Rhine v. New York Life Insurance , 273 N.Y. 1 ( 1936 )

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] The defendant life insurance company issued, in 1927, a policy insuring the life of the plaintiff in the sum of $2,000 with provision for "disability benefits." In 1934 the insurance was split into two policies for $1,000 each, with similar provisions. The Insurance Law (Cons. Laws, ch. 28, § 83) commands that every domestic life insurance company "shall provide in every policy * * * that the proportion of the surplus accruing upon said policy shall be ascertained and distributed annually." In the same section the Legislature has defined the manner in which the proportion of the surplus "accruing upon said policy" shall be ascertained and distributed. From the surplus it earned during the year, the life insurance corporation may make certain deductions specified in the statute, and then must "apportion the remaining surplus equitably" to all the policies entitled to share therein. The plaintiff complains that since 1931 the defendant has not apportioned the surplus equitably to the policies entitled to share therein, but has discriminated unlawfully against life insurance policies which contain "disability benefits." The controversy has been submitted to the Appellate Division upon an agreed statement of facts. That court has decided in favor of the defendant.

The two $1,000 policies of the plaintiff are alike in all respects relevant to the controversy here. We, therefore, need set forth the provisions of only one. It provides that the insurance company agrees to pay to the beneficiaries named in the policy $1,000 upon receipt of due proof of the death of the insured. It then provides: "Such sum will be increased by any outstanding dividend additions and dividend deposits as provided herein. And upon receipt of due proof that the Insured is totally and presumably permanently disabled before age 60, as defined under ``Total and Permanent Disability' on the second page hereof, the Company Agrees To Pay To The Insured Ten Dollars each month and to waive payment of premiums, as provided therein. This contract is made in consideration of the payment in advance of the sum of $30.30, the receipt of which is hereby acknowledged, constituting the first premium and maintaining this Policy for the period terminating on the Thirteenth Day of June, Nineteen Hundred and Twenty-eight, and of a like sum on said date and every twelve calendar months thereafter during the life of the Insured until premiums for Twenty full years in all shall have been paid from the date on which this policy takes effect."

The insurance company offered applicants for insurance a choice of form of policy with variations in benefits and obligations. Those who desired life insurance solely might obtain a policy identical with the policy issued to the plaintiff except that the provisions for disability benefits were omitted. The premium or consideration to be exacted for each policy is fixed by the company by calculation and estimate of the probable cost to the company of providing the particular assurance or benefit embodied in that policy. Calculation of the cost of life insurance is based upon certain data and assumptions; calculation of the cost of disability benefits is based upon other or additional data and assumptions. For a policy which provides life insurance alone the company exacted as premium the amount determined by estimate and calculation as the cost of life insurance. For a policy like the plaintiff's, which provides exactly the same life insurance and, in addition stipulated benefits in case the insured becomes disabled, the premium exacted includes both the amount of the premium which would be exacted for life insurance alone and the amount determined as the probable cost of the additional benefits provided in case of disability. We are told that a regulation of the Insurance Department requires that in each policy there should be "a statement showing separately the amount of the extra premium charged for total and permanent disability * * * benefits." The plaintiff's policy contains such a statement. On the second page of the policy the clauses which relate to and define the disability benefits conclude with the following provision: "The total premium stated on the first page hereof includes an annual premium of $2.96 for Disability Benefits. Any premium due on or after the anniversary of the policy on which the age of the Insured at nearest birthday is sixty, will be reduced by the amount of premium charged for Disability Benefits. Upon written request signed by the insured and upon return of this policy for proper endorsement, the company will terminate this provision and thereafter the premium shall be reduced by the amount charged for Disability Benefits."

The statement of agreed facts shows that the aggregate premiums received by the company and the interest earned on its investments create one general fund from which are paid the death and disability claims, endowments, surrender value and other claims, the expense of conducting the business, including depreciation in investment values, and all other obligations of the company; and out of which also the reserves are maintained. The excess remaining in that fund, after these payments are made and sufficient reserves established, constitutes the divisible surplus to which the policyholders of the company are entitled both by statute and by the terms of their policies.

