Chun Ngit Ngan v. Prudential Insurance Co. of America

On May 1, 1922, the Prudential Insurance Company of America issued to Yuen Tai Kan, the insured, its certain life insurance policy of even date wherein it agreed among other things that in the event and upon due proof of the death of said Yuen Tai Kan it would pay to Chun Ngit Ngan, the wife of the insured, as beneficiary, the sum of $5000. The policy contained the following incontestable clause: "This policy shall be incontestable after one year from its date except for nonpayment of premium * * *." The insured died February 5, 1923. On April 7, 1923, the agent of the insurance company notified the beneficiary, Chun Ngit Ngan, that it refused to be bound by the policy on the ground of fraud on the part of the assured in its procurement, requested of the beneficiary that she deliver the policy to it for cancelation and tendered her the full annual premium theretofore paid in advance by the assured. The request for cancelation was refused and the tender declined. Subsequent to May 1, 1923 (after one year from the date of the policy), the beneficiary brought an action at law against the insurer for the amount of the policy. The insurer by way of answer to the complaint of the beneficiary, in addition to the allegations of general denial and notice of the defense of fraud, specially answered as follows: "That subsequent to the death of Yuen Tai Kan, named as the insured in said policy of insurance, on the 7th day of April, 1923, and prior to the expiration of one year from the date thereof, defendant notified Chun Ngit Ngan, named in said policy as beneficiary thereunder, that it refused to recognize such policy as valid because of false and erroneous statements made by the assured upon his examination by the medical examiner for defendant prior to the issuance of said policy, and did then and there tender to said Chun Ngit Ngan the entire sum theretofore paid as premium under said policy, which tender was refused by the said Chun Ngit Ngan, and did demand a return of said policy by said Chun Ngit Ngan to the defendant." Trial was had jury waived on April 21, 1924. The beneficiary made out a prima facie case. The insurance company offered evidence tending to prove and the court found that the policy had been procured by the assured by fraud. The court, however, found for the beneficiary, holding that the policy by its terms was incontestable after one year from its date and a year having elapsed since the date of the policy the insurance company was foreclosed from defending against the policy on the ground of fraud and ordered that judgment be entered accordingly.

The insurance company prosecuted error, assigning the following errors: 1. "That the circuit court erred in rendering and filing the decision in the above entitled cause and in holding and deciding as a matter of law that a tender back of the premium of insurance and a demand for the return of the policy coupled with a notification that the defendant refused to pay said policy on the ground of fraudulent and untruthful statements made to the examining physician of the Company, which tender, demand of return of the policy and notification of the grounds therefor, were made to the plaintiff, she being the beneficiary named in said policy, within the contestable period named in said policy, was not a sufficient contest under the terms of said policy and under the law, to which said decision defendant through its counsel excepted, which exception was allowed." 2. "That the circuit court erred in rendering and filing its judgment in the above entitled cause dated the 12th day of May, 1924, as follows:" (Here follows the judgment in stereotyped form.)

No charge of fraud was made against the beneficiary in the procurement of the policy. It is admitted by the insurer that no other action was taken by it to cancel the policy except that of April 7, 1923.

The policy in clear and unambiguous terms prohibits the insurer from contesting the policy at any time after the expiration of one year from its date except for the nonpayment of premium. The full annual premium had been paid in advance so the exception is not involved. The action on the policy was brought by the beneficiary after the expiration of one year from the date of the policy. The answer of the insurer setting up the defense of fraud was necessarily filed after the expiration of one year from the date of the policy. Unquestionably the filing of the answer and setting up of the defense of fraud by the insurer in an action by the beneficiary upon the policy constitutes a contest. Hence the insurer by its answer is contesting the policy after the expiration of a year from its date in the face of and contrary to the express prohibition of the incontestable clause. Clearly the insurer is foreclosed from contesting the policy unless by its acts of repudiation of the policy of April 7, 1923, it is exempted from the operation of the incontestability clause.

