1. A paid-up addition to a policy of life insurance is an amount
added to the face of the policy, paid for by a single premium, for
which there must be a legal reserve. P.
291 U. S.
173.
2. This is the meaning of the term " dividend additions," as
used in Art. 7432, Par. 7, Rev.Civ.Stats. of Texas, 1925. P.
181.
3. A paid-up addition is distinct from extended insurance. P.
291 U. S.
173.
4. The policy provided:
"In the event of the death of the insured during the days of
grace, the current premium being unpaid, if no other option has
been elected, or if the policy shall lapse, the dividend then due
shall be paid in cash."
Held applicable where the policy lapsed and the insured
died after the days of grace. P.
291 U. S.
174.
5. A level premium participating policy provided that, upon
lapse for nonpayment of premium, if the insured failed to exercise
specified options, the dividend due him for the current year should
be paid him in cash, and the surrender value of the policy (defined
as equal to the reserve at the end of the policy year, less
surrender charges), together with the value of any paid-up
additions, and accumulations of dividends at interest, should be
applied to the extension of the policy as term insurance from the
date to which premiums had been paid, first deducting any
indebtedness or advances on the policy.
Held:
(1) That a current dividend as to which the insured had
exercised no option was inapplicable to increase the extension of
insurance, but was payable in cash. P.
291 U. S.
176.
(2) A dividend is no part of the surrender value. P.
291 U. S.
176.
(3) The provisions as to paid-up additions and accumulations of
dividends at interest have no relation to such current dividend or
to earlier dividends applied in reduction of premiums. P.
291 U. S.
178.
Page 291 U. S. 171
6. Advances against surrender value do not create a personal
liability or debt of the inured, but are merely deductions from the
sum that the company ultimately must pay. P.
291 U. S.
179.
7. The company has no right, without agreement with the insured,
to apply dividend payable in cash under the policy to the reduction
of an advance against the policy. P.
291 U. S.
180.
8. While it is highly important that ambiguous clauses should
not be permitted to serve as traps for policyholders, it is equally
important to the insured, as well as to the insurer, that the
provisions of insurance policies which are clearly and definitely
set forth in appropriate language, and upon which the calculations
of the company are based, should be maintained unimpaired by loose
and ill considered interpretations. P.
291 U. S.
180.
65 F.2d 240 affirmed.
Certiorari, 290 U.S. 613, to review a judgment reversing a
recovery obtained by the present petitioner in an action on a
policy of life insurance. The case was removed to the District
Court from a court of Texas on the ground of diversity of
citizenship.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
This action was brought by petitioner as beneficiary of a policy
of insurance for $10,000 issued July 26, 1927, upon the life of her
husband, who died on October 15, 1931. Application for the policy
was made, and the policy was delivered, in the State of Texas. A
level premium of $449.10 was payable annually on June 10th, and was
paid to and including June 10, 1930. The premium payable on June
10, 1931, was not paid either at that time or within the thirty-one
days of grace allowed by the policy.
Page 291 U. S. 172
The "loan value" or "cash value" of the policy, as shown by the
table which the policy set forth, was then $910. Loans against the
policy, with interest, amounted to $898.88. The policy was a
participating one, and a dividend of $74.80 was declared in favor
of the insured on June 10, 1931. If that dividend had been applied
in reduction of the amount advanced against the policy or to the
purchase of extended insurance, the result would have been to
extend the insurance beyond the date of the death of the insured.
Petitioner contends that the dividend should have been so applied.
Respondent insists that such application would have been contrary
to the terms of the policy, and that, on the expiration of the
period of grace without payment of the premium due, the policy
lapsed and the dividend was payable in cash, and not otherwise.
Respondent's request for the direction of a verdict was denied,
and the verdict and judgment went for petitioner. The judgment was
reversed by the Circuit Court of Appeals. 65 F.2d 240, 245. This
Court granted certiorari.
The policy gave the following options as to the disposition of
dividends:
"11. Dividend Options. Dividends may be withdrawn in cash; or
applied to the payment of premiums; or left to accumulate with
interest at three percent, increased from surplus interest earnings
as apportioned by the Directors, until the maturity of the policy,
subject to withdrawal at any time; or applied to the purchase of
paid-up participating additions to the policy, convertible into
cash at any time for the amount of the original dividends or the
reserve of the additions, if larger, but payment may be deferred by
the Company ninety days from the date of application therefor."
