Central States Life Insurance v. Morris , 202 Ark. 969 ( 1941 )

On September 26, 1923, the Home Life Insurance Company issued a fifteen-year endowment policy to Toy Earle Morris in which it agreed to pay the said Toy Earle Morris who was designated as the insured the sum of $2,000 if living on September 26, 1938, and the policy was in full force and effect; or upon receipt of due proof of the prior death of the insured during the continuance of the policy to pay said sum to the beneficiary, Nell Elizabeth Morris, daughter of the insured. The reserves of the Home Life Insurance Company became impaired, and a reinsurance contract, effective March 31, 1931, was entered into whereby the Central States Life Insurance Company reinsured and assumed, subject to the exceptions, modifications, and limitations stated in the contract, all of the outstanding policies issued or assumed by the Home Life which were in force on that date. The parts of that contract involved in the question here presented are¹ section I (a), the reinsuring clause; section I (b), in which a lien equal to 50 per cent. of the legal reserve on all policies in force, bearing interest at the rate of six per cent. per annum compounded annually, was established, and which further provided that both lien and interest thereon should be deducted from any payment made by Central States Life pursuant to the terms of said policies, or from any settlement thereunder, or from the value used to purchase any paid-up or continued insurance, except as otherwise provided in the reinsurance contract; section I (c), which provided that Central States Life agreed that in the event of the death of an insured while his or her policy was in force it would waive the aforesaid lien or any balance thereof remaining and all interest accumulations thereon; section I (i), in which Central States Life agreed that on any endowment policy maturing before the lien had been discharged any reduction of liens as provided in the contract which became effective after the date of such maturity should be paid to the owner of such endowment policy at the time such reduction became effective; and section V (b), in which Central States Life agreed to make an accounting on March 31 each year and apply the net earnings, if any, on the assets conveyed to it by the Home Life to the reduction of the liens established in section I (b)

At the time the reinsurance contract was entered into the amount of the lien on the policy of Toy Earle Morris was $434.62, which had increased by addition of interest to $671.45 when the policy matured on September 26, 1938. On October 6, 1938, the Central States Life made a settlement with Mr. Morris, by which it paid him $5.93, for which he executed his receipt acknowledging payment of said sum in full settlement of the amount due him as of September 26, 1938, on account of Home Life policy No. 25863, in the sum of $2,000, being the full amount of the policy less automatic premium loan of $61.83, premium lien note for $1,260.79, and less reinsurance lien and accrued interest amounting to $671.45, deducted in accordance with the reinsurance agreement.

Mr. Morris died on June 22, 1939, and subsequently Nell Elizabeth Morris, one of the appellees herein, filed this suit as beneficiary under the policy, in which she set up that the policy matured as an endowment on September 26, 1938, and by the terms of the reinsurance agreement the policy remained in fun force and effect: that upon the death of the insured on June 22, 1939, it was the duty of appellant under the terms of the reinsurance agreement to waive the lien of $671.45 and pay that sum to her as beneficiary. In its answer, appellant denied that any sum was due her as beneficiary, or that it was the duty of appellant to waive the lien. Thereafter, Mrs. Nell Morris filed her intervention in which she set out that she was the widow, and that the plaintiff, Nell Elizabeth Morris, was the sole and only heir of Toy Earle Morris; that there were no debts against the estate; that if it should be held that the lien was properly payable to the deceased during his lifetime or to his widow and heir after his death, judgment should be rendered in favor of her as widow and of her daughter, Nell Elizabeth, as sole heir.

There was a trial by the court without a jury. In his conclusions of law the trial court held that appellant had a continuing obligation by virtue of section I (i) of the reinsurance agreement to pay to the insured the amount of any reduction in said lien which might accrue, and that in the event of the death of the insured at any time prior to the full payment and discharge of the lien appellant then became obligated by the terms of section I (c) of the reinsurance agreement to waive said lien or any balance thereof remaining and all interest accumulations thereon, and to pay the amount thereof to the heirs or legal representatives of the insured. Judgment was entered for appellees as widow and sole heir of Toy Earle Morris for $671.45 with interest, penalty of 12 per cent. and attorney's fee of $100, from which is this appeal.