The purpose of the incontestability clause is obvious. Fraud vitiates a contract but until some action is taken by the defrauded party thereto the contract continues in existence. The contract is voidable and not void. It is upon the discovery of the fraud by the defrauded party that the necessity of determination arises — whether the defrauded party will continue with the contract or rescind for fraud. "The party who has been induced to enter into a contract by fraud, or by concealment or misrepresentation in any matter such that the truth of the representation made, or the disclosure of the fact, is by law or by special agreement of the parties of the essence of the contract, may affirm the contract, and insist, if that is possible, on being put in the same position as if the representation had been true. Or he may at his option rescind the contract, and claim to be restored, so far as may be, to his former position within a reasonable time after discovering the misrepresentation * * *." Wald's Pollock on Contracts, marg. p. 576, top p. 705. Until the discovery of the fraud the defrauded party is not called upon to act. Hence it is that irrespective of the period of existence of the contract, if the defrauded party has been ignorant of the existence of the fraud, his prior acts of affirmance of the contract do not bar him from subsequently disaffirming it after the discovery of the fraud. The time of the discovery of the fraud is the turning point in the subsequent relations of the parties. In the absence of an incontestability clause a life insurance policy may be avoided by the insurer at any time so long as the acts of avoidance are taken within a reasonable time after the discovery of the fraud. But where a policy of life insurance contains an incontestability clause the insurance company in effect waives its right of disaffirmance upon the discovery of the fraud if such disaffirmance is not undertaken prior to the incontestability clause coming into effect. Hence the authorities are uniform to the effect that incontestability clauses found in life insurance policies are in the nature of short statutes of limitation limiting the time within which the insurer may contest the policy. "The practical and intended effect of the stipulation is * * * to create a short statute of limitations in favor of the insured, within which limited period the insurer must test, if ever, the validity of the policy." Wright v. Mutual BenefitAss'n, 43 Hun (N.Y.) 61 (1887), affirmed 118 N.Y. 237 (post). "While it is true that fraud voids all contracts, it is equally true that it is competent for the lawmaking power to fix a definite time in which an action shall be brought to declare a fraudulent contract void, and a failure on the part of the person defrauded to bring such action within the time designated would have the effect of debarring him from the right to set aside such a contract. While in such cases it is generally provided that the limitations so fixed shall not begin to operate in favor of the party who has committed the fraud until the same has been discovered, the duty is placed upon the party who seeks to avoid the contract on the ground of fraud to make such efforts to discover the fraud as would amount to ordinary diligence in law. Civ. Code, Secs. 3669, 3711-3785; Little v. Reynolds (Ga.) 28 S.E. 919, and cases cited. As the law may prescribe such a limitation in which actions shall be brought by the party to be affected, it is also within the power of the contracting parties to agree among themselves upon a period of time which would amount to a statute of limitations, either greater or less than the period fixed by the law. Telegraph Co. v. James,90 Ga. 254, 16 S.E. 83; Brown v. Insurance Co., 24 Ga. 97; Melson v. Insurance Co., and Maril v. Same, 97 Ga. 723, 25 S.E. 189; Ritch v. Association, 99 Ga. 112, 25 S.E. 191. The period fixed by law being intended for the benefit of the parties interested in the contract, and for their protection, it is competent for them to stipulate that the time which the law gives them to act shall be shortened, on the one hand, or lengthened, on the other. Parties interested in the contract may waive the benefit of the statute of limitations fixed by the law, the effect of the waiver being either to make a longer or shorter period than the law prescribes." Mass. Ben. Life Ass'n v.Robinson, 30 S.E. (Ga.) 918, 925 (1898). "Incontestable provisions in insurance policies have been held valid as creating a short statute of limitations in favor of the insured; the purpose of such provisions being to fix a limited time within which the insurer must ascertain the truth of the representations made." Monahan v. Met. Life Ins. Co., 119 N.E. (Ill.) 68, 69 (1918). "(1) The plea alleges facts showing that the insured was guilty of intentional fraud in procuring the policy, and the demurrer admits them. It is an elementary rule of law that fraud vitiates all contracts, and therefore the contract was voidable by the company. When the insured died it had a complete defense to any action on the policy which his representative might bring. The only question, therefore, is whether the company was still bound, after the death of the insured, by the limitation of one year from the date of issue of the policy in which to contest it. (2) We have held that the provision in a policy of life insurance that it shall be incontestable after one year from the date of its issue, provided the premiums are duly paid, is a valid provision, which bars the insurer from making any defense against the policy, after the expiration of the contestable period, except for nonpayment of premiums, and that after the lapse of that period even fraud in procuring the policy is not available to avoid it. Royal Circle v. Achterrath, 204 Ill. 549, 68 N.E. 492, 63 L.R.A. 452, 98 Am. St. Rep. 224; Flanigan v. Federal Life Ins. Co., 231 Ill. 399, 83 N.E. 178; Weil v.Federal Life Ins. Co., 264 Ill. 425, 106 N.E. 246, Ann. Cas. 1915D, 974; Monahan v. Metropolitan Life Ins. Co., 283 Ill. 136, 119 N.E. 68, L.R.A. 1918D, 1196. This is in accord with the substantially unanimous decisions of the courts which hold that the language admits of no reasonable construction other than that the company reserves to itself the right to ascertain all the matters and facts material to its risk and the validity of its contract for one year; and that, if within that time it does not ascertain all the facts and does not cancel and rescind the contract, it may not do so afterward upon any ground then in existence. When the execution of a contract has been procured by the fraud of one of the parties, the innocent party, upon discovering the fraud, may still insist upon the contract or may rescind it. He must, however, if he desires to repudiate it, do so promptly upon discovering the fraud and consistently adhere to his intention. By delay or vacillation he waives his right to rescind. The effect of the stipulation in the policy is not to prevent the insurer from annulling the contract upon the ground of the fraudulent representations of the insured, but its practical and intended effect is to create a short statute of limitations in favor of the insured, within which limited period the insurer must, if ever, test the validity of the policy.Wright v. Mutual Benefit Life Ass'n, 43 Hun (N.Y.) 61; Id.,118 N.Y. 237, 23 N.E. 186, 6 L.R.A. 731, 16 Am. St. Rep. 749;Massachusetts Benefit Life Ass'n v. Robinson, 104 Ga. 256, 30 S.E. 918, 42 L.R.A. 261; Clement v. New York Life Ins. Co.,101 Tenn. 22, 46 S.W. 561, 42 L.R.A. 247, 70 Am. St. Rep. 650;American Trust Co. v. Life Ins. Co. of Virginia,173 N.C. 558, 92 S.E. 706; Murray v. State Mutual Life Assurance Co.,22 R.I. 524, 48 A. 800, 53 L.R.A. 742; Mutual Life Ins. Co. v. Buford, 61 Okl. 158, 160 P. 928; Metropolitan Life Ins.Co. v. Peeler (Okl.) 176 P. 939, 6 A.L.R. 441." Ramsay v.Old Colony Life Ins. Co., 131 N.E. (Ill.) 108, 109 (1921). "Payment was refused by the company on the ground that the insurance had been procured by false representations of a material character which had been made by the insured in his application for the purpose of procuring the policies of insurance. No answer was filed to the present suit within one year after the date of the insurance policies, and no suit has been brought by the insurance company to set aside the contract of insurance because it had been procured by fraudulent representations on the part of the insured. Thus it will be seen that the sole issue raised by the appeal depends upon the construction to be given the incontestable clause which is set out in full in our statement of facts. In substance, it provides that the policies shall be incontestable after one year if the premiums are duly paid, except for the violation of the provision relating to military or naval service in time of war. The modern rule is that a life insurance policy containing a provision that it shall be incontestable after a specified time cannot be contested by the insurer on any ground not excepted in that provision. It is said that the practical and intended effect of such a stipulation is to create a short statute of limitations. By the stipulation the insurance company agreed that it would take a year to investigate and determine whether it would contest the policies of insurance, and that, if it failed within that time to discover any grounds for contesting the same, it would make no further investigation and would not thereafter contest the validity of the policies."Missouri State Life Ins. Co. v. Cranford, 257 S.W. (Ark.) 66, 67 (1923).