There is no ambiguity in the terms of these options. They are
clear and definite in the terminology of insurance,
Page 291 U. S. 173
and each is to be applied with its distinctive significance. No
one of these options provides for the use of a dividend to procure
extended insurance -- that is, to procure an extension of the term
of the insurance from the date to which premiums have been paid,
without any further payment. Dividends may be withdrawn in cash or
applied to the payment of premiums or left to accumulate with
interest subject to withdrawal at any time. The further option to
have dividends "applied to the purchase of paid-up participating
additions to the policy" is quite distinct from an option to
procure extended insurance. A "paid-up addition" to the policy, by
the application of a dividend, is the amount added to the face of
the policy and purchased by the use of the dividend as a single
premium. For such paid-up additions there must be a legal
reserve.
The insured did not exercise any one of the options given by
article 11. It appears that he had several other policies issued by
the same company, and, in addition to the amount advanced by the
company, he had borrowed certain amounts from the company's agents
in Dallas, Texas. These agents, on September 18, 1931, obtained an
order on the company, signed by the insured, which directed payment
to them of the dividend on the policy in suit, together with
dividends on other policies. On this order, the dividend here in
question was paid to the agents. Petitioner contested the order as
having been signed at a time when the insured did not have
sufficient mental capacity to understand the transaction. This
issue of fact was decided by the jury in favor of petitioner, and
the Circuit Court of Appeals did not pass upon the sufficiency of
the evidence in that relation. Nor do we deal with that question.
The only other indication of the intention of the insured is sought
to be drawn from a statement in a letter addressed to the company
by its
Page 291 U. S. 174
agents on September 14, 1931, referring to a conversation with
the insured about September 1st. The agents said that the insured
had rejected their proposal for the use of dividends on his
policies in partial payment of his note held by the agents, saying
that "he was going to have every nickel applied towards paying
these policies as far as it would carry them." We agree with the
view of the Circuit Court of Appeals that this statement was too
indefinite to serve as a direction to the company to apply the
dividend in question in any particular way, and, unless the
insurance had been extended under the provisions of the policy, it
had already lapsed and could be reinstated only in accordance with
the requirements of the policy -- that is, upon payment of premium
arrears with interest and satisfactory evidence of insurability. We
are unable to find any basis for the conclusion that the insured
either had or attempted to exercise any option to use the dividend
to obtain extended insurance, and our decision must turn upon the
construction of the provisions of the policy applicable to such a
case.
Article 12 provides for the "automatic disposition" of dividends
as follows:
"12. Automatic Disposition. On payment of the premium, or on the
policy anniversary if no further premium is payable, if no other
option has been elected, the dividend then due shall be applied to
the purchase of paid-up additions. In the event of the death of the
insured during the days of grace, the current premium being unpaid,
if no other option has been elected, or if the policy shall lapse,
the dividend then due shall be paid in cash. At the death of the
insured during the continuance of the policy, the
pro rata
part of the dividend for the current policy year shall be paid in
cash."
The first sentence of article 12 is inapplicable, as it provides
for the disposition of the dividend "on payment
Page 291 U. S. 175
of the premium, or on the policy anniversary if no further
premium is payable, if no other option has been elected." The
present case is not one where the premium was paid or where, on the
"policy anniversary," no further premium was payable. The first
part of the second sentence is also inapplicable, as the insured
did not die during the days of grace. It is also clear that the
third and last sentence does not apply. But the case does fall
directly within the alternative of the second sentence, "or if the
policy shall lapse, the dividend then due shall be paid in cash."
That is precisely this case. And this provision of the policy is in
plain opposition to the contention that the dividend should be
applied to an extension of the insurance. The provision presupposes
a dividend due and the lapse of the policy for nonpayment of
premium, and the dividend is then to be paid in cash.