The only question to be determined on this appeal is whether the appellant became obligated to waive the lien upon the death of Mr. Morris after the endowment policy had matured. There are no disputed facts. Appellees admit the validity of the reinsurance contract, and that Mr. Morris, by his acceptance thereof and by continuing to pay the premiums on the policy, became bound by its terms, as was held by this court in Home Life Insurance Company v. Arnold, 196 Ark. 1046, 120 S.W.2d 1012.

Appellant contends that the only right Toy Earle Morris or his estate had under the reinsurance contract was by virtue of section I (i), which obligated the appellant to pay the amount of any reduction of the lien to him or to his estate, and that section I (c) did not apply for the reason that the policy was not in force at the time of the death of Mr. Morris. Appellees contend that the policy was in force when Mr. Morris died, that section I (c) required appellant to waive the lien and pay them the amount thereof, and that section I (i) cannot be construed so as impliedly to exclude endowment policyholders from the benefits of section I (c), which provides: "Central States Life agrees that in the event of the death of an insured while his or her policy is in force, it will waive the aforesaid lien. . . ."

An endowment policy is a contract by which the insurer agrees to pay to the insured a sum certain at the end of a certain period, or if he dies before the expiration of the term fixed, to pay the amount to a person designated as beneficiary. Cooley's Briefs on Insurance, 2d ed., v. 1, p. 32. In this case the Home Life Insurance Company was the insurer, Toy Earle Morris was the insured, and Nell Elizabeth Morris was the beneficiary. From the time the policy was issued until its maturity, the life of Toy Earle Morris was insured, and in the event of his death the beneficiary, Nell Elizabeth Morris, was entitled to receive the full sum of $2,000 as provided in the policy. In that event the appellant would have been obligated to waive the lien under section I (c) of the reinsurance contract. But when this endowment policy matured September 26, 1938, all elements of insurance disappeared. There remained only the obligation to pay the amount due upon maturity of the policy. As stated in Tennes v. Northwestern Mutual Life Insurance Company,26 Minn. 271, 3 N.W. 346: "This contract is not purely of life insurance. So far as it is an agreement to pay, upon the death of the husband within ten years, it assured his life, and is a contract of life insurance; but the agreement to pay at the end of the ten years, though the husband be still alive, is not one assuring his life." And in Walker v. Giddings, 103 Mich. 344, 61 N.W. 512, the court said: "In Cooke, Ins., 107, it is said: ``Sometimes the contract to pay on the death of the insured is conjoined with a contract to pay on the expiration of a fixed period, should he live so long. Such a contract is called a "contract of endowment insurance," though, so far as concerns the contract to pay on the expiration of a fixed period, it is not, strictly speaking, a contract of life insurance at all.'"

And in Cooley's Brief on Insurance, 2d ed., v. 1, p. 33, in discussing endowment insurance it is stated: "On the other hand, so far as the endowment feature of these contracts is concerned, they are not regarded as life insurance contracts, the endowment being regarded as a mere incident to the life insurance contract."

When this policy of endowment, insurance was issued to Toy Earle Morris there were only two contingencies. One was that if he died prior to the 26th day of September, 1938, the insurer would pay $2,000 to his beneficiary. The other was that if he lived until the 26th day of September, 1938, the insurer would pay $2,000 to him. He was living on September 26, 1938, and what had previously been a life insurance policy was then converted into a liquidated debt. This rule is clearly stated in McDonnell v. Mutual Life Insurance Company of New York,116 N.Y.S. 35 131 A.D. 643, where the beneficiary was seeking to recover a deferred dividend due the insured at the expiration of a fifteen-year period, the insured having died eleven days prior to the expiration of that period, in which the court said: "But this contention loses sight of the fact that this is a contract for life insurance, that it involves the risk, that after death there is no risk, and that the contract for life insurance as such then and there ceases to be in force. The obligation to pay in accordance with the terms of the contract is in force, but the policy of life insurance is no longer in force. It has been transformed into a liquidated debt by the happening of the contingent event theretofore provided for."