The question therefore arises as to what steps the insurer must take by way of disaffirmance to exempt it from the application of and the limitations imposed by the incontestability clause of an insurance policy so that in the event of a suit by the beneficiary after the elapsation of the first year of the policy there is available to it in such suit the defense of fraud.

The contention of the plaintiff in error is best understood by the following quoted excerpt from its brief: "It is uncontradicted by the evidence and so found by the trial court that the insurer upon learning of the fraud of insured and within a period of one year from the date of the policy, tendered to the beneficiary the premium which had been paid, demanded a surrender of the policy and notified the beneficiary that it did not recognize the policy as a valid contract and elected to rescind said policy because of the fraud of insured in the declarations to the medical examiner. The insurer took, therefore, within a period of one year all of the steps to renounce liability, rescind the contract and put the parties in statu quo which were possible outside of court."

This the plaintiff in error contends was a "contest" which exempted it from the application of the one-year incontestability clause and was sufficient to permit it, after one year from the date of the policy, to plead the fraud of the assured in an action at law brought by the beneficiary. Plaintiff in error rests its contention primarily upon two cases, namely,Life Insurance Co. v. Hurni Packing Co., 280 Fed. 18, andMet. Life. Ins. Co. v. Rose, 294 Fed. 122.

The Rose case depends for its conclusion upon the HurniPacking Co. case and Jefferson Standard Life Ins. Co. v.McIntyre, 285 Fed. 570. The Hurni Packing Co. case contains unsupported dicta to the effect that a letter by the insurer to the beneficiary denying liability was a sufficient contest and that court proceedings were not essential to the right. I do not consider this language persuasive. The court did not deny that some affirmative action must be taken by the insurer to cancel the policy prior to the incontestability clause coming into effect. On the contrary it said: "Affirmative action was necessary to the consummation of the inchoate right created by the terms of the policy." But if the effect of the decision is that rescission may be taken personally against the beneficiary exclusive of the legal representatives of the assured the case was in my opinion incorrectly decided. Moreover, if this case holds that rescission by act of the insurer, without the concurrence of the assured, taken prior to the incontestability clause coming into effect, exempts the insurer from the application of such clause, it is contrary to the weight of Federal authority. See N.W. Mutual Life Ins. Co. v. Pickering (Fifth Circuit Court of Appeals), 293 Fed. 496-499; JeffersonStandard Life Ins. Co. v. Keeton (Fourth Circuit Court of Appeals), 292 Fed. 53, 54, and Jefferson Standard Life Ins. Co. v. McIntyre (Fifth Circuit Court of Appeals), 294 Fed. 886, 887, all of which hold in effect that mere repudiation of a policy does not constitute a "contest."

The decision in the Keeton case is peculiarly interesting. There as here the policy contained a one-year incontestability clause. There similarly as here rescission by act of the insurer was attempted against the beneficiary after the death of the insured but during the first year of the policy. If such rescission operated to cancel the policy, then the insurer could have within the decision of the Rose case availed itself of its rescission at law by way of defense to any action at law that the beneficiary might bring upon the policy. In other words, the insurer had a plain, adequate and complete remedy at law. And yet the court holds that the insurer has not an adequate remedy at law and entertains jurisdiction of a suit in equity for rescission. The reason for equitable interference is perfectly plain — that rescission by act of the insurer did not operate to cancel the policy and restore both parties thereto to their respective statu quo ante and that if the beneficiary delayed bringing suit at law until the expiration of the first year of the policy the attempted rescission in pais would not be available as a defense. These were the "peculiar circumstances" which rendered Insurance Co. v. Bailey, 13 Wall. (U.S.) 616, and Cable v. U.S. Life Ins. Co., 191 U.S. 288, inapplicable. The applicability of the Rose case is discussed later.

In the McIntyre case (285 Fed. 570), cited in the Rose case, the U.S. district court of Florida held that mere denial of liability by the insurer to the beneficiary on the ground of the fraud of the assured made within the first year of the date of the policy exempted the insurer from the provisions of a one-year incontestability clause contained therein. This case, however, was reversed by the circuit court of appeals of the fifth circuit (294 Fed. 886), where the court said: "A mere denial or repudiation by an insurer of its liability under a policy, accompanied by a tender of the premium paid, is not a contest within the meaning of such a provision as the one above set out.Northwestern Mutual Life Ins. Co. v. Pickering, 293 Fed. 496, in the United States circuit court of appeals, fifth circuit, present term. The provision in a life insurance policy that ``this policy shall be incontestable, except for nonpayment of premiums, provided two years shall have elapsed from its date of issue,' has the effect of making the policy incontestable, on a ground other than the excepted one, by the insurer after two years from its date of issue, though the insured died within that time.Mutual Life Ins. Co. of N.Y. v. Hurni Packing Co. (November 12, 1923), 44 Sup. Ct. 90, 68 L.Ed. ___. We think that the reasons stated in support of the conclusion reached in the last-cited case are applicable to the provision now in question. The contested policies did not cease to be in force upon the death of the insured. The contracts remained in force, upon the death of the insured immediately inuring to the benefit of the beneficiaries."