Petitioner seeks to escape this definite stipulation by invoking
the provisions of the policy as to the use of the "policy value" or
"surrender value" in obtaining extended insurance. After stating
that the reserve of the policy "is computed on the American
Experience Table of Mortality with interest 3 1/2%," the policy
provides:
"15. Surrender Value. After two full years' premiums have been
paid, the surrender value for each thousand dollars of insurance is
equal to the reserve at the end of the policy year, omitting cents,
except that in the second, third and fourth policy years, it is
equal to the reserve at the end of the policy year, taken to the
nearest dollar, less surrender charges of $21, $13, and $6,
respectively."
"16. Policy Values. The surrender value may be used at the
option of the owner of the policy in any one of the following ways,
all of equal value, as set forth in the following tables, provided
there be no indebtedness or advances on the policy. If, on failure
to pay a premium, no
Page 291 U. S. 176
option is exercised, such value shall be applied as provided in
Option 1."
"17. Option 1. Extended Insurance. Applied to the extension of
this policy as participating term insurance from the date to which
premiums have been paid, without any further payment (Table 1.) The
value of any paid-up additions will be used to increase the term of
extension. Accumulations of dividends at interest may be applied to
increase the term of extension. Dividends on extended insurance
shall be paid in cash and only for completed policy years."
"
* * * *"
"22. Deduction of Indebtedness. If there be any indebtedness or
advances on this policy, the cash value shall be reduced thereby;
the paid-up value shall be reduced proportionately, and the
extended insurance shall be for the face value of the policy less
the indebtedness and advances and for such term as said reduced
cash value will provide."
Petitioner argues that an earlier provision of the policy
(article 8) that
"after two full years' premiums have been paid, on failure to
pay any subsequent premium, this policy shall lapse and its value,
if any, shall be applied as set forth in article 16,"
conflicts with the provision of article 12 that the dividend in
case of lapse shall be paid in cash. There is no conflict, however,
as article 16 refers to the use of the "surrender value," as
defined in article 15. Instead of there being inconsistency,
article 8 expressly provides for lapse on nonpayment of premium,
the event on which, by article 12, the dividend is to be paid in
cash. The dividend is not a part of the "surrender value." That
value is equal to the "reserve" at the end of the policy year, less
the "surrender charges" stated. Where level premiums are paid, the
amount of the annual premium is necessarily greater than the
mortality
Page 291 U. S. 177
cost during the early years of the insurance and less than the
mortality cost in later years. With the mortality table and an
assumed rate of interest on the investment of premiums received,
the amount of the accumulated savings on this basis at any date can
be mathematically computed. This amount constitutes the "reserve"
against the policy or its net value. The insurer must have on hand
the aggregate amount of these reserves against its outstanding
policies. And, in case of lapse, after a policy has been in force
for a specified time, its net value or "surrender value," less
surrender charges, is made available to the policyholder.
"Dividends" are in a different category. In fixing the annual
level premium, there is added to the sum required on the basis of
the mortality table, and assumed rate of interest, an amount to
cover anticipated expenses and contingencies. If the rate of
mortality exactly coincided with the expected rate, and the income,
expenses, and contingencies were precisely in accordance with the
allowance made therefor, there would be no surplus, and hence no
dividends. But, in the actual course of business, there may be, and
probably will be, gains from the fact that the mortality turns out
to be less than that expected, or that the income is larger or the
outlays are less than those estimated, and these gains are
distributable to policyholders by means of "dividends" in
accordance with the provisions of policies. The "surrender value"
is calculated on the basis of the reserve, and without reference to
such possible dividends.
In this instance, according to the tables set forth in the
policy to which article 16 refers, the surrender value at the time
in question was $91 for each $1,000 of insurance, and thus amounted
to $910. According to article 22, this "cash value" was to be
reduced by the amount advanced on the policy. It is not questioned
that the
Page 291 U. S. 178
amount which had been advanced, with interest, was $898.88.
There was thus left, of the surrender value, the sum of $11.12
which the insured was entitled to have applied as provided in
article 16. The insured, on the failure to pay the premium due, did
not exercise any of the options for the use of the surrender value
of the policy under article 16, and hence "such value" was to be
applied "as provided in Option 1," set forth in article 17. The
amount to be so applied was clearly the surrender value of $11.12,
as above stated. And, under "Option 1," it was this amount that was
to be used to obtain "extended insurance."
Article 17 provided that this amount should be
"applied to the extension of this policy as participating term
insurance from the date to which premiums have been paid, without
any further payment (Table 1)."
