Succession of Watson v. Metropolitan Life Ins.

On April 28, 1924, the Metropolitan Life Insurance Company issued to Frank Watson an industrial life insurance policy for $164. On April 20, 1925, the insurance company issued another policy to Watson for $820. Both policies provided for weekly premiums, which were regularly paid until November 14, 1932, when the payments ceased and the policies lapsed. Frank Watson, the insured, died on April 13, 1933, and his succession was opened in the civil district court for the parish of Orleans. Albert W. Newlin, public administrator, qualified as administrator of the succession, and as such administrator brought this suit against the Metropolitan Life Insurance Company to recover the face value of the two policies issued by the defendant insurance company on the life of the deceased.

The district court rendered judgment in plaintiff's favor for $984, the full amount of the policies. The Court of Appeal amended the judgment by reducing the amount of plaintiff's recovery to $122. The case comes before us on certiorari for review of the judgment of the appellate court.

The defendant insurance company urged several defenses to plaintiff's action in the district and appellate courts. But in this court only two of these defenses are relied on to defeat plaintiff's suit. They are that Act No. 193 of 1906, on which plaintiff's action is predicated, is not applicable to industrial life insurance; and that, if applicable, the statute is satisfied by the terms of the insurance contract providing for paid-up insurance on the lapsing of the policies for nonpayment of the premiums.

The defendant insurance company contends that Act No. 193 of 1906 does not apply to industrial life insurance, because the statute makes no reference to such insurance, which is authorized, defined, and regulated by Act No. 65 of 1906, section 7 of which provides that: "No law, hereafter passed, shall be held or deemed to refer to the business of industrial life insurance unless the same is expressly referred to in said law."

But the question involved in the contention was settled by the decision of this court in McBride v. Acme Industrial Life Insurance Society, 179 La. 701, 154 So. 741, where it was held that, notwithstanding section 7 of Act No. 65 of 1906, the general laws of the state relating to life, health, and accident insurance are applicable to industrial life insurance.

Act No. 193 of 1906 is a general law under the provisions of which life insurance policies become nonforfeitable for nonpayment of premiums after three years' premiums have been paid. Under the decision in the McBride Case, the statute is applicable to the business of industrial life insurance, although that business is not specifically referred to therein. The question involved in this case is not different from the one involved in the McBride Case, because Act No. 193 of 1906 was enacted by the same Legislature which had previously enacted Act No. 65 of 1906. The legal principle governing both cases is the same. As correctly stated by the Court of Appeal in its opinion herein, the reasoning in the McBride Case is applicable "not only to enactments of subsequent Legislatures, but also to laws passed by the same Legislature which enacted the original statute which prohibits the application to industrial life insurance of subsequent enactments which do not expressly refer to such business."

Section 1 of Act No. 193 of 1906 makes life insurance policies nonforfeitable for nonpayment of premiums after three years' premiums have been paid. Section 2 of the statute provides that, where such a policy lapses, "The reserve on such policy computed according to the standard adopted by said company, together with the value of any dividend additions upon said policy, after deducting any indebtedness to the company and one-fifth of the said entire reserve, shall upon demand with surrender of the policy be applied as a surrender value as agreed upon in the policy, provided that if no other option expressed in the policy be availed of by the owner thereof, the same without any further act on the part of the owner of the policy, shall be applied to continue the insurance in force at its full amount * * * so long as such surrender value will purchase non-participating temporary insurance, * * * and provided further that any value allowed in lieu thereof shall be at least equal to the net value of the temporary insurance * * * herein provided." The same section of the statute also provides: "That any attempted waiver of the provisions of this paragraph [section] in any application, policy or otherwise, shall be void."

When the policies were issued by the defendant insurance company to the deceased, Frank Watson, they contained the following nonforfeiture clause, viz.: "After premiums upon this policy have been fully paid for the respective periods named in the table below, then in case of default in the payment of any subsequent premium the company, will, without action on the part of the holder, continue this policy as a nonparticipating Free Policy, payable on the same conditions as this policy but upon which no further payment of premiums shall be required, for a reduced amount in accordance with the following table, but any indebtedness to the company hereon if not repaid, will reduce such amount in the proportion which the indebtedness bears to the amount of surrender value used as a single premium in calculating the values appearing in the table." The policies also contained a table by which the value of nonparticipating insurance might be determined according to the insured's age at time of issuance, the number of years they were in force, and the amount of the premiums.