The overwhelming weight of authority is to the effect that in order that an insurance company may defend at law against an insurance policy containing a one-year incontestability clause after such clause has come into effect it must have during the first year of the life of the policy taken some step, the immediate or ultimate legal effect of which is to cancel the policy within the first year of its life or to render it within that time of no further force or effect. The majority opinion recognizes the weight of authority but refuses to be guided by it.

The following excerpts from some of the State and Federal decisions are illustrative:

"An action for the recovery of the sum insured not being maintainable until after the death of the insured, one effect of the stipulation, if valid, is to prevent the insurer from interposing as a defense the falsity of the representations of the insured. But its effect is not to prevent the insurer from annulling the contract upon the ground of the fraudulent representations of the insured, provided an action for that purpose is brought in the lifetime of the insured and within two years from the date of the policy." Wright v.Mutual Ben. Ass'n, 43 Hun 61, 65 (1887). "* * * it recognizes fraud and all other defenses but it provides ample time and opportunity within which they may be, but beyond which they may not be, established. It is in the nature of and serves a similar purpose as statutes of limitations and repose, the wisdom of which is apparent to all reasonable minds. It is exemplified in the statute giving a certain period after the discovery of a fraud in which to apply for redress on account of it and in the law requiring prompt application after its discovery, if one would be relieved from a contract infected with fraud. The parties to a contract may provide for a shorter limitation thereon than that fixed by law and such an agreement is in accord with the policy of statutes of that character. (Wilkinson v.First Nat. Fire Ins. Co., 72 N.Y. 499, 502.) No doubt the defendant held it out as an inducement to insurance by removing the hesitation in the minds of many prudent men against paying ill-afforded premiums for a series of years when in the end and after the payment of premiums, the death of the insured, and the loss of his and the testimony of others, the claimant instead of receiving the promised insurance may be met by an expensive lawsuit to determine that the insurance which the deceased has been paying for through many years has not and never had an existence except in name." Wright v. Mutual Ben. Ass'n,118 N.Y. 237, 243 (1890). "It is true that fraud vitiates all agreements and undertakings based upon it, and they may be set aside at the instance of the party defrauded. So, in this case, fraud in obtaining the policy would vitiate it at the option and upon the motion of the party defrauded; but, under the provision in question, the party must within the year exercise his right to repudiate and rescind it. The effect of this agreement not to contest is to put the company in the attitude of being unable to set up any fraud or false swearing in obtaining the policy, or any other defense to it, save the one excepted, so far as its original validity is concerned. Unless the language be thus construed, it is unpractical to put any reasonable interpretation on it. Unless it is the object and purpose of the provision to cut off all defenses arising out of the false statements of the applicant to obtain it, it is difficult to see what practical benefit the insured is to derive from it. It has been well said: ``The effect of the provision is to prevent the insurer from interposing as a defense the falsity of the representations of the insured, which is fraud. But it does not prevent an abandonment, rescission and cancellation of the contract for such fraud provided the action for that purpose is brought within a year.'" Clement v. N.Y. Life Ins.Co., 46 S.W. (Tenn.) 561, 562 (1898). "The practical, and evidently the intended, effect of the stipulation in question was to create a short statute of limitations in favor of the insured, within which limited period the insurer must, if ever, test the validity of the policy." Murray v. State Mut. Life Ins. Co., 48 Atl. (R.I.) 800 (1901). "An examination of the following cases will show that the holding of the courts of this country has been, almost universally, that every defense to a policy of insurance embraced within the terms of the ``incontestable clause' is completely lost to the insurer if it fails to make the defense or take affirmative action within the time limited by the policy." Indiana, etc., LifeIns. Co. v. McGinnis, 101 N.E. (Ind.) 289 (1913). "The admissions in the answer show beyond question the issuance of the policy, payment, and proper tender of payment of the premiums thereon, death of the insured, notice to the company of such death, and refusal of the company to pay such policy, and that more than two years had elapsed since the date of issue of the policy, and the defendant failing to show that within two years from the date of policy that legal action had been taken to avoid the policy on account of breaches of the warranties in the application for insurance, or that said policy had been canceled with the assent of the insured, the court properly overruled defendant's demurrer to the evidence, correctly denied motion for a directed verdict for defendant, and properly directed a verdict for the plaintiff. * * * If the insurer desired to avoid the policy, on the ground of misrepresentations contained in the application for insurance, it should, in the absence of the consent on the part of the insured and the beneficiaries named in the policy, have taken legal steps to do so within two years from the date of issuance of the policy, and, failing so to do within two years from the date of the issue of the policy, the policy of insurance was incontestable on the ground of breaches of warranties contained in the application." Mutual Life Ins.Co. v. Buford, 160 Pac. (Okl.) 928, 930, 931 (1916). "One year is given to the defendant to make inquiry and investigation as to the health of the insured, and as to the statements made in the application and the policy, as an inducement to the contract. Within this time, if the defendant refused to perform its part of the contract and so notified the insured, three remedies are given to the plaintiff: ``(1) He may elect to consider the policy at an end and recover its just value; (2) he may sue in equity to have the policy declared in force; (3) he may tender the premiums and treat the policy as in force and recover the amount payable on it at maturity.' 14 R.C.L. 1004; Day v. Ins.Co., 45 Conn. 480, 29 Am. Rep. 693; Ins. Co. v. McCormick,19 Ind. App. 49, 49 N.E. 44, 65 Am. St. Rep. 393. The insurance company also has the right, if it concludes that the policy has been improperly procured, to institute an action for the cancellation of the policy within the year. ``The insured may maintain a suit in equity in a proper case to rescind or cancel the contract for fraud on the part of the company or its agent or for breach of contract. In like manner the company may maintain a suit in equity to cancel a policy because of fraud upon the part of the insured or the beneficiary, as the case may be, or because the policy is a wager policy by reason of want of insurable interest.' 25 Cyc. 788; French v. Connely, 145 Eng. Report (Reprint) 933; Whittingham v. Thorngbourgh, 23 Eng. Report (Reprint) 734; Asso. v. Palmer, 53 Eng. Report (Reprint) 768;Insurance Co. v. Dick, 114 Mich. 337, 72 N.W. 179, 43 L.R.A. 566. The two cases relied on by the defendant (Ins. Co. v.Bailey, 13 Wall. 616, 20 L.Ed. 501; Cable v. Ins. Co.,191 U.S. 288, 24 Sup. Ct. 74, 48 L.Ed. 188) to sustain the position that the insurance company has no right to bring an action to have the policy canceled are not in point, because, in both of these cases the right was denied upon the ground that an action at law was pending upon the policy, the insured having died, and it was held that the insurance company did not have the right to go into a court of equity as it could set up the defense in a court of law. It follows, therefore, that the conduct of the defendant, in notifying the insured that it would cancel the policy and in tendering the first premium which had been paid, did not rescind or cancel the contract, as the plaintiff did not consent thereto, and amounted to no more than a breach, and that the remedy of the defendant was to institute an actionfor cancellation within the year, and as it did not do so, the policy was in force at the expiration of the year. This is also in accordance with the authorities holding that if the defendant wished to contest and to avoid the payment of the policy and the force of the incontestable clause, it must take affirmative action within the time limited by the policy. * * * The meaning of the terms, ``take affirmative action,' ``test the validity of the policy,' if in doubt, is made clear by the decision inWright v. Benefit Ass'n, 43 Hun, 65, which was affirmed in118 N.Y. 237, 23 N.E. 186. * * * We are therefore of opinion as the plaintiff had an insurable interest in the life of the insured when the policy was issued; and as no action was brought by the defendant within one year from the date of the policy to have the contract of insurance canceled or rescinded, that the in contestable clause was in force at the death of the insured, and that the defendant is precluded thereby from relying on the defenses set up." American Trust Co. v. Life Ins. Co., 92 S.E. (N.C.) 706, 711 (1917). "It does not follow, however, that we concur in appellant's views respecting the rights of the parties under such a construction, but rather that if, as a result of such investigation or of knowledge otherwise obtained, the insurer desires to contest the policy, appropriate steps to that end, either by a