Fire Insurance Co. v. Randall , 232 Mich. 210 ( 1925 )

Plaintiff brought suit to recover two annual assessments and interest on a fire policy which it issued and delivered to defendants on August 25, 1920. The assessment for 1921 was $15.60. If not paid when due, 10% a month was added for a period not to exceed one year. The assessment for 1922 was $12, and interest thereon, as in the previous item. The defendants conceded they were liable for the 1921 assessment and interest at the rate of 5% per annum. They, however, say they are not liable for the 1922 assessment because their policy was suspended on March 1, 1922, and they further say that 10% per month was a penalty and not liquidated damages, and therefore cannot be collected. The trial court held with defendants on both of these propositions, and judgment was rendered for plaintiff for $17.72, the amount tendered by defendants for the assessment of 1921, and interest thereon at 5% per annum.

The same questions are before us for solution:

(1) Was the 10% a penalty or liquidated damages?

(2) Was the policy assessable in that part of 1922 while under suspension?

1. Was a charge of 10% per month for failure to pay the assessment when due usury or a penalty? It is not usury because the excessive rate was not absolutely payable. Where the payor can avoid the excessive rate by making payment of the demand when due it is not usury. While there is some authority to the contrary, the prevailing opinion is that whenever the debtor by the terms of a contract can avoid the payment of the larger by payment of a smaller sum at an earlier date the contract is not usurious, but conditional, and the larger sum becomes a mere penalty.

Ruling Case Law states the rule as follows

"Where a borrower has agreed to pay a rate of interest not forbidden by law, but has stipulated that in the event of his not making payment at the time specified, the obligation shall bear a higher rate of interest, either from default or from the date of its execution, or that some specific sum shall be paid in addition to the increased principal and interest contracted for, the increased rate is generally regarded as a penalty and not within the usury laws." 27 R. C. L. p. 232.

Cyc. makes a similar statement:

"The agreement by the borrower that in case of default in payment at the time of maturity, there should be paid an additional sum in excess of legal interest, as liquidated damages is a penalty and generally unenforceable; but it is not usurious since it is not absolutely payable. But there is some authority holding such contracts usurious." 39 Cyc. p. 985.

The following cases are in accord with this statement of the rule: Lloyd v. Scott, 4 Pet. (U.S.) 205; Blake v. Yount,42 Wn. 101 (84 P. 625, 7 Ann. Cas. 487, 114 Am. St. Rep. 106);Ward v. Cornett, 91 Va. 676 (22 S.E. 494, 49 L.R.A. 550).

Valuable notes will be found in 55 Am. Dec. 396; 46 Am. St. Rep. 178; 81 Am. Dec. 737; 91 Am. St. Rep. 588.

Inasmuch as defendants in the present case could have relieved themselves from the excessive rate by making payment of the assessment when due, we must conclude that the excessive charge was not usury but was a penalty and therefore not recoverable.

2. Are defendants liable for the assessment during the period when the policy was suspended?

Subdivision (f) of article 10 of the charter provides:

"A member is liable for his ratable proportion of all liabilities of the company which may accrue during the time his policy is void or suspended, and until his policy is legally canceled."

This provision does not appear to be altogether unreasonable. During the period of suspension the insured has the right to reinstate himself by making payment of his arrears. This is not true if the policy is canceled as he is then obliged to make a new application and it is optional with the company whether it will again accept his risk. The validity of this charter provision perhaps might be challenged on account of the word "void" but we need not pass upon that question as there is no contention in the present case that the policy is void. The charter provision will control in so far as the policy was suspended on account of defendants' default in payment. In view of the plaintiff's excessive and illegal demand the suspension was unauthorized and no recovery could be had for an assessment during that period. For that part of the year in which the policy was in force no basis appears in the record for computing the amount due. Therefore plaintiff should not be permitted to recover in this suit for any part of the assessment of 1922. This being in accord with the conclusion of the trial court, the judgment should be affirmed. Defendants should recover costs in both courts.

MOORE and WIEST, JJ. concurred with BIRD, J.