Penn's Mutual Life Ins. Co. v. Barnett's Adm'R.

• Decision Date: 15 January 1907
• Citation: 124 Ky. 266
• Parties: Penn's Mutual Life Ins. Co. v. Barnett's Adm'r.
• Court: Kentucky Court of Appeals

Page 266

124 Ky. 266

Penn's Mutual Life Ins. Co. v. Barnett's Adm'r.

Court of Appeals of Kentucky.

January 15, 1907.

Appeal from Jefferson Circuit Court, Chancery Branch (Second Division).

SAMUEL B. KIRBY, Judge.

Judgment for plaintiff. Defendant appeals. Reversed.

THOS. W. BULLITT and A. SCOTT BULLITT for appellant.

COPYRIGHT MATERIAL OMITTED

JAMES T. A BAKER and JOHN ROBERTS, attorneys for appellant.

OPINION OF THE COURT BY JUDGE NUNN — Affirming.

On the 6th day of April, 1885, the appellant issued a policy of insurance for the sum of $5,000 upon the life of Jonathan T. Barnett; the annual premium due thereon being $189.60. The assured paid the premiums regularly to the number of 12, but failed to pay the thirteenth, when, according to its terms, the policy lapsed. The policy in question contains, among others, the following provisions: "(11) That if this policy shall become void, all payments previously made upon it shall be forfeited to the company, but if the lapse shall occur by non-payment of premium after two full annual premiums have been paid, the company will, subject to the other conditions of the policy: First, extend, without participation, the full amount insured by this policy for as many years and days as the full reserve, by the actuaries 4 1-2 per cent table of mortality, at the time of such lapse (less any indebtedness upon this policy under the company's rules), will carry the same at the present established rates of the company, but if death shall occur within three years after such lapse by non-payment of premium, and during such extension of insurance, there shall be deducted from the amount payable the sum of all the accrued premiums (less surplus), with interest thereon; or, second, upon written application by the owner of this policy, and the surrender of all claims thereunder to the company at its home office within 60 days after such lapse, will grant nonparticipating paid-up insurance payable at death, for an equitable amount; but if, at the time of such lapse, five full years' premiums have been paid on this policy, then the paid-up policy shall be for as many twentieth parts of the said sum insured as there shall have been full annual premiums paid thereon; provided all outstanding liability under this policy be first paid off."

On the 26th day of September, 1896, Barnett executed a note to the appellant for $1,000. He only received $940, the remaining $60 was advanced in the payment of interest on the note for 12 months. He assigned his policy as collateral security for the repayment of the sum to the company. The note contained the following provision: "* * * it is agreed that, if said loan be not paid at maturity, the company is hereby authorized, with or without notice to the undersigned, to ascertain (according to its rules for the purchase of policies), the cash value of said policy, to cancel and annul the same, and, with the cash surrender value thereof, pay this loan note and any interest and costs that may be due on the same, and with the balance, if any, purchase and pass to the credit of said policy, on the books of the company, as much paid-up non-participating insurance (payable as the policy is, payable), as the amount will purchase at the then age of the insured; or apply the said balance according to the terms of the policy." The premium due April 6, 1897, was not paid, and by its terms, as said before, the policy lapsed. It is admitted that, at that time, the reserve fund on the policy due the insured amounted to $1,506.25, and the appellant, without notice to the insured, appropriated $33.75 of this fund to carry the policy to September 27th, the day the note fell due. On that day the company, without the knowledge or consent of the insured, made a settlement of the matter in this way: It first arbitrarily deducted 25 per cent of the total reserve, leaving $1,138.34; from this it deducted $33.75, the charge for carrying the policy from April 5 to September 27, 1897, and $1,000, the amount applied to payment of the note, which left, according to its calculation, $104.59 with which to purchase non-participating insurance payable at his death. Barnett was then 51 years of age, and the company reported to him that the balance of the reserve to his credit would purchase a policy for $215. The insured died in the year 1903, whereupon the appellant company offered to pay to his administrator $215, which he refused to accept, and instituted this action for an adjudication of his rights under the policy. Appellee claims that, under the terms of the policy, his decedent, on the 6th day of April, 1897, when the policy lapsed, was entitled to paid-up insurance for twelvetwentieths of $5,000, which amounted to $3,000. This was controverted by appellant, claiming that the terms of the note, which was executed for $1,000, changed the terms of the policy. The lower court adopted appellee's view, and rendered judgment in his favor for the $3,000, subject to a credit of the note for $1,000, with interest, leaving the judgment in favor of appellee for $1,802.

