Kansas Mut. Life Ins. Co. v. Whitehead

• Decision Date: 17 May 1906
• Citation: 93 S.W. 609,123 Ky. 21
• Parties: KANSAS MUT. LIFE INS. CO. et al. v. WHITEHEAD.
• Court: Kentucky Court of Appeals

93 S.W. 609

123 Ky. 21

KANSAS MUT. LIFE INS. CO. et al. v. WHITEHEAD.

Court of Appeals of Kentucky.

May 17, 1906

Appeal from Circuit Court, Jefferson County, Common Pleas Branch First Division.

"To be officially reported."

Action by Marie E. Whitehead against the Kansas Mutual Life Insurance Company and others. From a judgment in favor of plaintiff, defendants appeal. Reversed.

Du Relle & McHenry and Long & Price, for appellants.

John C Strother, for appellee.

BARKER J.

On February 10, 1898, the Kansas Mutual Life Insurance Company issued to Lurette M. Whitehead, a policy of insurance on his life for the sum of $2,000 payable at his death to his wife Marie E. Whitehead, and which contained among others, the following stipulation: "After two years from its date this policy will be incontestable, provided the premiums are duly paid and the requirements of the company as to age military or naval service, in time of war are observed." To obtain the policy, the insured made the usual representations as to his health, and, to the specific question as to whether he had consumption, answered, "No." On the 10th of November, 1900, the company undertook to cancel the policy for fraudulent representations on the part of the insured as to the state of his health, and notified him of this fact. An arrangement was then made by the parties preserving the legal status of each in the matter of tender and refusal of premiums as they thereafter fell due. On the 19th of June, 1903, the company being insolvent, was in the hands of receivers under order of the United States Circuit Court for the District of Kansas. Under a statute of Kansas authorizing it, the receivers effected a reinsurance of all the policies in good standing on the books of the insolvent corporation, by a contract with the Illinois Life Insurance Company, which was approved by order of the court. On the 8th day of August, 1903, Lurette M. Whitehead died, and payment of the policy having been refused by the corporations, this action was instituted by the beneficiary, Marie E. Whitehead, against both. The Kansas Mutual Life Insurance Company pleaded the fraud of the insured in the obtention of the policy in bar of the action against it, and the Illinois Life Insurance Company set forth circumstantially the facts of the contract of reinsurance made by it and the receivers of the Kansas Mutual Life Insurance Company, and denied that the policy in question was in good standing on the books of the insolvent company, at the time of the contract of reinsurance, or that it was embraced in the terms of that agreement. The trial judge sustained general demurrers to both pleas; to the first, because two years had elapsed between the date of the policy and the attempt to forfeit it, and, therefore, the incontestable clause applied; and to the second, because the policy, being legally in good standing at the date of the reinsurance contract, was embraced by its terms. The corporations declined to plead further, and a judgment was rendered in accordance with the prayer of the petition; of which they both complain.

In regard to the incontestable clause, appellants insist: First, that it should be construed to exclude any defense based upon the personal fraud of the insured; and, second, if this be not so, that the provision is void as authorizing and promoting fraud, contrary to public policy. It seems to us that the terms of the clause clearly embrace all defenses, except those specifically excluded by its language, and these are: First, that the premiums are duly paid; and, second, that the requirements of the company as to age, military or naval service in time of war, are observed. The language is that "after two years from its date the policy will be incontestable, provided," etc. Webster defines "incontestable" to mean, "Not contestable; not to be disputed; that which cannot be called in question or controverted; incontrovertible; indisputable." It must be conceded that if all defenses predicated upon the fraud of the insured are excluded there will be very little left upon which the incontestable clause can operate. In construing an insurance policy, as in construing any other contract, words are to be given their ordinary meaning and significance, except where they are terms of art; and applying this rule to the contract under discussion the word incontestable must, of necessity, include every defense which could otherwise be made to the policy, except those specifically excluded by the subsequent language. If this be not so, then the policy can only in a very limited sense be said to be incontestable.

Is the clause void as contravening public policy? It is said that, as a rule, fraud vitiates every contract, and that a sound morality requires that the courts should forbid one's contracting for immunity from the consequences of his own fraud. All this may be admitted to be sound as an abstract proposition; but it does not hold good in the actual affairs of life, when rules must be adjusted to meet conditions, rather than theories. In the case at bar, full force and effect is given to the theory for a specified time--two years--and after that another public policy comes into play, which recognizes the right of the insured, under certain conditions, to contract for peace, and for a knowledge that after the stipulated time has expired, neither he, nor, if he be dead, those for whom he has undertaken to provide, shall be put to the expense and trouble of a trial of the question as to whether or not fraud was perpetrated in the procurement of the policy. This view does not exclude the consideration of fraud, but allows the parties to fix by stipulation the length of time which the fraud of the insured can operate to deceive the insurer. It recognizes the right of the insurer, predicated upon a vast experience and profound knowledge in such matters, to agree that in a stipulated time, fixed by himself, he can unearth and drag to light any fraud committed by the insured, and protect himself from the consequences. This clause is of vast importance and benefit, both to the insured and to the insurer. It enables the latter to increase his business by giving an assurance to persons doubtful of the utility of insurance, that neither they nor their families, after the lapse of a given time, shall be harassed with lawsuits when the evidence of the original transaction shall have become dim, or difficult of obtention, or when, perhaps, the lips of him who best knew the facts are sealed by death. That this consideration is a powerful inducement, especially to the poor and obscure, to take out insurance, cannot be doubted; and after the lapse of this reasonable time, it must, of necessity, be of great consolation to the insured to feel that the insurance money, to secure which he has, perhaps, so often indured privation, will be paid over to his family undiminished by court costs or lawyers' fees.

To permit an insurance company to induce persons to insure their lives under the pleasing expectation of an incontestable clause, and then, when the insured is dead, to undertake, as against his family, to contest the policy on the ground of fraud, would be to permit the perpetration of as great fraud as the insured could possibly have committed in the obtention of the policy. There is no more public policy against the fraud of the insured than against the fraud of the insurer. The incontestable clause is upheld in law, not for the purpose of upholding fraud, but for the purpose of shutting off harassing de- fenses based upon alleged fraud; and, in so doing, the law merely adopts the certificate of the insurer that within a given time he can expose and render innocuous any fraud in the preliminary statement of the insured. There is no hardship in this to the insurer, because he fixes the time, and knows best his own ability to accomplish what he undertakes. There is no actual public policy which forbids so reasonable a contract. It is not a stipulation in favor of fraud or a fraudulent contract. On the contrary, it gives a long period of time...