Powell v. Mut. Life Ins. Co. of New York

• Decision Date: 09 October 1924
• Docket Number: Nos. 15640-15643.,s. 15640-15643.
• Parties: POWELL v. MUTUAL LIFE INS. CO. OF NEW YORK (four cases).
• Court: Illinois Supreme Court

313 Ill. 161

144 N.E. 825

POWELL

v.MUTUAL LIFE INS. CO. OF NEW YORK (four cases).

Nos. 15640-15643.

Supreme Court of Illinois.

June 17, 1924.

Rehearing Denied Oct. 9, 1924.

Error to Appellate Court, Fourth District, on Appeals from Circuit Court, Randolph County; John F. Gillham, Judge.

Two separate actions by Le Roy D. Powell and two separate actions by Bessie A. Powell against the Mutual Life Insurance Company of New York. Judgments for plaintiffs were affirmed on appeal to the Appellate Court (229 Ill. App. 59), and defendant brings certiorari. Appeals consolidated.

Affirmed.

Farmer, J., dissenting.Winston, Strawn & Shaw, of Chicago, and Charles E. Feirich, of Carbondale (Silas H. Strawn, John D. Black, and James H. Cartwright, Jr., all of Chicago, of counsel), for plaintiff in error.

H. Clay Horner, of Chester, for defendants in error.

STONE, J.

The plaintiff in error issued to Alfred E. Powell four life insurance policies: One for $3,000, dated April 28, 1919; one for $3,000, dated May 13, 1919; one for $5,000 and one for $4,000, each dated October 27, 1919. Bessie A. Powell was named beneficiary in the first two mentioned, and Le Roy D. Powell in the other two. These policies each contained this clause: ‘This policy shall be incontestable after two years from its date of issue except for nonpayment of premiums.’ The insured died October 26, 1921. Suit was started on these four policies on February 21, 1922. The declarations aver that on the 3d day of December, 1921, the plaintiffs gave to the defendant notice of the death of Powell, and submitted proofs thereof. To each of the declarations the defendant filed three special pleas, averring false and fraudulent answers in the applications of the insured, and that the same were known by him to be false and fraudulent, and that the defendant, relying upon the truth of the answers, issued the policies; that afterwards, on December 2, 1920, the defendant discovered that the answers were false and fraudulent, and immediately served notice in writing on the insured and on the beneficiaries named in the policies that it had canceled the same on the ground of the false and fraudulent statements, and that it at that time tendered back to the insured all the premiums paid by him, with interest thereon. The plaintiffs (defendants in error here) demurred to these special pleas, and the court sustained their demurrers. Plaintiff in error elected to stand by its pleas, and judgment was rendered for the plaintiff in each of the four cases. These judgments were affirmed on appeal to the Appellate Court, and the causes come here by certiorari. The causes are consolidated for hearing and determination in this court, as they involve the same questions.

[1] Plaintiff in error's contention is that, when it rescinded the policies for fraud within the two years referred to in the incontestable clause, it contested the same within the meaning of that clause, and that it is therefore entitled to make that defense against payment of the policies. Defendants in error, on the other hand, contend that the incontestable clause requires that the plaintiff in error shall within two years from the date of the policy contest the same by an action or defense in court, and that, since this was not done, the attempted rescission was of no avail. It is undisputedthat a contract may be rescinded and terminated for fraud upon notice thereof to the offending party and the tender back of any consideration of benefits received. Doane v. Lockwood, 115 Ill. 490, 4 N. E. 500;New York Brokerage Co. v. Wharton, 143 Iowa, 61, 119 N. W. 969;Ludington v. Patton, 111 Wis. 208, 86 N. W. 571;New York Life Ins. Co. v. Adams, 151 Ark. 123, 235 S. W. 412;Defiel v. Rosenberg, 144 Minn. 166, 174 N. W. 838.

The question in this case is whether notice of rescission and tender back of premiums paid constitutes a contest within the meaning of the incontestable clause. Defendants in error, however, contend that, as to an insurance policy containing the incontestable clause herein set out, it is necessary, in order to terminate the policy, that the same be contested within two years, and that a contest means a court proceeding. In support of this contention defendants in error rely upon Ramsey v. Old Colony Life Ins. Co., 297 Ill. 592, 131 N. E. 108. Plaintiff in error replies to this position, first, that the Ramsey Case can be distinguished from this case; and, second, if it cannot, this court should not adhere to the rule there announced, for the reason that it is wrong, and for the further reason that what was said in the opinion in that case was not necessary to the decision.

