A policy of life insurance containing a provision that a default
in payment of premiums shall not work a forfeiture, but that the
sum insured shall then be reduced and commuted to the annual
premiums paid, confers the right on the assured to convert the
policy at any time, by notice to the insurer, into a paid-up policy
for the amount of premiums paid.
The neglect to pay a premium on a policy of life insurance will
not work a forfeiture of the policy if the neglect was caused by a
representation made in good faith but without authority by an agent
of the insurer that it would be converted by his principal into a
paid-up policy on the basis of the premiums already paid in.
On the termination of its business by a life insurance company
and the transfer of its assets and policies to another company,
each policyholder may, if he desires, terminate his policy and
maintain an action to recover from the assets such sum as he may be
equitably entitled to.
In such case, the measure of damages will be the amount of
premiums paid less the value of the insurance of which he enjoyed
the benefit.
When one party to an executory contract prevents the performance
of it or puts it out of his own power to perform it, the other
party may regard it as terminated and demand whatever damages he
has sustained thereby.
United States v. Behan,
110 U. S. 339,
cited and affirmed.
This case was commenced by a bill in chancery filed by the
appellants, Lovell and wife, citizens of Tennessee, against the St.
Louis Mutual Life Insurance Company and the St. Louis Life
Insurance Company, for relief in relation to a certain policy of
insurance issued by the former company through an agent at
Nashville, Tennessee, to Lovell on his own life for the sum of
$5,000, for the benefit of his wife, and to be paid to her on his
death. The policy was dated the 24th of April, 1868, and stipulated
for the payment of an annual premium of $162.14, payable (in the
words of the instrument) as follows:
"An annual premium note of $53, and a semiannual cash premium of
$54.57 on the 24th days of April and October, the
Page 111 U. S. 265
first one of said notes, and the first semiannual cash premium,
commencing with the date of this policy."
There was a condition in the policy that if, after the payment
of the first three annual premiums, a default should be made in the
payment of the annual premiums thereafter to become due, then (in
the words of the condition)
"such default shall not work a forfeiture of this policy, but
the sum of five thousand dollars, the amount insured, shall be then
commuted or reduced to the sum of the annual premiums paid."
After setting out the policy the bill states the following
facts. The premiums called for by the policy were all paid down to
and including the 24th of April, 1873; a new premium note being
given at the end of each year, and any dividends due to the insured
being credited thereon, the company being a mutual one. At or
shortly after the last payment, which was made to one Foote, agent
of the company at Louisville, Kentucky, the agency at Nashville
having been discontinued, Lovell made known to Foote his desire to
receive a paid-up policy for what he was entitled to, and a return
of his premium note; he and the agent agreeing, as had also been
represented by the agent at Nashville, on the issuing of the
policy, that all the money he had paid by way of premiums
(amounting to $822, less the amount of his outstanding note) would
be credited to him, and that he could have a paid-up policy for
such amount, as that money, under the regulations of the company,
would entitle him to if he had paid it all at once for a paid-up
policy. With this view and understanding he surrendered his policy
to the agent, to be transmitted to the home office at St. Louis,
and exchanged for a paid-up policy in its stead. Lovell being
engaged in steamboating on the Mississippi, gave the matter no
further thought, supposing that it would be all right. But after
some time he was surprised at receiving notice to pay the interest
on his note, and on going to his home he found that, instead of a
paid-up policy, the original policy had been returned, with an
endorsement on the margin in the words and figures following:
"In default of payment of renewal premium due 24th October,
1873, this policy is commuted and reduced to eight hundred and
Page 111 U. S. 266
twentytwo dollars, on condition that the interest on outstanding
premium notes is paid annually in advance."
"M. A. CAMPBELL,
Assignee"
The complainant, Lovell, went to the agent at Louisville and
protested against the course of the company, and insisted that he
was to have received a paid-up policy and a return of his note; but
the agent told him that since the agreement made with him for a
paid-up policy the St. Louis Mutual Life Insurance Company had sold
out to the Mound City Life Insurance Company (whose name was
afterwards changed to the St. Louis Life Insurance Company), and
that such a thing as issuing to him a paid-up policy, or even
restoring or reinstating his policy, was wholly outside of the
contract with the Mound City company, and that the policy was now
forfeited.