defense to an action brought on the policy in case of the death of the insured, or by proper affirmativeaction must be taken within the year, otherwise that the policy becomes incontestable, save as to conditions excepted from the noncontestable clause. Such a construction is in harmony with the language of the stipulation, and does not necessitate the interpolation of words, phrases or clauses not found therein."Ebner v. Ohio State Life Ins. Co., 121 N.E. (Ind.) 315, 320 (1918). "If, therefore, there is nothing in the clause itself changing its terms or effect upon death of the insured within one year, if the clause was inserted for the benefit of the insurance company, to enable it to increase its business, if the period of one year after which the policy was to become incontestable, was to afford opportunity to the company to make its investigations and tocommence an action for the cancellation of the policy, and if during the whole of the year some one has been in existence, the beneficiary, against whom an action could be brought, we see no reason for refusing to give the plaintiff the full benefit of the clause as it is written. The death of the insured did not place the defendant at any disadvantage under the policy, nor stop its investigations, nor did it affect its right to commence an action, and in most cases death would enure to the benefit of the company, if it contemplated an action to cancel the policy by removing a hostile witness." Hardy v. Phoenix Mut. Life Ins.Co., 104 S.E. (N.C.) 166, 168 (1920). "It clearly appears, and in fact it is indisputable, that more than one year had elapsed since the issuance of the policy before any act was done oraction taken by the defendant to contest it. Thus the defendant thereafter is, by the terms of its contract, precluded from voiding the policy for any cause whatever, except failure to pay the premium as provided in the policy. * * * In other words, after the expiration of a year, where there is no default in the payment of the premium, and thereafter the death of the insured should occur, the defendant has no defense against the collection or payment of the amount specified in the policy. It, in substance, has stipulated to that effect in its policy."Plotner v. Northwestern Nat. Life Ins. Co., 183 N.W. (N.D.) 1000, 1003 (1921). "The insurance company agreed with the insured, if he would buy this policy for the benefit of his wife, it would not contest the payment of the insurance money after the expiration of one year from the date of the policy. The defendant assumed this clause gave it the arbitrary right to cancel the policy at any time within the year, regardless of the rights of the insured. This clause does not mention cancellation; it provides the conditions under which the policy shall be incontestable. Webster's International Dictionary defines these words as follows: ``Contest: Earnest struggle for superiority, defense, victory, etc.; competition; emulation; strife or argument.' ``Cancel: To annul or recall; to mark out by a cross line or lines; to strike out; to blot out or obliterate; specif., of legal documents, to annul, or make void or invalid, by such marking, or (by extension) in any way.' To cancel presupposes power or authority to do the act — cancel the contract. To perform the physical act of cancelling a contract by obliterating it, drawing lines through it to strike it out or by writing upon it ``Canceled,' without the authority to cancel it, is a nullity, and the contract remains in full force and effect. This clause does not even purport to give the insurance company authority to cancel the contract. It may only contest it under certain conditions and upon certain grounds and within a specified time. A contest is an earnest struggle for superiority, or a defense. Reserving in a contract the right to contest any of its terms or provisions presupposes the right to resist such contest, andthat such contest shall take place before some person or tribunalwith power and authority to decide the questions raised by such contest." Reliance L. Ins. Co. v. Thayer, 203 Pac. (Okl.) 190, 192 (1921). "The language is not ambiguous. It admits of no reasonable construction, as the courts have said in the cases already cited, other than that the company may have one year, and no more, for investigation of the questions material to its risk, and if it does not within that time, either as plaintiff or defendant, contest the policy, it cannot do so afterward. Such contest can be made only by proceedings in court to which the insurer and the insured, or his representatives or beneficiaries, are parties. American Trust Co. v. Life Ins. Co. of Virginia,supra; Mutual Life Ins. Co. v. Buford, supra." Ramsay v. OldColony Life Ins. Co., supra. "The question seems to have been resolved against the defendant by the Illinois Supreme Court and the construction of the incontestable clause contended for by plaintiff upheld, namely, that under the clause the defendant has two years from the date of the policy in which to takeaffirmative action to cancel the same or by a defense to a suit on the policy by the beneficiary within that period, and that ifno action is taken within the two-year period the defendant is cut off from all defenses except nonpayment of premium, and the fact that the insured died within the period makes no difference." Lavelle v. Met. Life Ins. Co., 238 S.W. (Mo.) 504 (1922). "Stipulations to the effect that a policy or certificate shall become incontestable for fraud in procuring the same after the lapse of a specified period from the date of its issue have been held valid as creating a short statute of limitations in favor of the insured, and as giving the insurer a limited period for the purpose of testing the validity of the policy. In such cases the company or association cannot set up fraud as a defense if the period so fixed is sufficient to enable the company or association, by the exercise of proper diligence, to ascertain whether fraud has been practiced or not." RoyalCircle v. Achterrath, 68 N.E. (Ill.) 492, 496 (1903). "An effect of the provision in question was to fix a time limit for a contest of the policy by the insurer on a ground other than the nonpayment of premium. A contest so provided for imports litigation, the invoking ofjudicial action to cancel or prevent the enforcement of the policy, either by a suit to that end or by a defense to an action on the policy. A mere denial or repudiation by the insurer ofits liability under the policy, accompanied by a tender of thepremium paid, is not a contest, within the meaning of the provision. American Trust Co. v. Life Insurance Co.,173 N.C. 558, 92 S.E. 706; Lavelle v. Metropolitan Life Ins. Co., 209 Mo. App. 330, 238 S.W. 504; Pratt v. Breckinridge, 112 Ky. 1, 23, 65 S.W. 136, 66 S.W. 405." N.W. Mut. Life Ins. Co. v.Pickering, supra. "Incontestable means not contestable. A contest in law implies an adversary proceeding in which matters in controversy may be settled by the courts upon issue joined. The great body of policy holders are persons who are not learned in the law and who have no knowledge of the judicial construction of pleadings. In the application of the rule just announced, we think the natural and most reasonable view is to hold that the insurer has not contested the policy until it has acted in the premises. The contract provides that the policy shall be incontestable after one year, and no action on the part of the insured or of the beneficiary can relieve the company of its duty to act. In order to contest the policy it was required to file an answer to the suit brought by the beneficiary within one year,or to have instituted an action of its own in equity to cancelthe policy on the ground of fraud." Missouri State Life Ins. Co. v. Cranford, supra. "The remedy of the defendant was to institute an action for cancellation within a year, and if it did not do so the policy was in force at the expiration of the year. In disposing of this question the learned chancellor, in his opinion, said: ``It takes two to make a contract and likewise it takes two to rescind one (Ault v. Dustin, 100 Tenn. 366, 45 S.W. 981), or the judgment of a court of competent jurisdiction at the instance of the party having a good ground for rescission. It is true that the defendant undertook to rescind the contract in this case upon the ground of complainant's fraud in procuring it, on August 29, 1922, by delivering to complainant on that date a written notice to that effect and demanding the surrender of the policy. But complainant refused to agree to the rescission and refused to surrender the policy. The contract was therefore not rescinded merely by the act of the defendant in giving said notice. It was open to the defendant thereafter to repent of its act and treat the policy as in full force and effect or it might elect to haveits right to rescind tested and enforced by a court, either byitself instituting a suit for that purpose or by interposing itas a defense if sued. In my opinion it takes the one or the other of these steps to constitute a contest of the policy within the meaning of the statute and the contractual limitation found in the policy. In the instant case this was not done until the answer and cross-bill was filed on October 16, 1922, which was after the one year had elapsed in any view of the date of issue of the policy.'" Thistle v. Equitable Life Assur. Soc., 261 S.W. (Tenn.) 667, 668 (1924). See also Jefferson Standard LifeIns. Co. v. McIntyre, supra; Humpston v. State Mutual LifeAssur. Co., 256 S.W. (Tenn.) 438; Great Western Life Ins. Co. v. Snavely, 206 Fed. 20; Dibble v. Reliance Life Ins. Co.,170 Cal. 199, 149 P. 171; Weil v. Federal Life Ins. Co.,264 Ill. 425; Reagan v. Union M.L. Ins. Co., 189 Mass. 555,76 N.E. 217; Flanigan v. Federal Life Ins. Co., 231 Ill. 399, 83 N.E. 178; Mutual Life Ins. Co. v. New, 125 La. 41, 51 So. 61; Central Law Journal, Vol. 97, No. 3, p. 40.

