Ross v. Producers Mut. Ins. Co., 8394

• Decision Date: 14 March 1956
• Docket Number: No. 8394,8394
• Parties: d 396 Clark A. ROSS, Nicholas G. Shaheen, Hugh V. Bird, Glen W. Crosby, Ellis A. Shaheen, Otto L. Jorgensen and Larry W. Blake, Plaintiffs and Appellants, v. PRODUCERS MUTUAL INSURANCE COMPANY, Producers Finance Company of Utah, Wendel A. Davis, Richard G. Johnson, Ernest A. Richards, George R. Heeder, David A. Russell and Nina B. Davis, Defendants and Respondents.
• Court: Utah Supreme Court

Page 339

295 P.2d 339

4 Utah 2d 396

Clark A. ROSS, Nicholas G. Shaheen, Hugh V. Bird, Glen W Crosby, Ellis A. Shaheen, Otto L. Jorgensen and Larry W. Blake, Plaintiffs and Appellants, v. PRODUCERS MUTUAL INSURANCE COMPANY, Producers Finance Company of Utah, Wendel A. Davis, Richard G. Johnson, Ernest A. Richards, George R. Heeder, David A. Russell and Nina B Davis, Defendants and Respondents.

No. 8394.

Supreme Court of Utah.

March 14, 1956.

Delbert M. Draper, Salt Lake City, for appellants.

J. Grant Iverson, Salt Lake City, for respondents.

CROCKETT, Justice.

Plaintiffs sued for return of all premiums they had paid Producers Mutual Insurance Company (hereinafter called Mutual) on policies because of illegal aspects of the policies. The trial court granted a motion to dismiss the complaint; hence this appeal.

The form the policy in question was called 'Founders Participating Policy.' It states that it is automatically convertible at the end of a five-year period into a whole life policy to be carried by a 'Producers Life Insurance' Company, not shown to be then in existence. Sold in connection with this policy was a Trust Agreement in which the insured assigned dividends from the policy to trustees to purchase stock in Producers Finance Company (hereafter called Finance Company). This plan for intermingling stock and insurance was developed in Arizona, and it is legal in that state. However, in 1953, the Utah Department of Business Regulation, acting under Section 31-27-15, U.C.A.1953, ordered Mutual to refrain from selling shares of stock either in connection with or as an inducement for insurance. That section provides that:

'No insurer * * * shall, as an inducement to the purchase of insurance, or in connection with any insurance transaction, provide in any policy for, or offer, or sell, buy, or offer or promise to buy or give, or promise, or allow, in any manner whatsoever:

'(1) any shares of stock or other securities issued or at any time to be issued or any interest therein or rights thereto * * *.'

In the case of In re American Buyers Ins. Co. ¹ we rejected the theory of the defendants that the statutory provision extended only to old line insurance companies and not to mutual life insurance companies such as defendant.

In seeking to recover the premiums paid in, plaintiffs make three contentions: (1) The policies are void ab initio because they violate Section 31-27-15, supra, as decided in the American Buyers case; ² (2) that the policies are voidable because they lack mutuality, and (3) that the policies were obtained by fraud. The trial judge ruled against plaintiffs on all three grounds, and granted defendants' motion to dismiss for failure to state a cause of action. It is from this action that plaintiffs prosecute their appeal here.

1. Does the fact that Mutual combined insurance and security transactions in violation of our insurance code render the policies void ad initio?

Plaintiffs complain of numerous violations of our statutes regulating the insurance business. The only one we deem of sufficient importance to warrant consideration here is Section 31-27-15 above referred to. In view of our holding in American Buyers case, supra, defendant conceded in this action that the sale of the policy and trust agreement together was illegal and tendered into court the amount to be set up as representing payments to the finance company under each agreement. But its position is that the contract of insurance was not void but could be regarded as separate and valid.

It is true, as plaintiffs contend, that there is a rule which is generally recognized to the effect that insurance contracts in violation of statute are void. ³ But the cases that have found exceptions to the rule have lead Professor Williston to conclude that the so-called general rule as it is usually quoted is not strictly accurate: ⁴

'It is more correct to say that 'A party to an illegal bargain generally can neither recover damages for the breach thereof, nor, by rescinding the bargain recover the performance that he has rendered thereunder or its value."

