Devaux Legrand Owens v. American Bankers Insurance ( 1967 )

Lyle BrowN, Justice.

This suit was. brought by plaintiffs-appellants against American Bankers Insur-anee Company to cancel an insurance contract and obtain refund of premiums. The complaint was grounded in fraud. Complainants did not recover the full amount sought, and they appeal. The Insurance Company cross-appeals, relying principally on thé defense of laches. The Company also contends, that the trial court erred in finding" it had breached the contract.

Dr. Owens one of the two appellants, purchased a policy of insurance from Equitable Investors Life Insurance Company in December 1948. The named insured was Dr. Owens’ granddaughter, Mary Christine Johnston, and he was the beneficiary. The triple features of the policy are significant.

First the policy provided ordinary life coverage in the principal sum of $6,000.00.

Second, the Insurance Company set up a “Mortality Endowment” plan designated as a “Primary Division.” Under this feature the Company would place twenty-sis policy holders in the “Primary Division,” and they would be numbered from one through twenty-six. In this instance Mary Christine Johnston, then two years of age, would be placed in a group of twenty-six persons of corresponding age. In the event of the death of any person in her division, Dr. Owens (as the owner of his granddaug’hter’s policy) would receive a stated amount if at that time Mary’s policy was the lowest numbered policy in her division. If it was not then the lowest numbered policy, she would move up to the next favored position, and so on until she was next in line for payment.

The third and final, feature of the. policy was designated “Secondary Division.” This division worked similarly to the “Primary Division,” except that the names in these units worked in inverse order. In other words, those named in this group would progress downward to twenty-six instead of upward to number one position.

The important point to the investor (in this case Dr. Owens) was the filling of the various divisions, by the Insurance Company. This could be accomplished only by the sale of similar policies to persons in the same age bracket as his granddaughter. American Bankers Insurance Company assumed this contract in June 1950. By 1952, the efforts of Equitable and the succeeding efforts of American Bankers had not filled any of the divisions. Because of lack of public demand American ceased selling this type of contract. Until that time Dr. Owens had annually received “Certificate of Advance in Position” of his granddaughter. The last of these notices was received in July 1953.

The abundant correspondence between Dr. Owens and American Bankers from 1953 until 1962 was introduced at the trial. In 1956 the doctor inquired about the advancements of his granddaughter in the various positions. He specifically asked whether this type policy was then being sold. Bankers’ reply did not answer that question. Again, in 1959 Dr. Owens made further inquiry. For the first time he was advised that the endowment provisions would in time reach the point of no benefit. Bankers’ statement read:

“There is one situation regarding these policies, Dr. Owens that you should know about. This type policy has. not been sold for the past several years and naturally no additional members are being added to the divisions. Eventually, because of death, lapse, maturity by endowment, etc., these divisions will get down to where there will be only one person in them and the mortality endowment feature of the policy will not then be of benefit.”

From 1959 through 1961 the correspondence reflects Dr. Owens ’ complete dissatisfaction with the policy. His first demand was for an equitable settlement. The only offer made was payment of cash surrender value ($144.00 as of 1959). During the succeeding years the doctor made repeated demands for settlement. He received the same answer as in 1959. In 1962 he referred it to Ms attorney. The attorney’s efforts were not successful, and suit was filed in December 1964.

During all these years Dr. Owens timely paid the premiums under protest, apparently in order to prevent forfeiture until such time as he could obtain what he considered an adequate settlement. In. fact, he paid the premium due in 1964 into the registry of the court.

The holding of the chancellor was based on his finding that the insurance companies violated an implied obligation to in good faith continue to write the particular type of policy owned by Dr. Owens. From the testimony of an actuary it was determined that of the annual premium of $176.88, the sum of $78.88 was attributable to the cost of the endowment provisions. The balance of the premium represented the cost of the ordinary life provision. The chancellor awarded Dr. Owens judgment for $1,340.96, being that part of the premium payments attributable to the cost of the endowment provisions. This judgment was conditioned that the holder of the policy agree to a deletion of the endowment provision or forfeit the policy for its cash value. No attorney’s fee was allowed. No interest on the premium payments ordered refunded was awarded.

We agree with the chancellor’s finding that the sale of the policy to Dr. Owens carried an implied obligation on the part of the insurance company to in good faith endeavor to market this type of policy. The filling of the positions under the endowment provisions was. vital to the operation of the plan. When efforts to sell tMs type of policy ceased before the positions were filled, good faith would dictate that such purchasers as. Dr. Owens be forthwith notified. The principle adopted by the chancellor serves, generally, as a proper equitable basis, for disposition of the case. However, we tMnk equity dictates some modifications of his calculations. The reason for each such modification will be explained.

1. Dr. Owens is not entitled to a refund of premiums he paid in 1948, 1949, 1950, and 1951. The policy was received December 21 1948. He carefully studied the policy. Some parts, were not understandable, and he immediately wrote Equitable for information. He also advised that the insurance salesman assured him the granddaughter would have a preferred position in the divisions. From the correspondence it appears that the salesman, under instructions from Equitable, called on Dr. Owens with reference to his request for information. There was no further complaint registered with Equitable until December 1949. Dr. Owens received notice of the second annual premium. Dr. Owens protested that he had been assured by the salesman that there would be a pay-off under the endowment before the second premium came due. Equitable replied, calling the doctor’s attention to the provisions of the policy. The company clearly indicated that the provisions of the policy governed, and not oral representations, made by a salesman.

