The state is entitled at all time to prevent the perversion of
its legal machinery, and may require that it be availed of only
bona fide.
To impose a penalty on those who unsuccessfully and not in good
faith defend their liability on contracts does not violate the
obligation of the contract.
Quaere whether the state could
impose such a penalty as to prior contracts as a mere consequence
of unsuccessful defense. This Court will not construe a state
statute as including that which it expressly excludes on the ground
that the statute's practical effect will be to include cases which
are so excluded therefrom.
A state statute imposing on insurance companies an additional
specified proportionate amount of the policy where there has been
an unsuccessful defense interposed not in good faith is not
unconstitutional as violating the contract clause of the
Constitution, and so
held as to a statute of Tennessee to
that effect.
122 Tenn. 248 affirmed.
The facts, which involve the constitutionality under the
contract clause of the federal Constitution of a statute of
Tennessee permitting the court to add certain amounts to the
recovery on insurance policies where refusal to pay was not in good
faith, are stated in the opinion.
Page 227 U. S. 500
MR. JUSTICE HUGHES delivered the opinion of the Court.
In 1887, the plaintiff in error issued a certificate or policy
of insurance for $3,000 upon the life of Charles C. Snyder. His
wife, the defendant in error, was the beneficiary. He died in 1908,
and, liability upon the policy having been denied by the company,
this suit was brought by Mrs. Snyder in the Chancery Court of
Tennessee to compel payment. The court gave judgment
Page 227 U. S. 501
in her favor, and finding that the refusal to pay was not in
good faith, added to the recovery twenty-five percent of the
principal, or $750, which was adjudged to be "reasonable
compensation and reimbursement to the complainant" for the
"additional loss, expense, and injury" which had been inflicted
upon her as the holder of the policy by the refusal. This addition
was made pursuant to an act passed by the Legislature of Tennessee
in 1901 (April 18, 1901, Acts of 1901, c. 141, p. 248). The supreme
court of the state, sustaining the statute, affirmed the judgment,
and the insurance company has sued out this writ of error. 122
Tenn. 248.
The sole federal question for decision is whether the
above-mentioned statute, as applied, impaired the obligation of the
contract in suit, and thus violated Art. I, ยง 10 of the
Constitution of the United States.
The act in question provides:
"SECTION 1. . . . That the several insurance companies of this
state, and foreign insurance companies and other corporations,
firms, or persons doing an insurance business in this state, in all
cases when a loss occurs and they refuse to pay the same within
sixty days after a demand shall have been made by the holder of
said policy on which said loss occurred, shall be liable to pay the
holder of said policy, in addition to the loss and interest
thereon, a sum not exceeding twenty-five percent on the liability
for said loss; Provided, that it shall be made to appear to the
court or jury trying the case, that the refusal to pay said loss
was not in good faith, and that such failure to pay inflicted
additional expense, loss, or injury upon the holder of said policy,
and provided, further, that such additional liability within the
limit prescribed shall, in the discretion of the court or jury
trying the case, be measured by the additional expense, loss, and
injury thus entailed."
"SECTION 2. . . . That, in the event it shall be made
Page 227 U. S. 502
to appear to the court or jury trying the cause that the action
of said policyholder, in bringing said suit, was not in good faith,
and recovery under said policy shall not be had, said policyholder
shall be liable to such insurance companies, corporations, firms,
or persons in a sum not exceeding twenty-five percent of the amount
of the loss claimed under said policy; Provided, that such
liability, within the limits prescribed, shall, in the discretion
of the court or jury trying the cause, be measured by the
additional expense, loss, or injury inflicted upon said insurance
companies, corporations, firms, or persons by reason of said
suit."
The contention is that the provision for added liability placed
a burden upon the assertion of the rights which the contract
secured, and thus in effect changed the contract by allowing a
recovery to which the parties had not agreed, and which was not
sanctioned by the law as it existed at the time the contract was
made.
Bronson v.
Kinzie, 1 How. 311,
42 U. S. 317;
Barnitz v. Beverly, 163 U. S. 118;
Bedford v. Eastern Building & Loan Ass'n, 181 U.
S. 227;
Oshkosh Water Works Co. v. Oshkosh,
187 U. S. 437,
187 U. S. 439.
It is pointed out that, in the cases in which statutes have been
sustained providing for the addition to the recovery of attorneys'
fees or damages, or penalties, the question arose under the
Fourteenth Amendment, and that, so far as they applied to suits
upon contracts, the latter had been made after the enactments.
Atchison, T. & S.F. R. Co. v. Matthews, 174 U. S.
96;
Fidelity Mutual Life Ass'n v. Mettler,
185 U. S. 308,
185 U. S. 322;
Iowa Life Insurance Co. v. Lewis, 187 U.
S. 335,
187 U. S. 355;
Farmers' &c. Insurance Co. v. Dobney, 189 U.
S. 301,
189 U. S.
304-305;
Seaboard Air Line Railway Co. v.
Seegers, 207 U. S. 73;
Yazoo & Miss. Valley R. Co. v. Jackson Vinegar Co.,
226 U. S. 217.
What, then, is the effect of the statute with respect to
preexisting contracts? It is at once apparent that it does not
purport to affect the obligation of the contract in
Page 227 U. S. 503
any way. It does not attempt to change or to render nugatory any
of the terms or conditions of the policy of insurance, or to
relieve the insured from compliance with any stipulation it
contained. It does not seek to give a right of action where none
would otherwise exist, or to deprive the company of any defense it
might have. If the company is not liable according to its contract,
it is not required to pay. Nor does the statute permit a recovery
of expenses or added damages as a mere consequence of success in
the suit. The question whether the state may so provide as to prior
contracts is not before us, and we express no opinion upon it.
The statute is aimed not at the rights secured by the contract,
but at dishonest methods employed to defeat them. The additional
liability is attached to bad faith alone. This is the necessary
effect of the proviso. It is only when it is "made to appear to the
court or jury trying the case that the refusal to pay said loss was
not in good faith" that the added recovery may be had. It must also
appear that such refusal inflicted "additional expense, loss, or
injury" upon the policyholder, and it is this further expense,
loss, or injury that measures the amount to be allowed, which is
not to exceed twenty-five percent of the liability on the
policy.
It cannot be said that this effort to give indemnity for the
injuries which would be sustained through perverse methods and
through an abuse of the privileges accorded to honest litigants
imposed a burden upon the enforcement of the contract. Neither the
contract nor the existing law which entered into it contemplated
contests promoted in bad faith, or justified the infliction of loss
by such means. The state was entitled at all times to take proper
measures to prevent the perversion of its legal machinery, and
there was no denial or burdening, in any proper sense, of the
existing remedies applicable to the contract by the demand that
they be availed of
bona fide.
Page 227 U. S. 504
But we are asked to look behind the language of the statute and
to assume that its effect is to impose the additional liability in
the absence of bad faith. That is, we are to take the statute as
including what it expressly excludes -- as allowing what it
explicitly denies. The act does not make the mere refusal to pay
sufficient evidence of bad faith, so as to justify the added
recovery; it requires that the bad faith be shown, and that the
consequent additional loss be shown. And the state court so
construed the statute in the application that was made of it in the
present case.
The trial court adjudged that the refusal of the company to pay
the amount of the policy was not in good faith, and the amount
allowed was determined to be a reasonable compensation for the
resulting damage. The evidence before the court, save a small
portion of it, is not in the record. The fact must be taken to be
as found. The statute, judged by its provisions as they have been
construed and applied, cannot be regarded as an impairment of the
obligation of the contract.
Judgment affirmed.