The Insurance Law requires that the apportionment be made "equitably." If the company issued but one form of policy to a single group of policyholders of the same age who paid the same premium, equality would be equitable, and any discrimination would be unfair. The Insurance Law contains provision which would indeed make such discrimination unlawful: "no life insurance corporation doing business in this state shall make or permit any discrimination between individuals of the same class or of equal expectation of life, in the amount or payment or return of premiums or rates charged for policies of insurance, * * * or in the dividends * * * payable thereon, or in any of the terms and conditions of the policy." (§ 89.) Insurance companies, however, issue policies with many variations in terms and conditions to individuals of different ages and unequal expectation of life. There the statute leaves discretion to each company as to what constitutes an "equitable" apportionment, and when "directors have exercised their discretion in regard thereto the courts will not interfere unless there is bad faith, or wilful neglect, or abuse of such discretion." (Greeff v. Equitable Life Assur.Society, 160 N.Y. 19, 32.)

Because the return on investments is not constant; because the expense of doing business, including losses sustained, varies from year to year; because no actuarial mathematical calculation based on mortality tables enables men to determine years in advance when a policyholder will die or become disabled or even, with accuracy, how many policyholders will die or become disabled each year, premiums cannot be fixed at the exact amount necessary to provide a fund which is exactly sufficient to make the payments required year by year and to maintain proper reserves. To insure the stability of the company the premiums are fixed at an amount which is expected to provide a surplus if the company is well managed and its risks prudently selected. That expectation has always been realized. Each year the defendant company distributes as dividends to its policyholders many millions of dollars.

In their agreed statement of facts the parties have set forth that: "For about 50 years past, the principles and methods used by the New York Life in the calculation of its premiums, ascertainment of its dividends and the distribution of its Surplus to its policy-holders, have been subject to the scrutiny and inspection of, and have been approved by, the Insurance Departments of New York and of all of the States; and, until the New York Life withdrew from foreign countries, have been approved by practically every foreign Government. In such calculation, ascertainment and distribution, every policy issued by the New York Life has received precisely the same treatment and the same dividend per $1,000 insurance as every other policy in the same ``class' as defined on pp. 70-72, infra.

"The ascertainment of the average ratios of Mortality, Disability, Expense, Interest, Surrender and Lapse (which the New York Life applied to each of said ``classes') and the application thereof, involved a consideration of millions of items, and of many difficult and conflicting factors which have been determined by mathematical principles of great complexity. In ascertaining many of the elements going to compose those factors, it was necessary that determinations and decisions should be taken with respect to various facts, concerning which there might be a legitimate and honest difference of opinion between different companies and their various actuaries, and concerning the mathematical formulas to be used.

"THE PLAN OF MUTUAL LIFE INSURANCE.

"Under such mutual plan, in order to provide for unforeseen contingencies, the premium to be paid by the member is fixed by the company at an amount somewhat in excess of that which the company anticipates will be necessary in order to cover the cost of furnishing the insurance. The member pays that amount for the insurance in advance but later receives back such excess payment, if any, as a dividend, and thus gets the insurance at actual cost."

Since the factors upon which premiums are calculated vary with different forms of insurance and different groups of policyholders, the excess of the amount which the company "anticipates will be necessary in order to cover the cost of furnishing the insurance" over the actual realized cost will, of course, also vary. Anticipation may approximate realization more closely in some cases than in others. If each member receives back the excess payment he has made, then the apportionment must be based upon calculation of the actual cost of furnishing the insurance which the company provided for that particular policyholder. Accordingly the defendant company and all other mutual companies, in apportioning divisible surplus, use the "contribution" method which aims to distribute the divisible surplus amongst policyholders in the same proportion as the policyholders by their payments have contributed to that surplus.