Equitable’s position in this respect is strengthened by the application which Dr. Owens executed. Among other things, it provided:

“I hereby agree: (1) that any statements, promises, or information made or given by or to the person soliciting or taking this application for policy or by or to any other person, shall not be binding on the Company or in any manner affect its rights unless such statements, promises, or information be reduced to writing and presented in this application to the home office of the Company; ...”

Dr. Owens, a medical doctor, held important offices in the Arkansas Medical Society. He apparently had substantial business interests. In the field of insurance he has served on the board of directors, of two insurance companies.

In view of these facts, along with the fact that the insurance companies were apparently endeavoring during these years to market this special policy, we hold it would be inequitable to order refund of the premiums for these stated years.

2. Dr. Owens is entitled to a refund of that part of all other premiums which were charged because of the endowment provisions. American Bankers absorbed Equitable in 1950. American apparently sold this type of policy through 1952. The actuary testified that none of the endowment divisions had been filled to the maximum since the issuance of Dr. Owens’ policy. He explained this was caused by lack of public demand. The fact that American Bankers had ceased marketing this type of policy was. not made known to Dr. Owens until 1959, notwithstanding his repeated inquiries.

In this situation Dr. Owens was faced with a dilemma. One, he could forfeit the policy and collect the small cash value. Two, he could switch to a standard endowment policy which would likely not be payable during his lifetime. Three, could keep the present policy in force. Four, he could sue for recovery of premiums.

It is urged that Dr. Owens continued to keep the policy in force with full knowledge of the status of the endowment provisions, particularly after 1959. It is true he kept paying the premiums., but such payments were under considerable protest. He wrote seven letters to Bankers over a three-year period and before turning the matter over to his attorney. He emphatically explained his intention to recoup all premium payments and urged a settlement in lieu of litigation. We are impressed by the fact that during those years he was paying a premium for the endowment provisions, which were practically worthless. This condition was due to the fact that so few persons were in the groups with the granddaughter. In fact, the numbers in the respective groups ranged from a low of one to a high of five. To allow Bankers to retain premium monies chargeable to the endowment provisions would constitute unjust enrichment.

With respect to the ordinary life provisions in the policy, the situation is. different. Ordinary life coverage was afforded during these years. It would be inequitable in this case to hold that Bankers he required to refund the charge for that coverage. In situations where an insurance company has wrongfully repudiated a contract, premiums have been ordered refunded as damages. Here, the prime contract is, and always has been, in force.

American Bankers advances the defense of laches. Numerous, cases on the subject are cited. Most of these cases are concerned with the requirement that the policyholder examine the policy and return it within a reasonable time. Otherwise, he i,s deemed to have accepted it and is liable for the premium obligation. The case before us. does not fall in that category. For some seven years American Bankers had not lived up to its implied obligation to sell this type of policy — a fact that was not made known to Dr. Owens until 1959. By that time the doctor had invested over two thousand dollars in premiums. If he surrendered the policy, he would be paid $144.00 surrender value. If he accepted Bankers’ offer to switch to a twenty-year endowment, he would probably not receive any benefit therefrom during his lifetime. Alternatively, he could pay premiums under protest to keep alive his chance to recoup a more substantial sum. The dilemma was. created by American Bankers. Laches is an equitable defense. Before sustaining a defense of laches the court will take a long look at the facts to see if the pleader has in fact done equity.

American Bankers contends. Dr. Owens could have sued for recovery of premiums in 1949 if he was not satisfied with the policy. It is. then asserted he should have so acted in 1953 when he was writing to Bankers. But Bankers overlooks the fact that its letters to Dr. Owens, during this period were reassuring. It was not until 1959 that Bankers, revealed the truth.

But there is yet another, and stronger, reason for denying the defense of laches. To sustain that plea the leader mast show that the delay results in a disadvantage. No such disadvantage was suffered by Bankers.

“Since laches, is an equitable doctrine, its application is controlled by equitable considerations. It cannot be invoked to defeat justice; and it will be applied where, and only where, the enforcement of the right asserted would work injustice.” 30A C. J. S. Equity § 115.

It should be noted that Bankers pleads the statute of limitations.; however, it is not argued as a point for reversal. We therefore express no opinion in this respect.

We are reminded by appellants that this court cannot make a contract for the parties. This is correct; we can only construe and enforce contracts which have been made. The result of our decision will not have the effect of making a contract; we simply find that the endowment provisions of the insurance policy are so nearly worthless as to justify rescission and refund of premiums.

The chancellor made no allowance for an attorneys’ fee. Appellants claim a fee under Ark. Stat. Ann. § 66-3239 (Repl. 1966). This statute, being penal in nature, must be strictly construed. Whether we treat this as a suit to recover premiums or to cancel the policy, the statute does not authorize an attorney’s, fee. See American Republic Life Ins. Co. v. Claybough, 227 Ark. 946, 302 S. W. 2d 545 (1957).

Dr. Owens, is entitled to six per cent simple interest on his recovery, to be calculated from the date he made each payment.

Finally, we dispose of the question of the future status of the policy. The chancellor gave Dr. Owens, the option of keeping the policy at a reduced premium and with the endowment provisions deleted, or of surrendering the policy upon receipt of the cash loan surrender value. We hesitate to approve this, procedure, because it might be interpreted as making a contract between the parties. Since plaintiffs specifically prayed for cancellation and supported this prayer with testimony to the effect that they do not want the policy, we think it better to lay the matter at rest by directing surrender of the policy and payment by Bankers of the cash value.

Remanded with directions that the decree be modified to comport with this, opinion.

Ward, J., would affirm the decree. Fogleman, J., dissents.