It is true that the cases are not entirely uniform as to what affirmative action must be taken by the insurer in order to exempt it from the incontestability clause found in policies of life insurance. Some of the cases hold that this step must be by court action. Still other cases that it may be either by court action or other "affirmative" action. There is but the one exception, the Rose case, which holds that rescission may be had by act of the insurer (called by Bigelow "rescission in pais"), and when so taken by the insurer against the assured on the ground of fraud prior to the elapsation of the first year of the policy it renders available to the insurer either a suit in equity for cancelation or the defense of fraud in an action at law by the beneficiary, even though said suit be filed or action brought after the elapsation of such period. All the cases are unanimous, however, in holding that mere denial of liability is not sufficient. No difficulty is encountered in appreciating the reason underlying those decisions which hold that court action is necessary. If in an action brought by the beneficiary the insurer answers prior to the expiration of the first year of the policy, any defense of which the answer is capable is available to it irrespective of whether final judgment is entered during or after the expiration of the first year of the policy, the judgment operating as of the date of the filing of the answer, and, if fraud be found, determining the legal existence of the contract within the first year of the life of the policy. Similarly in the event of suit in equity brought by the insurer during the first year of the policy for rescission of the policy on the ground of fraud. A decree of cancelation operates as of the date that suit is filed and serves to cancel the policy ab initio. Hence by the decree of cancelation in equity the contract of insurance will have been set aside within the first year of its life after which it would be of no further force or effect. In other words, in either event, that is, by a judgment at law against the beneficiary upon the defense of fraud or by a decree in equity of cancelation, the legal existence of the policy is judicially determined during and prior to the expiration of the first year of the policy. This is none the less true even though the beneficiary delayed action at law until the expiration of the first year of the policy. If the insurer had previously and during the first year of the policy brought a suit for cancelation, a court of equity having acquired jurisdiction would retain it until decree and the action at law would necessarily abate and await the final determination of the suit in equity.

