Security Life Insurance Co. v. Watkins

• Decision Date: 25 May 1920
• Citation: 189 Ky. 20
• Parties: Security Life Insurance Company of America v. Watkins.
• Court: Kentucky Court of Appeals

189 Ky. 20

Security Life Insurance Company of America v. Watkins.

Court of Appeals of Kentucky.

Decided May 25, 1920.

Appeal from Daviess Circuit Court.

C. W. WELLS and F. W. BULL for appellant.

J. R. HAYS for appellee.

OPINION OF THE COURT BY JUDGE SAMPSON — Affirming.

The Security Life Insurance Company issued a twenty year policy on the life of Perry A. Watkins, dated April 17, 1912, for $1,000.00. Watkins paid all the premiums from the date of the issual of the policy up to and including April 17, 1916, which carried the policy up to and including April 16, 1917. On April 17, 1917, Watkins was unable to pay the entire premium in cash, but entered into an arrangement with the company whereby he paid $4.87 in cash, and executed two notes of $18.80 each; one due in three months and the other due in six months from that date, in satisfaction of the premium for that year. The first note for $18.80 fell due on July 17, 1917, and was not paid by Watkins. These notes contain the following provision:

"I understand and agree that in consideration hereof, said policy is extended until default is made in payment of this note, when all rights and benefits secured thereby shall cease and determine without notice, and said policy shall be ipso facto, null and void, and except as otherwise provided therein. I hereby agree that this note shall not be considered a payment for life insurance, but only for an extension of the time for the payment of the same, and the non-payment of this note when due, and the termination of said insurance by reason thereof, shall not impair the validity of this note, but the same shall become due and payable for the proportion of its face and interest that the time the insurance has been extended for bears to the whole time covered by said premium.

"This note shall be an indebtedness against said policy and be subject to all the terms concerning indebtedness given therein, and I agree that, if the available value of said policy at the date of the non-payment of this note when due, be not sufficient to pay the amount of said note and interest, the excess shall at once become due and payable."

The policy contains these conditions:

"In case any premium should not be paid when due, according to the terms of this contract, then in every such case this policy shall cease and determine, except as otherwise herein especially provided. This contract is based upon the American Experience Table of Mortality and three and one-half per cent interest, and the loan and other values given herein are derived from the reserve computed in accordance with said basis.

"Extended Insurance — Automatic. After this policy shall have been in force for two years, it shall, upon non-payment of a premium when due, be automatically continued in force as non-participating term insurance; provided that, if any indebtedness exist against this policy at the time of such non-payment, the amount of this policy shall be reduced in the ratio of the indebtedness to the then cash value. The period of extension (given in the table for complete policy years up to and including the twentieth) shall be based upon a value of not less than the reserve, at the date of default, on this policy minus two and one-half per cent of the amount of insurance granted by this policy; provided if the said value be more than sufficient to purchase a period of extension for life, the excess shall be accumulated for a cash payment to the insured at the end of the twentieth year from the date of this policy, if he shall then be living."

Watkins died February 28, 1918, after the default in payment of the premium note on July 17, 1917. The company declined to pay the policy or to allow Mrs. Watkins, the beneficiary, to present proof of the death of the insured, claiming that the policy had lapsed and become null and void "on non-payment of the first note at maturity," meaning the premium note due July 17, 1917. She thereupon brought this suit against the insurance company to recover on the policy subject to a certain loan and other indebtedness which the company held against the policy.

The company filed answer which was later amended and to which demurrer was sustained, and judgment entered for Mrs. Watkins, the beneficiary, for the face of the policy less $121.00, loaned by the company to Watkins, and the sum of $1.51 interest, and the further sum of $37.60, being the balance due upon the last premium payable on the policy before the death of Watkins. From this judgment the insurance company appeals.

Under its terms the policy had a reserve value at the time it lapsed, of $147.84, which, by section 3 of the policy quoted above, on the non-payment of a premium when due, was to "be automatically" applied to the purchase of non-participating term insurance, or in other words, to the extension of the policy of insurance without allowing the insured to participate in any benefits or dividends otherwise arising under the terms of the policy. Watkins had borrowed $121.00 on the policy and in addition owed the company interest on his loan from April 17th to July 17th, which amounted to a small sum. He also owed the company the premium on the policy between said dates, making his total indebtedness to the company, according to its answer, $128.35, thus leaving a balance in his favor of $19.49. The company contends that this balance in favor of the insured was more than consumed by the surrender charge which it was entitled to make under the terms of the policy above quoted, which provided that the "reserve at the date of the default on the policy minus two and one-half per cent of the amount of insurance granted by the policy" shall be available to purchase extended insurance; and this is correct if the insurance company is entitled to take advantage of the terms of the policy and make a surrender charge, because if we take two and one-half per cent of the face of the policy, $1,000.00, which equals $25.00, from the reserve value of the policy at the time of the default in the payment of the premium note, $147.84, we have only $122.84, which is less than the amount of Watkins' indebtedness to the company at that date, and leaves nothing to keep the policy alive and purchase "extended insurance." Mrs. Watkins, the beneficiary, however, contends that the company is not entitled to enforce its surrender charge of $25.00, and that there was about $19.49 left after deducting the $128.35, which included all the indebtedness of Watkins to the company, with which to carry "extended insurance," and that this sum would more than have paid for the carrying of the policy as a non-participating contract beyond the date of the death of the insured. So one of the questions to be determined is, can an insurance company enforce its surrender charge and thus take from the reserve fund, $25.00, and defeat the extension provision of the policy? If it can, the judgment must be reversed.

It is said in brief of counsel for appellant that section 659, Kentucky Statutes,...