According to that table, the sum of $910, the total surrender
value without deducting advances, would have sufficed to purchase
$10,000 of participating term insurance for "four years, 330 days"
-- that is, at between 50 and 51 cents a day. The amount remaining
of the surrender value, after deducting advances, or $11.12, would
thus purchase extended insurance for only twenty-two days, a period
inadequate to keep the policy alive until the date of the death of
the insured.
The petitioner is not aided by the other provisions of article
17. It provides that "the value of any paid-up additions will be
used to increase the term of extension." But there were no "paid-up
additions." Prior dividends had been used in reduction of the
annual premiums paid. No option had been exercised for the use of
the dividend in question in the purchase of a paid-up addition as
provided in article 11, and that dividend, on the lapse of the
policy, became payable in cash by the terms of article 12.
Page 291 U. S. 179
Article 17 also provided that "accumulations of dividends at
interest may be applied to increase the term of extension." This
provision manifestly refers to the option in article 11 that
dividends may be "left to accumulate with interest at three
percent." That option had not been exercised, and no dividends had
been left to accumulate. The provision has no application to a
current dividend as to which no option had been exercised and
which, on the lapse of the policy, is expressly made payable in
cash. If, after the lapse and during the life of the insured, the
company had attempted to apply that dividend to extended insurance,
its action would not have been binding upon the insured, and he
would have been entitled to demand the cash payment explicitly
promised him. [
Footnote 1]
It is the contention of the petitioner that, on the lapse of the
policy, the dividend of $74.80 should have been applied in
reduction of the amount advanced against the surrender value of the
policy, thus raising what remained of that value from $11.12 to
$85.92, a sum sufficient to extend the insurance until after the
death. But the policy gave no warrant for an application of the
dividend to the reduction of advances against the policy. As this
Court pointed out in
Board of Assessors v. New York Life Ins.
Co., 216 U. S. 517,
216 U. S. 522,
such advances being against the surrender value do not create a
"personal liability" or a "debt" of the insured, but are merely a
deduction from the sum that the company "ultimately must pay."
While the advance is called a "loan," and interest is computed in
settling the account, "the item never could be sued for," and, in
substance, "is a payment, not a loan."
Page 291 U. S. 180
Id. The company had no right, without agreement with
the insured, to apply a dividend, payable in cash, to the reduction
of the advance against the policy. [
Footnote 2]
In the endeavor to support its contention, petitioner refers to
a statement and a "cash surrender voucher" sent by the company to
the insured under date of July 15, 1931. These papers were
submitted for the signature of the insured, but were not signed or
approved by him. In them, the cash value of the dividend, or
$74.80, was added to the cash value of the policy, and the amount
of the advances against the policy with interest, together with a
"balance on loan" ($81.10) on another policy, were deducted,
leaving a "net cash surrender value available" of $4.82. The
endeavor to treat this statement and proposed voucher as making the
dividend a part of the surrender value is unsuccessful. Not only is
this effort opposed to the clear terms of the policy, but the
papers themselves show that the "cash value" of the dividend was
regarded as a separate item. These papers, so far as the present
question is concerned, evidence neither an admission nor an
agreement.
As there is no ambiguity in the provisions under consideration,
there is no occasion for resort to the familiar principle that
equivocal words should be construed against the insurer. While it
is highly important that ambiguous clauses should not be permitted
to serve as traps for policyholders, it is equally important, to
the insured as well as to the insurer, that the provisions of
insurance policies which are clearly and definitely set forth in
appropriate language, and upon which the calculations of the
company are based, should be maintained unimpaired by loose and ill
considered interpretations.