The bill charges that after the original policy was surrendered
for exchange as aforesaid, without the knowledge or consent of
complainant, the St. Louis Mutual Life Insurance Company sold and
transferred its entire assets, name, good will, etc., to the Mound
City Life Insurance Company, before any interest had accrued on his
premium note. The complainant insists that he has been guilty of no
default that ought to work a forfeiture of his policy; and that the
money paid by him on his policy should be refunded to him, with
interest, and that his outstanding note should be delivered up to
be cancelled. The bill further states that there is in the hands of
William Morrow, Treasurer of the State of Tennessee, $20,000 of
state bonds, held as the property of the insurance company, under
the laws of Tennessee, as indemnity against loss to citizens of
Tennessee on life policies such as that of complainant; he
therefore prays for an attachment and an injunction to hold said
fund subject to the orders of the court until the claim of the
complainant is satisfied. The bill concludes with a prayer for
general relief.
An attachment and injunction were issued as prayed, and the
defendants appeared and answered the bill.
The answer does not question the material averments of the bill,
and admits that the affairs of the St. Louis Mutual Life
Page 111 U. S. 267
Insurance Company having become greatly embarrassed, on the 7th
of October, 1873, the superintendent of the Insurance Department of
the State of Missouri filed in the Circuit Court of St. Louis
County a petition setting forth that the company was insolvent, and
praying for an injunction against its carrying on the business
further, and that such injunction was issued, and that in due
course the court pronounced the company insolvent, and restrained
it from reinsuring its risks without the order and consent of the
court. What further took place in reference to the affairs of the
company is shown by the following extracts from the joint answer of
the two companies -- that is to say:
"In the progress of said matter, said Frank P. Blair,
superintendent as aforesaid, on December 13, 1873, filed his motion
in said cause, praying said court to order said company to reinsure
all the risks held by it in the Mound City Life Insurance Company
upon the terms set forth in said motion, and allow him to dismiss
his suit as aforesaid. Said terms were that said St. Louis Mutual
Life Insurance Company should transfer to said Mound City Life
Insurance Company all of its assets, real, personal, or mixed,
wheresoever situated, and that in consideration of said transfer
said Mound City Life Insurance Company, whose name was afterwards
changed to the St. Louis Life Insurance Company, should reinsure
all risks of said St. Louis Mutual Life Insurance Company, and
assume all its liabilities and should for these purposes increase
its capital stock to the sum of $1,000,000, such increase to be
secured and paid according to the laws of the state of Missouri,
and to the satisfaction of said superintendent. Said motion was
duly considered by said court, and was ultimately granted."
"* * * *"
"No policyholder of said St. Louis Mutual Life Insurance Company
and no stockholder therein appeared in opposition thereto, or made
any objections, and said arrangement was accordingly fully
consummated and carried out according to the terms of said
motion."
"And said St. Louis Life Insurance Company in good faith
undertook, and is now undertaking, so to carry out said
arrangement, and to perform all the terms and conditions,
covenants,
Page 111 U. S. 268
promises, and agreements thereof. All the stockholders of the
said St. Louis Mutual Life Insurance Company have, in good faith,
accepted the said transfer and reinsurance under the order of said
court, and a very large majority of its policyholders, towit, more
than 8,000, have surrendered their policies in it, and accepted
policies in lieu from the St. Louis Life Insurance Company, which
is, moreover, by the terms of its contract with the St. Louis
Mutual Life Insurance Company so approved as aforesaid, directly
liable on any and all policies issued by said last-mentioned
company to the same extent as itself would have been."
"* * * *"
"Said contract was made, and said transfer and assumption of
liabilities executed, and said increase of capital stock made, on
or before January 17, 1874."
Lovell, being sworn as a witness in the cause, fully verified
all the allegations of the bill, and there was no conflicting
evidence. He showed that when he surrendered his policy, to be
exchanged for a paid-up policy, in April, 1873, it was with the
distinct understanding, both of himself and the agent of the
company, that he was entitled to and would receive a paid-up policy
for an amount which the aggregate sum of premiums paid, less the
premium note would purchase if paid, as a single premium, and would
also receive his premium note; and that the company kept his policy
from the time of its surrender in April until after October, and
after the company had become insolvent, and had been put under
injunction, without giving him any notice that he would not receive
what he supposed himself entitled to.