The origin of this rule is rooted in public policy considerations: that if parties to illegal agreements are denied the aid of a court in enforcing them or recovering damages for their breach, the number of such illegal operations will decrease. This judicial policy was not developed for the sake of either of the immediate parties to an unlawful transaction, although often--and unavoidably--one of them may reap a windfall. As Williston points out: ⁵

'To deny a wrongdoer damages or the return of value of his performance, though an equally guilty defendant thereby escapes punishment and may be enriched, tends to diminish the number of illegal bargains. To go further and assert that all unlawful agreements are ipso facto no contracts and void is opposed to many decisions and unfortunate in its consequences, for it may protect a guilty defendant from paying damages to an innocent plaintiff.'

Williston concludes that no agreement should be held void in toto unless no other result is possible from the words of the statute. Otherwise, blind and unreasoning forfeitures would result in depriving one party of his entire investment, or effort in performance, because of some technical violation of statute, and reward the other, perhaps equally guilty party, with an undeserved and unearned benefit. This probably explains the actual attitude of the courts which have considered various aspects of contracts which violate some statutory provision. ⁶ Originally a distinction was often drawn between statutes that were malum in se (contracts violating such statutes were void) and those which were malum prohibitum (such contracts were not void); but it is now recognized that whether a malum prohibitum contract is void is to be determined from an examination of the statute as a whole. ⁷ Among the factors to be weighed are whether the enactment was passed primarily as a revenue measure or whether it was a policing measure, ⁸ and whether the statute contains an express provision making the contract void. ⁹ But the primary consideration, of course, is what does the statute construed as a whole indicate?

Turning to our statute, we think it is apparent that our Legislature intended to make contracts of insurance valid wherever possible. For example Section 31-19-35, U.C.A.1953, reads:

'Any insurance policy, * * * otherwise valid, which contains any condition or provision not in compliance with the requirements of this code, shall not be rendered invalid thereby, but shall be construed and applied in accordance with such conditions and provisions as would have applied had such policy, rider, or endorsement been in full compliance with this code.'

And, although Section 31-19-19, U.C.A.1953, specifically declares 'void' any conditions which require a policy to be construed according to the laws of some other state, or which deprive the courts of this State of jurisdiction, or which limit actions against insurers, the statute then goes on to state specifically that such voiding will not affect the validity of other provisions of the contract. We note also that, irrespective of statute, the general judicial attitude toward insurance policies is to sustain them on grounds of public policy wherever possible. ¹⁰

Somewhat similar problems have arisen in the treatment of the anti-rebate provisions in insurance codes both in this State and in other jurisdictions. Violation of the anti-rebating section of the statute subjects the insurer to prosecution for a misdemeanor and to revocation of its license to do business within the State, the same penalties imposed for a violation of the section here under consideration. ¹¹ But irrespective of these sanctions, it has generally been held that such illegality may not be pleaded either to avoid liability on the contract, or to recover the amount paid or promised as a rebate. And this is so whether the plea is attempted at the instance of the insured, the insurer or the beneficiary. ¹² Since the Legislature has deemed it fit to treat interdictions on rebates and on stocks in the same manner, logic would impel us also to view the two violations in the same manner and hold that neither will render the insurance policy void.

Policy considerations require this result also. The corollary to holding this policy to be void at the instance of the policy holder would be that in the event of loss the insurance company would not be bound to respond. Yet, plaintiffs offered evidence showing that Mutual paid death claims on this type of policy, and that these policy holders received protection during the period that they maintained their policies in force. The same conclusion would undoubtedly follow on principles of estoppel; having accepted payments made as premiums, the company would not be permitted to set up the defense that no risk attached. Under such conditions it would be unfair to allow plaintiffs to recover their full premium payments. Of even more concern are the conceivable effects that such a decision would have on insurers not even involved in the present suit. Suppose, for example, that other insurance companies are in fact operating in some technical violation of statute, the difficulties arising from the dictum that such policies are void (except for principles of estoppel) are obvious. We hold, therefore, that the violation of Section 31-27-15, U.C.A.1953, does not void the entire contract of insurance.

2. Was the policy voidable for lack of mutuality?

Each of the plaintiffs purchased a term insurance policy in Mutual. The policy was denominated on its face as automatically convertible. In addition to the initial premium, each plaintiff paid a $5 life membership fee and agreed to exchange the policy in Mutual for a non-assessable legal reserve life policy in a different company, Producers Life Insurance Company, after the fifth anniversary of...