It is admitted that the policies involved in this suit were in force for more than three years and for less than ten years and had lapsed because of nonpayment of the premiums prior to the death of the insured. It is also admitted that on the lapsing of the policies the insured did nothing. He neither availed himself of the surrender value nor exercised the option for the paid-up value as provided in the policies.

Plaintiff contends that under the provisions of Act No. 193 of 1906 the reserves accumulated on the policies must be applied to the purchase of extended insurance. Defendant contends that under the terms of the policies the reserves must be applied to the purchase of paid-up insurance. The extended insurance, which plaintiff claims, is the face value of the policies for the period which the reserves purchased. The paid-up insurance, which defendant claims is the extent of its liability, is the coverage which the reserves would purchase for the remainder of the insured's life. Both kinds of insurance are purchasable out of the same reserve.

The Court of Appeal upheld defendant's contention and limited plaintiff's recovery to the amount of paid-up insurance purchased by the accumulated reserves in accordance with the table contained in the policies. We are unable to affirm the judgment.

Among the above-quoted provisions of section 2 of Act No. 193 of 1906 appears the following, viz.: "The reserve * * * shall upon demand with surrender of the policy be applied as a surrender value as agreed upon in the policy, provided that if no other option expressed in the policy be availed of by the owner thereof, the same [reserve] * * * shall be applied to continue the insurance in force at its full amount."

We do not find anything in the statutory provision which shows that the legislative intention was that an insurance company may require the insured to agree in advance to the benefit he shall be entitled to if the policy lapses after the payment of three years' premiums. On the contrary, we think that the language used indicates that the Legislature intended to grant the insured the privilege of selecting one of the three well-recognized and usually agreed upon ways of applying a surrender value. Those ways are set forth by the Court of Appeal as follows, viz.: (1) By paying in cash; (2) by using it to extend the full policy for a short term; (3) by using it to purchase a small amount of fully paid insurance.

If this were not so, an insured permitting his policy to lapse after the payment of three years' premiums could obtain neither a cash surrender value nor an extended value, as he would be obligated from the moment of the issuance of the policy to accept a paid-up value. There would be no necessity for a demand and surrender of the policy by the insured, and the proviso, "that if no other option expressed in the policy be availed of by the owner thereof, the same (reserve) shall be applied to continue the insurance in force at its full amount," would be meaningless.

The obvious purpose of Act No. 193 of 1906 is to prevent life insurance companies from inserting in their policies conditions of forfeiture or restrictions, except those which the statute itself allows. Equitable Life Assur. Society v. Pettus,140 U.S. 226, 11 S. Ct. 822, 35 L. Ed. 497.

While the statute not only permits the insured on his demand to make a new bargain with the company at the time he surrenders the policy, it goes further and actually makes the bargain for the insured in the event he fails to avail himself of the permission by providing that "the reserve * * * shall be applied to continue the insurance in force at its full amount."

The words appearing in the proviso, "no other option expressed in the policy" clearly show that the Legislature had in mind more than one way of applying a surrender value to be specified in the policy. As hereinabove stated, the three ways or options of applying a surrender value contained in life policies are surrendering the policy for cash, accepting a paid-up policy or obtaining extended insurance.

The statute expressly commands that the insured be given the option in the policy of selecting extended insurance when it unequivocably declares that in the event the insured fails to avail himself of any of the other options agreed upon in the policy, the reserve "shall be applied to continue the insurance in force at its full amount." And clearly the other options contemplated by the Legislature as being agreed on in the policy are the options of securing cash or accepting a paid-up policy which are always embodied in life policies in association with the option of selecting extended insurance. In fact, in Darby v. Equitable Life Assur. Society, 143 La. 757, 79 So. 329, it was held that under Act No. 193 of 1906, life insurance policies which are nonforfeitable after they have been in force for three years have a cash or surrender value.

Our conclusion is that the plaintiff cannot be compelled to accept paid-up insurance as provided in the policy. Act No. 193 of 1906 was dictated by public policy. It was enacted to protect the insured. It expressly prohibits him from waiving in any application, policy, or otherwise any of the provisions of section 2. The statute is mandatory and its provisions control the provisions of the policy. To fully protect the insured its provisions must be interpreted so as to give him his choice of benefits at the time the policy lapses.

For the reasons assigned, the judgment of the Court of Appeal is annulled and the judgment of the civil district court is reinstated and made the final judgment of this court; all costs of suit are to be paid by the defendant insurance company.

HIGGINS, J., recused.

On Rehearing.