declaratory judgment, the period of duration of the contract hereinafter described, and for incidental relief. 28 U.S.C.A. §§ 2201, 2202.

Freeport is engaged in the mining of sulphur in Louisiana and Texas. In 1933, it desired to institute a pension plan for the benefit of its then and future employees, and those of its affiliated companies, by which annuities would be provided for said employees when they reached the age of retirement. To this end, beginning in August, 1933, Freeport commenced negotiations with the defendant Aetna Life Insurance Company, and another company, seeking to formulate a satisfactory group annuity plan. After spirited competition, the business was awarded to Aetna, which issued a group annuity contract dated April 1, 1934.

Under the policy, employees who had been in the employ of Freeport or its affiliates, for one year or more, and new employees after one year of employment, who had not attained the age of 65 years for men, 60 years for women, could apply for, and Aetna would issue to them, annuity policies maturing at stated ages, upon the payment by Freeport of designated premiums, provided the employees remained in the employment of Freeport, or its affiliates, until their normal retirement age.

The contract obligates Aetna to cover every qualified employee who makes application to the employer (not to Aetna), and for whom the required premium is paid. Coverage becomes effective as to each such employee when Freeport gives notice to Aetna that an application therefor has been made by the employee to the employer. Thus, coverage is virtually automatic upon the application of a qualified employee. Aetna is not authorized to reject any such application, so long as the employee is eligible under the terms of the master contract. Premiums are paid annually by Freeport, which partially reimburses itself by deductions from the pay of the participating employees, both employer and employee bearing a portion of the cost. Aetna reserved the right to modify the premium rates from time to time after the first five years of operation of the policy, by increasing the rates by not more than 7½% of the original rate for the period of 1939-1944, and further increases of not more than 2½% for each additional five year period. See note 1, post. Aetna exercised these rights at the expiration of each five year interval.

The contract remained in force without interruption from April 1, 1934 until November 23, 1949, about 15½ years, when Aetna notified Freeport that after January 1, 1950, no new coverages would be issued under the contract. This amounted to a cancellation of the contract as to new coverages, but did not undertake to affect or impair the rights of employees already covered. It was this notice which precipitated this controversy.

The contract is unambiguous, except that it does not specify how long it shall remain in effect. The absence of such a clause is the basis of this suit. Freeport contends that the contract remains in effect perpetually, so long as premiums are paid. Aetna claims that the contract is terminable at will by either party, insofar as it remains executory, that is, as to future coverages, but concedes that the rights of employees already covered can not be impaired. The district judge accepted neither contention, but held that the contract is terminable by Aetna upon notice, after a reasonable time, which he determined to be 25 years after its inception, which would be April 1, 1959, thus leaving a further effective period of approximately 6½ years from the date of the decree below. 107 F.Supp. 508, 513. Both parties appeal from those portions of the decree adverse to them.

In reaching his conclusions as to the interpretation and effect of the contract, the district judge thus correctly stated the law: "This employees' group annuity policy is a unilateral contract, an exchange of a promise for an act, a situation in which the insurer, in consideration of the annual payment of the premium by the employer, gives the employer, among other things, a continuing option to purchase annuities for its new employees at the price fixed in the contract. Such an option is not terminable at will by the insurer. Since no term for the option is provided in the contract, it is terminable after a reasonable time. Restatement, Law of Contracts, §§ 24, 47; Williston on Contracts, Revised Edition, Vol. 1, §§ 38, 61; Holt v. St. Louis Union Trust Co. 4 Cir., 52 F.2d 1068; Bach v. Friden Calculating Mach. Co., 6 Cir., 155 F.2d 361; Cohen & Sons, Inc. v. M. Lurie Woolen Co., Inc., 232 N.Y. 112, 133 N.E. 370; Pope v. Terre Haute Car & Mfg. Co., 107 N.Y. 61, 13 N.E. 592. * * * One effect of Freeport's performance under the contract is to give Freeport an option to purchase for its new employees annuities pursuant to the contract. The consideration supporting the contract also supports the option which is one of the terms of the contract." Of course, the contract would "discontinue" at any time Freeport ceased paying the required premiums.

We agree with the foregoing conclusions of the district judge, as well as his conclusion that the contract should be interpreted according to the laws of New York, where it was delivered to Freeport and became effective, after having been submitted to, and approved by, the Superintendent of Insurance of that state. N. Y. Life Ins. Co. v. Chapman, 8 Cir., 132 F.2d 688; Mutual Benefit Health & Acc. Ass'n v. Kennedy, 5 Cir., 140 F.2d 24; Order of U. C. T. v. Meinsen, 8 Cir., 131 F.2d 176; 11 Am.Jur. 386(100). Compare ...