The same theory is involved in the event of rescission by act of the insurer (decided in the Rose case), that is, that rescission by act of the defrauded party operates to forthwith cancel the policy ab initio.

The majority rely for their conclusion upon the Rose case. But the Rose case does not decide that the mere denial of liability by the insurer is a "contest." On the contrary it decides that rescission taken by the insurer against the insured (rescission in pais) cancels the policy as of the date of rescission and if accomplished within the first year of the policy exempts the insurer from the application of the one-year incontestability clause. The majority lack the support of any authority for their conclusion that a mere denial of liability by the insurer during the first year of the policy exempts it from the application of a one-year incontestability clause. And even assuming, but not deciding, that the legal effect of rescissionin pais as decided by the Rose case is to cancel the policy forthwith, then the facts in the Rose case furnish an example of "affirmative" action which some of the authorities say the insurer in order to be exempt from the provisions of an incontestability clause must take prior to such clause coming into effect and may with "actions in court" be included in the steps, the immediate or ultimate legal effect of which is to cancel the policy within the first year of its life or to render it within that time of no further effect. But whether rescission by action of the insurer prior to the incontestability clause coming into effect exempts the insurer from its application is not involved in the instant case for the reason that the acts of the insurer of April 7, 1923, did not amount to a rescission of the policy, rendering the Rose case inapplicable.

It is fundamental that rescission may be had against the fraudulent party to the contract or his legal representatives. "Inasmuch as the right of rescinding a voidable contract is alternative and coextensive with the right of affirming it, it follows that a voidable contract may be avoided by or against the personal representatives of the contracting parties." Wald's Pollock on Contracts, marg. p. 582, top p. 712. Whatever premiums were repayable to effect rescission were payable to the assured or his personal representatives. "The premium if returnable is due to the assured." 3 Joyce on Insurance, Sec. 1428. "* * * She" (the beneficiary) "had * * * not the title to support an action of law upon it in her own name against the defendants or for the recovery of the premiums paid by her husband" (the assured).McDonald v. Metropolitan Life Ins. Co., 38 Atl. (N.H.) 500, 501. There is no privity between the beneficiary and the assured. "Beneficiaries of a life insurance contract have, upon the repudiation of the policy by the company, no such interest in it that enables them to recover the premiums paid, that right being invested in the insured." 3 Joyce on Insurance, Sec. 1428a. The beneficiary upon the death of the insured becomes vested with a legal demand against the insurer for the amount of the policy. "* * * by the death of the cestui que vie the obligation to pay as expressed in the policies became fixed and absolute, subject only to the condition to give notice and furnish proof of that event within ninety days. Notice having been given and the required proof furnished, the obligation to pay certainly became fixed by the terms of the policies and the sums insured became a purely legal demand * * *." Insurance Co. v. Bailey, 13 Wall. (U.S.) 616, 622.