The cause came on to be heard before the circuit judge and
district judge, holding the circuit court of the United States for
the Middle District of Tennessee, and, the judges differing in
opinion upon the questions arising in the case, in accordance with
the opinion of the circuit judge, the bill of complaint was
dismissed, and the following questions were certified for the
opinion of this court, towit:
"1st. Whether, during the lifetime of complainant, James W.
Page 111 U. S. 269
Lovell, any suit is maintainable upon the policy of life
insurance set forth in the record in this case."
"2d. Whether the insolvency of the St. Louis Mutual Life
Insurance Company and its contract of reinsurance of December,
1873, with the Mound City Life Insurance Company, accompanied by
the transfer, of the assets of the former to the latter company, as
set forth in the record of this case, operated to confer upon
complainants, or either of them, any right of action or suit
against the St. Louis Mutual Life Insurance Company, or against the
St. Louis Life Insurance Company."
"3d. Whether, if so, complainants can maintain this suit upon
this record apart from the other policyholders of said St. Louis
Mutual Life Insurance Company, whose policies were in force at the
time of said reinsurance transaction, and who, equally with
complainants, dissented therefrom."
MR. JUSTICE BRADLEY delivered the opinion of the Court. After
stating the facts in the foregoing language, he continued:
The first and main question is whether, under all the
circumstances, including the insolvency of the company, and the
transfer of its business to another company, the complainants are
entitled to any relief. What they ask is a return of the money
actually paid on the policy, with interest, and a surrender of the
premium note; but if not entitled to this relief, are they
entitled, under the general prayer, to relief in any form?
We are satisfied that when Lovell surrendered his policy in
April, 1873, for the purpose of having it exchanged for a paid-up
policy, he exercised a right which the condition of the policy gave
him. It is true, the precise terms of the condition are that the
policy shall be commuted in case
default is made in the
payment of any premium; but as the making of a default is entirely
optional with the insured, it follows that the conversion of the
policy from an annualpremium policy to a paid-up policy, is at the
option of the insured, at any time after
Page 111 U. S. 270
the payment of the first three annual premiums. Though in no
default, he may elect to pay no more premiums, and may give notice
to the company to that effect; for it is the exercise of his option
against his own interest; since it would be his interest to hold
the policy for its whole amount until the maturity of the next
premium, and then to make default. But the greater always includes
the less. The right to have the policy commuted and reduced to a
paid-up policy, by making a default in the payment of a premium, in
legal effect includes the right to have it so commuted and reduced
by electing at any time to make such default, and giving due notice
to the company of such election.
At all events, neither the agent of the company, nor the company
itself, made any objection to the surrender of the policy at the
time when it was actually surrendered for the purpose of
exchange.
But it is clear that both Lovell and the agent of the company
labored under a mutual mistake as to the amount of the paid-up
policy to which Lovell was entitled. They supposed that he was
entitled to a paid-up policy for such amount as the sum of the
premiums paid (less the premium note) would purchase, if paid as a
single premium; whereas the actual stipulation or condition was
that the sum insured should be commuted or reduced to the amount of
the premiums themselves, not the amount of insurance that they
would purchase.
Now while it is true that the mutual mistake of Lovell and the
company's agent could not change the written stipulation, nor bind
the company to give Lovell a paid-up policy for a greater amount
than the sum of the premiums paid, yet as the mistake was in fact
made, and as Lovell surrendered his policy under the influence of
that mistake, and, as he testifies, with the distinct understanding
that he was to receive a new policy corresponding to such mistaken
view, and also to receive his premium note for cancellation, it was
the duty of the company, either to have returned him his policy
unchanged, or at least to have given him notice of the mistake, so
that he might have had an opportunity of determining whether he
would still have his policy commuted or not. Good faith required
this much
Page 111 U. S. 271
from the company. For it must be presumed that their agent, in
transmitting the policy to the home office for the purpose of being
commuted and exchanged, communicated what had passed between him
and Lovell on the subject, and at all events the communications
made by Lovell to the agent were notice to the company.