There must be three parties to a life insurance contract — the insurer, the insured, and the beneficiary. Without any one of these there can be no contract of life insurance. When the endowment policy issued to Toy Earle Morris matured, all the rights of Nell Elizabeth Morris, as beneficiary, then and there ceased and terminated, and the appellant was obligated to Toy Earle Morris only. He was no longer an insured, Nell Elizabeth Morris was no longer a beneficiary, and appellant was no longer an insurer. The relationship of debtor and creditor then came into existence. He became a creditor of appellant, entitled to receive the amount due under the policy less the amount of the lien, and any sums by which that lien might be reduced in the future as provided by the reinsurance contract. Since Toy Earle Morris was not an insured at the time of his death and the policy was not in force as a life insurance contract, appellant was not obligated to waive the lien.

We have not overlooked the case of State ex rel. Attorney General v. New York Life Insurance Co.,198 Ark. 820, 131 S.W.2d 639, which we do not regard as in conflict with the views herein expressed.

The judgment is, therefore, reversed, and the cause dismissed.

SMITH, J., disqualified.

¹ Sections involved are:

Section I.

(a) Central States Life agrees, subject to the exceptions, modifications and limitations herein stated, to and does hereby reinsure and assume all the outstanding insurance policies issued or assumed by Home Life which are in force in accordance with the terms of said policies on the day on which this reinsurance agreement becomes effective. (b) Whereas the assets of Home Life hereby conveyed to Central States Life are not sufficient at their present value to provide for the discharge of the policy obligations of said Home Life as they mature, as part of the consideration there shall be established and placed against each policy of the Home Life assumed hereunder by Central States Life a lien equal to fifty per cent (50%) of the legal reserve thereon as it has been established and is carried on the books and records of Home Life on the date as of which this reinsurance becomes effective, such lien to bear interest at the rate of six per cent (6%) per annum, compounded annually. Both lien and interest thereon shall be deducted from any payment made by Central States Life pursuant to the terms of said policies, or from any settlement thereunder or from the value used to purchase any paid-up or continued insurance, except as otherwise hereinafter provided. (c) Central States Life agrees that in event of the death of an insured while his or her policy is in force it will waive the aforesaid lien or any balance thereof remaining and all interest accumulations thereon and the mortality cost of waiving such lien shall be provided out of the net earnings of the business of Home Life reinsured hereunder during the calendar year in which death occurs. If such earnings are insufficient to provide such mortality cost then Central States Life will provide therefor out of its own surplus; but nothing herein shall obligate Central States Life to maintain any reserve, legal or otherwise, to insure the waiving of liens. (i) Central States Life agrees that on any Endowment policy maturing before the lien herein provided shall have been discharged, any reduction of liens as herein provided which becomes effective after the date of such maturity shall be applied to the amount of lien outstanding at the date of such maturity and the amount of such reduction shall be paid to the owner of such Endowment policy at the time such reduction becomes effective; when the total amount paid to such owner shall equal the amount of the lien at the date of maturity together with interest at 3 1/2% per annum on the balance of the lien, no further payment shall be made to such owner.

Section V.

(b) Central States Life agrees that on March 31, 1932, and annually thereafter it shall make a computation based upon the aforesaid statement, taking into consideration the admitted assets, exclusive of all policy indebtedness, and the policy reserve liabilities likewise exclusive of all policy indebtedness, and if the ratio of such net admitted assets to net liabilities shall be not less than fifty-five per cent (55%) then the net earnings of the period ending on December 31st of the year for which such computations are made, after deducting therefrom the mortality cost of waiving liens on policy death claims and any liens waived on payments due under supplementary contracts and monthly disability claims, shall be applied to the reduction of the liens; such reduction shall be effective as of the first day of April following.

HUMPHREYS, MEHAFFY and HOLT, JJ., dissent.