In the instant case the offer of the return of the premium was made to the beneficiary. It does not appear that she was in any way connected with the estate of the deceased assured. Nor does it appear that during the first year of the policy there was no legal representative of the estate of the assured upon whom tender of the premium might have been made. The offer to return the premium paid by the assured might as well have been made to a stranger. The burden of showing that there was no legal representative upon whom tender could be made devolved upon the insurer and not the beneficiary. It is upon the insurer and not the insured to show that it was wholly or partially exempted from the time limitation of the incontestability clause by reason of the absence of a legal representative of the assured. The majority say, "It is far from clear that a tender of the premium was necessary in the case at bar to constitute a rescission inpais." How can a rescission in pais be accomplished without an offer by the defrauded party to return to the fraudulent party the consideration received by the former under the alleged fraudulent contract? The defrauded party must rescind within a reasonable time after the discovery of the fraud or he will be taken as having affirmed the fraudulent contract. And how can rescission be had against a third party — a mere volunteer — for whose benefit the contract was made? Unquestionably the rights of the beneficiary depend upon the integrity of the insurance contract. But rescission must be taken against the fraudulent party (assured) or his legal representative. Nor that the defrauded party was "anxious to return the premium to the person entitled to it" can it be said that rescission was thereby accomplished.

In the case of Oplinger v. N.Y. Life Ins. Co., 98 Atl. (Pa.) 568, a policy of insurance was issued by the insurer to Allen A. Oplinger on February 24, 1913, in which the assured's wife was named as beneficiary. The assured died in January, 1914. On January 22, 1914, the defendant company notified the beneficiary that it rescinded the contract of insurance on the grounds of fraudulent representations and concealment of material facts by the assured. At the same time it tendered a return of the premiums, which tender was refused. Suit was then brought by the beneficiary. The defendant averred the rescission of the contract and paid the amount of the tender into court. As to the effect of the alleged rescission of the contract the trial judge ruled: "If this rescission had been dated the 22d day of January, 1913, instead of 1914, and Allen Oplinger had still been living * * * a different question would be presented, and it would be my duty to charge you * * * as to the effect of a rescission; but * * * Mr. Oplinger being dead the case must be tried by us just as if there had not been this formal rescission and as if they (the insurance company) were defending * * * in the first instance on the ground of fraudulent representations and concealments." The appellate division affirmed the judgment of the trial court, and in commenting upon this instruction said: "We see no error in the legal attitude thus assumed by the court below. After the death of the insured the defendant company could not change the status of the beneficiary by an attempted rescission of the insurance contract." In the case of Ramsay v. Old Colony Life Ins. Co.,supra, the court said: "The appellant's right of action to contest the validity of the policy was necessarily in abeyance after the death of the insured until the appointment of an administrator. There was no person in existence to be sued, the estate of the insured being the beneficiary in the policy, until such appointment. There was no person to whom the company could tender the premiums which it had received or against whom it could proceed for the cancellation of the policy."

The conclusion is inevitable that the insurer by its acts of April 7, 1923, did not effect a rescission of its policy. It is admitted that no other action was taken by it during the first year of the policy. Hence the interposition of fraud by the insurer during the incontestable period has for its sole justification the mere refusal by it to pay the beneficiary the amount of the policy upon the ground of fraud. This in the opinion of the majority was enough, and their opinion proceeds upon the theory that the insurer being by the terms of the policy prohibited from contesting it after the elapsation of the first year of the policy it may by implication "contest" the policy during the first year; that the denial of liability on the ground of fraud is a "contest;" that the insurance company inaugurated a "contest" within the first year of the policy and hence the incontestability clause does not apply. The word "contest," however, nowhere appears in the policy. The policy provides that it shall be "incontestable" after the elapsation of a certain period. It does not say that it shall be "incontestable" during one period and "contestable" during another. That is the inference of the majority. There is no necessity of interpretation. The incontestability clause is clear and unambiguous. We are only concerned with its meaning after it comes into operation and effect. It has no meaning until the first year of the policy has elapsed and then only, for the purposes of the instant case, when an insurer defends or "contests" an action at law by the beneficiary after the first year of the policy has elapsed, whereupon the sole question is of the justification of the contest in the face of the plain, clear, unequivocal and absolute inhibition of the incontestability clause.

But assuming that a denial of liability may be dignified by the term "contest," what is its effect? There is no question but that the insurer cannot contest after the elapsation of a year. What is there then in this mere denial of liability that renders inoperative the incontestability clause after the elapsation of the first year of the policy? To say that the denial of liability is a "contest" without showing wherein and how such contest exempts the insurance company from the application of the incontestability clause means absolutely nothing. The majority state that the rights of the insurer to contest during the first year of the policy "are as broad as they would have been if the clause of incontestability were not in the policy." Let us assume this to be true. Does this unlimited power of contestability during the first year of the policy, in the absence of an act of "contest," the immediate or ultimate legal effect of which is to neutralize the ensuing prohibition, detract one iota from the absolute prohibition against contest which becomes effective after this period of unlimited freedom has elapsed? To say that one may at one time perform an act prohibited at another time does not detract from the prohibition when effective. By mere denial of liability the policy is not canceled as by a decretal order of cancelation in equity. By the mere denial of liability upon the ground of fraud the contract is not avoided and the defrauded party restored as upon rescission by the act of the defrauded party, as held in the Rose case. Wherein does the mere denial of liability justify the interposition of the defense of fraud after the elapsation of a year in the face of the plain prohibition of the incontestability clause? For the insurer to say that it "contested" the policy within the first year of its life is not enough. It must show that it has done something prior to the expiration of the first year of the life of the policy, the immediate or ultimate legal effect of which is to exempt it from the prohibition of the incontestability clause, and failing this the incontestability clause operates to foreclose the defendant from the defense of fraud.

To hold that the mere denial of liability during the first year of the policy renders the incontestability clause of no application and permits the insurer to defend at any time against an action by the beneficiary seems to me to render the incontestability clause meaningless and of no effect and places the insured and beneficiary in the same position as though it were absent from the policy.

The judgment of the trial court should be affirmed.