It seems to us that the appellant was entitled to have a settlement of the policy when it lapsed; it was not obligated to await the death of the insured before adjusting the same; by so doing the interest on the not might have exceeded the value of the policy, and it would have lost money as a result. The rights of the parties were not changed by reason of the fact that the insured died within a few years thereafter. A true basis for the settlement is to ascertain the actual cash value of the policy at the time it lapsed, April 6, 1897, considering the age of the insured and his expectancy of life under the mortality table; from that sum deduct the debt of $971.50, owed by the decedent, reduced by reason of payment of interest in advance. The balance would have been due to the assured. However, as the parties have treated this case upon another principle, and, as the result reached is practically the same, we will determine it upon the method fixed in the pleadings and proof. We do not think appellant had the right to deduct 25 per cent of the reserve of $1,506.25; nor did it have the right to apply the $33.75 for the purpose of continuing the policy. This reserve, which belonged in full to the insured, after deducting the amount due on the note at the time the policy lapsed, April 6, 1897, would have purchased a non-participating policy, payable at the death of Barnett, for the sum of $1,104.50, and for this sum appellee is entitled to a judgment, with interest from the 10th day of September, 1903, until paid.

For these reasons, the judgment is reversed, and remanded, for further proceedings consistent herewith.

RESPONSE TO PETITION FOR REHEARING BY CHIEF JUSTICE O'REAR.

Appellant asks a modification of the opinion delivered herein on November 2, 1906, on the ground that the court while applying principles of law not further disputed, was in error in the application of the facts. The petition states as a fact, and quotes with assurance, certain testimony noted below, the practice of appellant and "all other standard life insurance companies," in applying the reserves of lapsed policies to the purchase of paid-up insurance, that the companies retain 25 per cent of the reserve as a surrender charge, and apply only the 75 per cent remainder, less indebtedness to the company, in buying paid-up insurance. It is also stated, in the petition for rehearing and in the testimony alluded to, that this practice is warranted by and in line with the Kentucky Statutes on this subject. In the original opinion it was said that this deduction of 25 per cent of the reserve was irregular and unauthorized. It is argued in response that the court is in error in ignoring a practice by appellant which the statutes of this State warrant.

The testimony alluded to is the deposition of Mr. Jesse J. Barker in the record, as follows: "Here it seems necessary to explain what is meant by `reserve' and `cash surrender value,' as used in the policy and note. The Penn Mutual Life Insurance Company, in common with all other standard life insurance companies, pursues the following course in regard to its policies: A level premium is charged to the insured throughout the period of the life of the policy. As the risk of death is constantly increasing, the level or average premium during the earlier years of the policy exceeds the amount of risk run by the company in any given year. During the latter years of the life of the policy the premium is less than the amount of risk in any given year. The difference between the premium charged in any one of the earlier years and the actual amount of risk run in that year is carried by the company into its `reserve,' and thus a fund is created to meet the years when the premium is less than the risk. When a policy ceases to be in force, either by virtue of a surrender or lapse by reason of non-payment of premiums or otherwise, it may happen that under the terms of the contract the insured is entitled either to receive a cash value for his policy or to paid-up insurance of such amount as said cash value will purchase. In order to ascertain the sum which will be paid to the insured in cash, the entire reserve derived from premiums paid under the policy in question is first ascertained, and of the sum thus ascertained 75 per cent is paid to the insured. The remaining 25 per cent is retained by the company as part of its general reserve fund. The reason for retention is that, if the full reserve were to be paid in cash to each policy holder upon demand (as few, if any, impaired risks would retire on these terms), there would be a disturbance of the average which lies at the whole business of insurance, and a consequent deficiency in the fund for the protection of the policies which remain in force. The deduction or retention of 25 per cent of the principal just stated is a reasonable retention, and is...