[2] Clauses in life insurance policies known as ‘incontestable clauses' are in general use, and in this state (Laws of 1921, p. 482) and in other states are now required by statute. In the earlier development of insurance contracts it not infrequently occurred that, after the insured had paid premiums for a large number of years, the beneficiaries under the policy found, after the maturity thereof by the death of the insured, that they were facing a lawsuit in order to recover the insurance; that in certain answers in the application it was said by the insurer the insured had made statements which were not true, and the beneficiaries were not entitled to recover on the policy. It is needless to call attention to the fact that this situation gave rise to a widespread suspicion in the minds of the public that an insurancecontract was designed largely for the benefit of the company. Recognizing this fact, and seeing the effect of it on the insurance business, numerous insurance companies inserted in their policies what is now known as an incontestableclause. Some early policies contained a clause to the effect that they were incontestable from date. Such a clause has been generally held in this country to be void as to the defense of fraud. The incontestable clause now in general use is to the effect that the policy shall be incontestable after a certain period, as one or two years, except for defenses recited therein. Such a clause is generally upheld as valid, because it gives to the insurer a reasonable time in which to discover fraud, if there be such, in the securing of the insurance contract. Wright v. Mutual Benefit Life Ass'n, 118 N. Y. 237, 23 N. E. 186, 6 L. R. A. 731, 16 Am. St. Rep. 749; Massachusetts Benefit Life Ass'n v. Robinson, 104 Ga. 256, 30 S. E. 918,42 L. R. A. 261;Clement v. New York Life Ins. Co., 101 Tenn. 22, 46 S. W. 561,42 L. R. A. 247, 70 Am. St. Rep. 650;Bates v. United Life Ins. Ass'n, 68 Hun, 144, 22 N. Y. Supp. 626;Murray v. State Mutual Life Assurance Co., 22 R. I. 524, 48 Atl. 800,53 L. R. A. 742. This clause amounts to an agreement between the insurer and the insured that after the expiration of such period the company shall be estopped from contesting the policy or setting up any defense, except such as may be reserved therein or such as is allowed on the ground of public policy. The stipulation does not waive all defenses and does not condone fraud, but recognizes fraud and all other defenses, and constitutes a short statute of limitations in favor of the insured, the purpose of which is to fix a limited time in which the insurer must ascertain the truth of the representations made, and, in case of a breach of warranty, the insurer must, under this clause, assert its claim within the two-year period, either by affirmative action or by defense to a suit brought on the policy by the beneficiary within two years. Monahan v. Metropolitan Life Ins. Co., 283 Ill. 136, 119 N. E. 68, L. R. A. 1918D, 1196;Weil v. Federal Life Ins. Co., 264 Ill. 425, 106 N. E. 246, Ann. Cas, 1915D, 974;Flanigan v. Federal Life Ins. Co., 231 Ill. 399, 83 N. E. 178;Royal Circle v. Achterrath, 204 Ill. 549, 68 N. E. 492,63 L. R. A. 452, 98 Am. St. Rep. 224.

In Ramsey v. Old Colony Life Ins. Co., supra, the policy was issued September 7, 1916, and was incontestable, except for nonpayment of premiums, after one year from its date of issue. The insured died April 13, 1917. No administrator of his estate was appointed until July 19, 1918, and suit was begun on the policy November 7, 1918. The plea alleged that, as soon as the insurer learned of the fraud, it did, on August 1, 1918, tender back the premiums and interest, which were, however, refused. This tender was repeated by the plea. This court in that case held that the rights of the parties were not fixed by death of the insured, but the policy was contestable only until the period had run. It was also held that during the time following the death of the insured and until an administrator was appointed, against whom suit to cancel the policy could be brought, the running of the incontestable period would be tolled, but that the effect of the clause was to create a short statute of limitations in favor of the insured, within which limited period the insurer must, if ever, test the validity of the policy. This rule has also been announced in Wright v. Mutual Benefit Life Ass'n, supra; Massachusetts Benefit Life Ass'n v. Robinson, supra; Clement v. New York Life Ins. Co., supra; American Trust Co. v. Life Ins. Co. of Virginia, 173 N. C. 558, 92 S. E. 706; Murray v. State Mutual Life Assurance Co., supra; Mutual Life Ins. Co. v. Buford, 61 Okl. 158, 160 Pac. 928; and Metropolitan Life Ins. Co. v. Peeler (Okl. Sup.) 176 Pac. 939, 6 A. L. R. 441. It was in the Ramsey Case held by this court that under the plain construction of this clause such contest can be made only be proceedings in court to which the insurer and the insured, or his representatives or beneficiaries, are parties.

Plaintiff in error contends that the affirmative action required by the rule generally adopted in this country has been met by its notice of rescission and tender back of premiums paid. The construction of the terms, ‘take affirmative action’ and ‘test the validity of the policy,’ however, has...