Page 291 U. S. 181
The remaining question is whether a different conclusion as to
the interpretation of the policy is required by view of the
provision of Article 4732, Revised Civil Statutes of Texas 1925,
quoted in the margin. [
Footnote
3] Petitioner insists that the phrase "dividend additions," as
used in the statute, means "dividends." The Circuit Court of
Appeals disagreed with this view, holding that "dividend additions"
are "paid-up insurance in addition to the face of the policy and
purchased with dividends." We think that this construction is
correct. It is in accord with the uncontradicted testimony which
was given by actuaries upon the trial as to the general
understanding of the phrase. It will be observed that the statutory
provision refers to the reserve at the date of default on the
policy "and on any dividend additions thereto." It thus refers
Page 291 U. S. 182
to "dividend additions" upon which there would be a reserve --
that is, it would seem plainly, to paid-up insurance purchased by
dividends, which would require a reserve. We also agree with the
Circuit Court of Appeals that the case of
First Texas State
Ins. Co. v. Smalley, 111 Tex. 68, 228 S.W. 550, is not to be
regarded as a construction of the phrase, as the present question
was not before the court. The same is true of the case of
Occidental Life Ins. Co. v. Jamora, 44 S.W.2d 808. In
Great Southern Life Ins. Co. v. Jones, 35 F.2d 122,
relating to a similar statute of Oklahoma, the policy provided for
guaranteed "premium reduction coupons" which were fixed liabilities
requiring a reserve, and were not dividends in the proper sense, as
in the instant case. The ruling of the Court of Appeals of Kentucky
in
United States Life Ins. Co. v. Spinks, 126 Ky. 405, 96
S.W. 889, 103 S.W. 335, is met by the later decision of the same
court in
Jefferson v. New York life Ins. Co., 151 Ky. 609,
616, 617, 152 S.W. 780, 783, where the court held that the words
"dividend additions" in the statute of Kentucky "has reference
solely to paid-up insurance."
See also Mutual Benefit Life Ins.
Co. v. O'Brien, 116 S.W. 750. We see no reason for
attributing, under the statute of Texas any other meaning to the
terms of the policy in suit than that which would otherwise be
regarded as their clear import.
The petition for certiorari in this case directed attention to
what was deemed to be a conflict between the decision below and the
decisions of other Circuit Courts of Appeals in
Harvey v. Union
Central Life Ins. Co., 45 F.2d 78, and
Atlantic Life Ins.
Co. v. Pharr, 59 F.2d 1024. In the case of
Harvey,
the decision could, and did, rest on the fact that the period of
extended insurance, to which the surrender value was applicable
according to the provisions of the policy, ran from the effective
date of the policy and, as thus calculated, the insurance extended
beyond
Page 291 U. S. 183
the date of death. So far as what was said by the court in that
case may be regarded as bearing upon the question presented in the
instant case, it was, and was stated to be, unnecessary to the
decision. In the case of
Pharr, there were provisions in
the policy, quite different from those before us, which were of
doubtful meaning. The views expressed by the court may be taken as
limited to the facts of the particular case.
The judgment of the Circuit Court of Appeals is
Affirmed.
[
Footnote 1]
See Hutchinson v. National Life Ins. Co., 196 Mo.App.
510, 195 S.W. 66;
Atlantic Life Ins. Co. v. Bender, 146
Va. 312, 131 S.E. 806;
Gardner v. National Life Ins. Co.,
201 N.C. 716, 161 S.E. 308;
Toncich v. Home Life Ins. Co.,
309 Pa. 336, 163 A. 673.
[
Footnote 2]
See Wagner v. Thieriot, 203 App.Div. 757, 197 N.Y.S.
560, 236 N.Y. 588, 142 N.E. 295.
[
Footnote 3]
The provisions of Article 4732 invoked by the petitioner are as
follows:
"No policy of life insurance shall be issued or delivered in
this state, or be issued by a life insurance company organized
under the laws of this state, unless the same shall contain
provisions substantially as follows:"
"
* * * *"
"7. A provision which, in event of default in premium payments,
after premiums shall have been paid for three full years, shall
secure to the owner of the policy a stipulated form of insurance,
the net value of which shall be at least equal to the reserve at
the date of default on the policy, and on any dividend additions
thereto, specifying the mortality table and rate of interest
adopted for computing such reserve, less a sum not more than two
and one-half percent of the amount insured by the policy and of any
existing dividend additions thereto, and less any existing
indebtedness to the company on the policy. Such provision shall
stipulate that the policy may be surrendered to the company at its
home office within one month from date of default for a specified
cash value at least equal to the sum which would otherwise be
available for the purchase of insurance, as aforesaid, and may
stipulate that the company may defer payment for not more than six
months after the application therefor is made. This provision shall
not be required in term insurances."