The defendant in applying the "contribution" method does not attempt to determine exactly the proportion which each policyholder has contributed to the divisible surplus. That would not be practicable for reasons set forth in the agreed statement of facts. It has outstanding approximately 2,600,000 policies. It divides these into a great number of classes or groups — we are told approximately 150,000 — based upon variation in some factor which entered into the computation of the anticipated costs of furnishing the insurance when the premium is fixed or into the computation of the actual realized cost when the divisible surplus is apportioned; and it determines the amount which should be returned to the policyholders of each group or class accordingly. The plaintiff does not challenge the principle of the "contribution" method of apportioning the divisible surplus and she challenges its application by the defendant company only in one respect. She maintains that the company is discriminating inequitably and unlawfully between holders of policies which provide life insurance only and holders of policies which provide life insurance with additional benefits.

The plaintiff's policy, as we have said, exacts a premium of $30.30 for life insurance and disability benefits and states that this premium "includes an annual premium of $2.96 for Disability Benefits" which the plaintiff may discontinue at will. The premium then which would be exacted for a policy exactly identical in terms, except that it does not provide for disability benefits, would be $27.34. These premiums were, it is not disputed, fixed, like other premiums, at "an amount somewhat in excess of that which the company anticipates will be necessary in order to cover the cost of furnishing the insurance." By calculations which the plaintiff does not challenge, the defendant company has determined that the premium fixed for lifeinsurance has, as expected, been more than the actual cost of furnishing the insurance, but that contrary to the company's anticipations the "extra premium" included in the premiums paid to obtain a policy with additional "disability benefits" has, in every year since 1931, been less than the cost of furnishing those benefits.

Of the 2,600,000 outstanding policies of the defendant insurance company, about 1,000,000 provide life insurance only; and about 1,600,000 provide life insurance and in addition, for an "extra premium," disability benefits in case the insured becomes disabled. The holder of every policy of life insurance contributed to the divisible surplus the excess which he paid for such insurance over the cost of furnishing it; the holder of every policy which provided additional disability benefits depleted the divisible surplus by the amount in which the "extra premium" was insufficient to pay the cost of furnishing the additional benefits. Then if the company repays to the holder of each policy of life insurance the amount which he paid in excess of the cost of furnishing the insurance and to the holder of each policy of life insurance with additional disability benefits, the excess of the total amount he paid for that policy over the cost of furnishing the life insurance and disability benefits, promised by that policy, the divisible surplus will have been apportioned to each policy in the same proportion as the holder of the policy contributed to that surplus and each policyholder will have paid the company the exact cost of furnishing the insurance or benefit promised by his policy.

That is the method used by the defendant since 1931 in carrying out the mandate of the Legislature and the stipulation of its policies, for the apportionment of its divisible surplus to all policies entitled to share therein. The premium of $30.30 exacted for the plaintiff's policy was based upon calculations by the company of the anticipated cost of furnishing the insurance and benefits provided in that policy and since, as stated in the policy, that premium included a premium of $2.96 for disability benefits, in addition to the premium of $27.34 which the company demanded for life insurance alone, the factor of the average risk of disability necessarily entered into the calculation of the anticipated cost of providing the stipulated benefits to the plaintiff in case disability should occur. In determining how much the total premium paid by the plaintiff was in excess of the actual cost of furnishing both the stipulated life insurance and the stipulated benefits in case of disability, the disability factor again necessarily entered into the calculations of the defendant company. The plaintiff concedes that these calculations establish that an annual premium of $27.34 per annum for the promised life insurance resulted in an average excess payment of $7.67 annually over the cost of furnishing the life insurance in the years 1931 to 1934, and thus during the four years contributed the total sum of $30.67 to the divisible surplus of the company, while an annual premium of $2.96 for the additional promise of benefits in case of disability would result in an average annual deficit of $2.27 in payment of the cost of furnishing the additional assurance in case of disability in the years 1931 to 1934, and thus during the four years would deplete the divisible surplus in the sum of $9.08. The defendant company in the apportionment of its divisible surplus to the policies entitled to share therein, determined that it should pay dividends totalling $30.67 for the years 1931 to 1934 upon a policy for life insurance alone since it appeared that the premiums resulted in a contribution to the divisible surplus of that amount, and that upon policies like the plaintiff's, which provided exactly the same life insurance and, in addition, benefits in case of disability, the company should pay dividends totalling $21.59 for the years 1931 to 1934, or $9.08 less than the dividends paid on the policy for life insurance only, since it appeared that the total premium paid for life insurance combined with disability benefits resulted in a contribution to the divisible surplus of the company which is $9.08 less than the contribution resulting from payment of the lesser premium for life insurance only.

The declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the holder of the policy. That is its purpose and effect. The plaintiff's grievance here is that though the defendant agreed to furnish life insurance for a premium of $27.34 and to furnish, in addition, disability benefits for an extra premium of $2.96, the plaintiff has been compelled to pay for the additional benefits promised to her, not only the extra premium of $2.96 but also, during the four years from 1931 to 1934, the difference between the dividends apportioned to her policy and the dividends which she would receive upon a policy identical with her own, except that it omitted the promise of additional disability benefits. That, we are told, constitutes an inequitable apportionment, an unlawful discrimination and even, perhaps, a breach of contract.

The Insurance Law, section 83, requires, as we have said, that the divisible surplus of each insurance company shall be apportioned equitably to the "policies" it has issued. The plaintiff is asking that apportionment to her "policy" be made as if it were a combination of two separate agreements based on separate premiums. If a policy which provides life insurance combined with disability benefits constitutes but a single agreement given to the insured in exchange for a stipulated premium or payment, then indubitably the apportionment made by the company is equitable, for upon each "policy" the company then pays exactly the excess of the premium paid over the cost of furnishing the insurance and benefits promised by the policy. The plaintiff and other holders of policies which provide for disability benefits in addition to life insurance have no ground for complaint unless their policies are divisible into an agreement for life insurance made in exchange for a stipulated premium and a second agreement independent of the agreement for life insurance and made in exchange for a separate premium. Only if the defendant's agreement to provide disability benefits to plaintiff is entirely divisible from the other promises embodied in the policy and has been made solely in exchange for the payment of an extra premium of $2.96 entirely independent of other consideration, may the plaintiff and others similarly situated insist that any loss caused to the company by insufficiency of the stipulated premium to meet the cost of furnishing the promised benefits be borne by the company out of its general funds.

Under such a construction of the policies issued by the defendant, the plaintiff and other holders of policies which provide disability benefits would pay to the company less than the cost of the insurance and benefits furnished, and to meet the deficit a minority of the defendant's policyholders who have a different form of policy would be required to pay more than the cost of the insurance furnished to them. The deficiency in the case of the plaintiff's policy is only $9.08, but it is plain that if the plaintiff's contentions are sustained the holders of the 1,600,000 policies which contain similar provisions will receive many millions of dollars of benefits beyond what they pay for. Neither the Insurance Law nor the terms of the defendant's policies dictate such a result.

It is true that the plaintiff's policy contains two promises which for some purposes and in some contingencies are separable. The promise of life insurance could be obtained without promise of additional disability benefits and for a premium or consideration fixed as the price of the promise of insurance alone; choice rested with the plaintiff whether the policy should include disability benefits for an extra premium, and choice still rests with the plaintiff whether the promise of additional disability benefits should be kept alive by the continued payment of the extra premium. The promise of life insurance would survive even if the promise of the additional benefits, and the extra premium demanded for the inclusion of that promise, should be excised from the policy. Though to that extent the promises are separable, they are none the less integral parts of a single policy.