But nothing of the kind was done. The company neither returned
the policy nor gave Lovell any notice that it would not be commuted
for the amount which he supposed and expected it would be, and, of
course, he was led to suppose that everything was right and that he
would receive his paid-up policy and note in due time. On the
contrary, the company kept the original policy for more than six
months -- from April until October -- until after they had gone or
were forced into a process of liquidation, and then some person,
designating himself as assignee, made the endorsement on the policy
which has been referred to, declaring that, in default of payment
of renewal premium due October 24, 1873, the policy was commuted
and reduced to $822 on condition that the interest on outstanding
premium notes should be paid annually in advance, and because the
interest was not paid on the premium note in April, 1874, the
parties having possession of the note, and who had assumed the
obligations of the company, declared the policy altogether
forfeited and the complainant entitled to nothing whatever.
It seems to us that the mere statement of the case is enough to
show the want of equity in the transaction on the part of the
companies and the right of the complainants to some relief at the
hands of the court. The sum of the matter is this: the complainant
surrendered his policy, as he had a right to do, for the purpose of
having it commuted to a paid-up policy; but he did so with the
understanding between him and the agent of the company that the
paid-up policy was to be for such amount as the premiums paid would
purchase and that his premium note should be returned to him. So
far as the amount of the paid-up policy was concerned, the
complainant and the agent acted under a mutual mistake; but the
company kept the policy for six months
Page 111 U. S. 272
without giving the complainant any notice of the mistake, and
then, by endorsement on the policy, attempted to reduce it to a
different amount, subject to the payment of interest on the premium
note, and kept the note instead of delivering it up for
cancellation. In the meantime, the company conveyed all its assets
to another company and transferred to such other company all its
business and all interest in its outstanding policies, and
completely and utterly put it out of its own power to fulfill any
of its obligations and virtually went out of existence. Under these
circumstances, we hold first that the complainant, Lovell, was in
no default, and that he did not forfeit his rights under his
policy; secondly, that he was under no obligation to continue his
insurance, either under his original policy or under a paid-up
policy, with the new company, to which the St. Louis Mutual Life
Insurance Company transferred its business; thirdly, that since the
latter company totally abandoned the performance of the contract
made with the complainant and transferred all its assets and
business to another company, and since the contract is executory
and continuous in its nature, the complainant had a right to
consider the contract as at an end and to demand what was justly
due to him by reason of its abandonment by the company.
Our first conclusion, that the complainant was not in default
and therefore that he forfeited no rights under his policy, is
based on the fact that when he elected to have his original policy
commuted to a paid-up policy and surrendered it to the company for
that purpose, without objection on its part, he had no further duty
to perform and no further premium or interest to pay, and therefore
he could not make any default. He became entitled to a paid-up
policy of some amount or other. If a difference arose between him
and the company as to what the amount was, he would have been
entitled to change his mind and take back his original policy. The
company being presumably informed through its agent of the amount
which the complainant considered himself entitled to, should have
given him notice if they did not agree to that amount. They gave
him no notice, but assumed to reduce his policy to an amount
different from that which he deemed his due, and
Page 111 U. S. 273
retained his note, which he expected to be delivered up to be
cancelled, and no notice of this procedure was communicated to the
complainant until after the company had been declared insolvent and
had placed all of its assets and business out of its hands. We
think it clear that the complainant was in no default whatever.
Our second conclusion, that the complainant was under no
obligation to continue his insurance in the new company, we think
is equally clear. He had nothing to do with that company; it was a
stranger to him. It is true that it received all the old company's
assets and assumed all its obligations on policies and otherwise,
and the complainant was relegated to the new company for the
obtainment of his rights, whatever they were. But that was a
transaction between the companies themselves, with which he had
nothing to do, and under such a total change of relations and
parties, it would be most unreasonable that he should be compelled,
against his will or with the alternative of abandoning all his
rights, to continue all his life to fulfill an executory contract
by the payment of premiums to a company to which he was a total
stranger, and in which perhaps he reposed no confidence whatever,
or to take a paid-up policy in such company. Still the complainant
might be without other remedy than that of accepting insurance in
the new company or of prosecuting the old and virtually defunct
company if it were not for the fund deposited with the Treasurer of
Tennessee as indemnity to the citizens of that state holding
policies in the company. The assignment of all its assets by the
old company to the new one, upon the consideration of its
obligations' being assumed by the new company, is somewhat
analogous to an assignment of property by a debtor for the benefit
of his creditors, in which only those creditors who are preferred,
or those who choose to come in and participate in the fund
assigned, receive any benefit, while those who refuse to come in
take no benefit, preferring to retain their claim against the
debtor. So here, if the complainant does not choose to continue his
insurance with the new company, he would have no remedy except
against the old company (which is totally unable to
Page 111 U. S. 274
respond) were it not for the fund which has been attached in the
hands of the State Treasurer of Tennessee. To this fund the
complainant, being a citizen of Tennessee, had a right to resort.
