Pendleton v. Pan American Life Ins. Co.

• Decision Date: 18 March 1932
• Docket Number: No. 5782.,5782.
• Citation: 56 F.2d 935
• Parties: PENDLETON v. PAN AMERICAN LIFE INS. CO.
• Court: U.S. Court of Appeals — Sixth Circuit

56 F.2d 935 (1932)

PENDLETON v. PAN AMERICAN LIFE INS. CO.

No. 5782.

Circuit Court of Appeals, Sixth Circuit.

March 18, 1932.

J. W. Howard, of Prestonsburg, Ky. (W. Porter Mayo, of Prestonsburg, Ky., and Geo. B. Martin, of Catlettsburg, Ky., on the brief), for appellant.

Wm. Marshall Bullitt, of Louisville, Ky. (R. Lee Blackwell and Bruce & Bullitt, all of Louisville, Ky., on the brief), for appellee.

Before MOORMAN, HICKS, and HICKENLOOPER, Circuit Judges.

MOORMAN, Circuit Judge.

On July 28, 1919, the appellee issued a policy of insurance for $5,000 upon the life of Edgar Wallace Pendleton, the appellant's intestate. Pendleton paid the first four annual premiums on their due dates, but when the fifth premium became due he was unable to pay it and executed his note therefor to the company. The sixth premium, due July 28, 1924, was not paid, and the policy lapsed. Pendleton died June 23, 1926, and his administratrix, the appellant, claiming that the policy was in effect at the time of his death, brought this suit to recover the full face value thereof.

The policy contained a nonforfeiture provision effective after the payment of premiums for the first three full years. Under this provision, upon default in the payment of any subsequent premium the insured had the right to elect: (1) To accept the cash value of the policy; (2) to have the insurance continued in force for its face amount as term insurance from the date, including the period of grace, that the premium was due, without the right to loan or cash value; or (3) to purchase paid-up insurance payable at the same time and on the same conditions as the policy, but without the right to loan or cash value. It was further stipulated in this provision that if the insured failed within one month (thirty days) from the date of default to surrender his policy and elect to accept therefor the cash surrender value or paid-up insurance as provided in options (1) and (3), then option (2) for extended insurance should become operative, and the insurance would be continued for such term as the cash value of the policy as of the date of default would purchase, "cash value" being defined as the reserve at the date of default, less a surrender charge of not more than 2½ per cent. of the amount insured by the policy, and less any unpaid premium or existing indebtedness to the company on the policy.

It is admitted that the insured did not surrender his policy or make an election thereunder within thirty days from the date of default; that the reserve as of that date was $216.80; that the amount of the insured's indebtedness to the company with interest was $103.50; and that the surrender charge, according to the provisions of the policy, was $36.80. Though not complaining of the judgment against it in the court below, the appellee contends that all of the terms of the nonforfeiture provision were effective and enforceable, with the result that upon the failure of Pendleton to make an election within thirty days from the date of default the cash value of the policy as of that date, $76.50 (the reserve less the indebtedness and surrender charge), was converted into extended insurance which expired May 2, 1926, fifty-one days before Pendleton's death. The appellant contends that the provision was inoperative in so far as it authorized the deduction of a surrender charge but was effective for the purposes of extended insurance, and that consequently the amount available for such insurance at the date of default was sufficient to extend and did extend the policy beyond the date of the insured's death. The trial court held that inasmuch as section 659 of the Kentucky Statutes forbade the deduction of a surrender charge, the nonforfeiture provision was wholly void and appellant was remitted to her rights under the statute, and gave judgment against appellee for such paid-up insurance as the reserve less the insured's indebtedness would purchase, amounting to $300.

The Kentucky Statutes, § 659, provide that upon default in the payment of a premium on a policy, after three full years' premiums in cash have been paid, the policy "shall be binding upon the company for the amount of paid-up insurance, which, according to the company's published tables of single premiums, the net value of the policy on such anniversary, and all dividend additions thereon, computed" according to section 653 of Kentucky Statutes, "will purchase as a net single premium for life or endowment insurance maturing and terminating at the time and in the manner provided in the original policy." While this statute also provides that an insurance company "may contract with its policy-holders to furnish, in lieu of the paid-up insurance, * * * any other form of life insurance lawful in this commonwealth, of not less value," it is plain that it does not require an insurance company to issue any form of insurance upon the lapse of a policy except paid-up insurance.

The Court of Appeals of Kentucky has undoubtedly held that the statute forbids the deduction of a surrender charge. This holding we accept as a binding construction of a state statute. We cannot, however, assent to the view that the court has also held that the statute requires the issuance of extended insurance. In Penn's Mutual Life Insurance Co. v. Barnett's Adm'r, 124 Ky. 266, 96 S. W. 1120, 99 S. W. 228, the suit was for paid-up insurance. There was no statute in the state, at the time the policy there involved was issued, requiring life insurance companies to issue paid up insurance. The insurance company, however, contracted to issue such insurance, but according to a practice deducted a surrender charge from the amount available for purchasing it. The policy did not authorize the deduction, but provided that upon its lapse, after a number of premiums were paid, the full reserve was to be accounted for in paid-up insurance. The court held that the contract did not authorize the deduction, and in the absence of any statute to that effect the company had no right to make it but was required to apply the full reserve to paid-up insurance. In Peak v. Mutual Benefit Life Ins. Co., 172 Ky. 245, 189 S. W. 195, 197, the policy provided for three options: (1) Cash surrender value; (2)...