The rules which govern the effect of a breach or of the illegality of one promise, which for some purposes is separate from other promises contained in the same agreement, have no application here. We are concerned solely with the question of whether the defendant's promise of disability insurance constitutes an independent agreement made in exchange for aseparate premium, though embodied in a policy which contains other promises. Concededly the promise of the disability benefits could be obtained from the company only as part of a policy of life insurance, and concededly it survives only so long as the policy of life insurance continues in existence. The test of the divisibility of a contract has been stated to be "whether the parties assented to all the promises as a single whole, so that there would have been no bargain whatever, if any promise or set of promises were struck out." (3 Williston on The Law of Contracts [Rev. ed.], § 863.) Since it is undisputed that the defendant would not have consented to the bargain for disability benefits unless it was made as part of a policy for life insurance, and since the provision for disability benefits can survive only as part of the policy, it is difficult to understand how the provision for disability benefits can be regarded as an independent agreement made in exchange for an independent consideration.

Policies of life insurance may contain different provisions for benefits based upon varying risks. The premium is always based upon a calculation of the anticipated cost of providing the promised insurance or benefits. We may reasonably assume that where one form of policy contains a promise of insurance or benefits which is not included in other forms, the premium provided for the policy containing the additional promise would include an extra premium for the additional promise even though the policy does not contain a statement to that effect. The premium fixed for a policy containing a number of promises might thus represent the sum of the amounts fixed by calculation of each factor of cost; nevertheless all the promises would be given to the insured in exchange for payment of the total premium. We may reasonably assume also that the choice of policy by an insured does not ignore the difference in the premiums demanded for each. Doubtless both the insured and the insurance company contemplate that the comparative amount of the premiums is the measure of the comparative cost of insurance. None the less when the divisible surplus is apportioned to all the policies, each should receive the excess of premium over cost of furnishing the insurance, or, in other words, the amount it has contributed to the divisible surplus. Then a factor of risk and cost present in one policy and not in another may produce a great difference in the amount of the dividends which are apportioned to each and the comparative size of the premiums will have proved a faulty measure of the actual cost of the insurance.

The only possible distinction between such a policy and the plaintiff's policy lies in the circumstance that the plaintiff's policy states that "The total premium stated on the first page hereof includes an annual premium of $2.96 for Disability Benefits." This, it is said, constitutes an apportionment of thetotal premium which the policy on the first page exacts for the entire policy, and places upon the company an obligation to furnish disability benefits in combination with life insurance at a cost to the insured of not more than $2.96 in addition to the cost for the promised life insurance alone. In that connection, stress is laid upon the regulation of the Insurance Department which requires a separate statement of the amount of extra premium charged for the disability benefits, though apparently the parties did not consider the regulation sufficiently important to embody it in the agreed statement of facts. It is not clear that the statement in the policy or the regulation of the department has either the purpose or effect claimed by the plaintiff. The policy exacts a "total premium" for the totality of the promises of the company, and the statement that the "total" premium includes an "extra" premium for disability benefits serves to inform the policyholder of the manner in which the premium is made up and the amount by which the premium may be decreased if the policyholder desires life insurance alone. The provisions of section 83 that the divisible surplus of the company must be equitably apportioned to each policy becomes part of every policy issued by the company. The premium represents merely the estimated cost of the policy. As the statement of facts shows, "The member pays that amount for the insurance in advance but later receives back such excess payment, if any, as a dividend, and thus gets the insurance at actual cost." The statute requires that. The policy so provides, and neither the insurance company nor the Department of Insurance could change that, and we may not assume that they have attempted to change that. The company has agreed to furnish life insurance combined with disability benefits for a "total" premium which includes an "extra premium" for the disability benefits. Promises and premiums are separable for some purposes, but the totality of the promises is given in exchange for the total premium. No promise of disability benefits alone could be obtained for the extra premium alone. The insurance company must carry out the promises it has made. It could not exact more than the stipulated total premium, even if that premium should be insufficient to meet the cost of furnishing the promised insurance. It must in addition return in the form of dividends any excess of the premium it may receive over that cost. It has done so in this case.

We have not overlooked the fact that the defendant company did not determine until 1931 that apportionment should be made in this manner, and that other companies still make other apportionment. The Insurance Law allows, as we have said, discretion in the manner in which apportionment may be made. So far as appears now, it may well be that both methods of apportionment lie within the range of that discretion.

The judgment should be affirmed, without costs.