The object of the laws of Tennessee in requiring the fund to be
placed on deposit with the treasurer was to protect and indemnify
its own citizens in their dealings with the company. The assignment
to the new company in Missouri could not deprive them of the right
to this indemnity.
Our third conclusion is that, as the old company totally
abandoned the performance of its contract with the complainant by
transferring all its assets and obligations to the new company, and
as the contract is executory in its nature, the complainant had a
right to consider it as determined by the act of the company and to
demand what was justly due to him in that exigency. Of this we
think there can be no doubt. Where one party to an executory
contract prevents the performance of it or puts it out of his own
power to perform it, the other party may regard it as terminated
and demand whatever damage he has sustained thereby. We had
occasion to examine this subject in the recent case of
United
States v. Behan, 110 U. S. 339,
to which we refer. It is unnecessary to discuss it further
here.
The question remains as to what is justly due to the complainant
in this case by reason of the contract's being terminated by the
act of the company. He demands a return of all the premiums paid by
him, with interest, less the amount of his premium note, and that
said note shall be delivered up to be cancelled. But we do not
think that he is entitled to a return of the full amount of his
premiums paid. He had the benefit of insurance upon his life for
five years, and the value of that insurance should be deducted from
the aggregate amount of his payments. In other words, the amount to
which the complainant is entitled is what is called and known in
the life insurance business as the value of his policy at the time
it was surrendered, with interest, less the amount of his premium
note, which should be surrendered and cancelled. The balance due
him will be small, but it will be something, and whatever it is, he
is entitled to it as well as to a surrender of his premium
Page 111 U. S. 275
note, and his bill ought not to have been dismissed. The amount
due the complainant can easily be ascertained by the court by
calling in the aid of an expert, without the trouble and expense of
a reference to a master. The equitable value of a policy, according
to the age of the insured life at the time it was issued and the
number of years it has run, is shown by the ordinary tables used by
every life insurance company, and there can be no difficulty in
ascertaining the amount in this case. The point of time for
calculating the value will be immediately after the payment of the
premium due on the 24th of April, 1873, five years having fully
expired, and the first payment being made on the sixth year.
The question has been raised whether the complainant can
maintain this suit alone, without bringing in all the other
policyholders. We see no reason why not. It does not appear that
there are any other policyholders who have not accepted the terms
of the arrangement between the two companies and continued their
policies in the new company. Nor does it appear but that the fund
now in court is abundantly sufficient to meet all demands upon it
in favor of those for whose indemnity it was deposited in the
treasurer's office, without any abatement, or the necessity of a
pro rata distribution. Of course, the St. Louis Life
Insurance Company is a proper party to this suit by reason of its
claiming the fund, attached therein, as part of the assets of the
St. Louis Mutual Life Insurance Company assigned to it.
In conclusion, our opinion is that the following answers should
be returned to the questions certified by the judges of the circuit
court -- that is to say:
To the first: that during the lifetime of the complainant, James
W. Lovell, a suit is maintainable upon the policy of life insurance
set forth in the record under the circumstances and for the cause
stated in this opinion.
To the second: that the insolvency of the St. Louis Mutual Life
Insurance Company, and its contract of reinsurance with the Mound
City Life Insurance Company, accompanied by the transfer of all its
assets to the latter company, as set forth in the record, did
operate to confer upon the complainants a
Page 111 U. S. 276
right of action against the said companies as stated in this
opinion.
To the third: that this suit may be maintained upon the record
presented therein apart from the other policyholders of the St.
Louis Mutual Life Insurance Company.
It follows that
The decree of the circuit court must be reversed and the
cause remanded for further proceedings in accordance with this
opinion, and it is so ordered.
