Rhine v. New York Life Insurance

The Insurance Law of New York provides in section 83 for the distribution of surplus to policyholders. Every policy shall state that the proportion of the surplus accruing upon said policy shall be ascertained and distributed annually, not otherwise. The section continues: "after setting aside from such surplus such sums as may be required for the payment of authorized dividends upon the capital stock, if any, and such sums as may properly be held for account of existing deferred dividend policies, and for a contingency reserve not in excess of the amount prescribed in this article, every such corporation shall apportion the remaining surplus equitably to all other policies entitled to share therein."

Section 89 relates to discriminations which are prohibited. "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, including endowment policies and annuity contracts, or in the dividends or other benefits payable thereon, or in any of the terms and conditions of the policy; nor shall any such company permit or agent thereof offer or make any contract of insurance, endowment policy or annuity contract, or agreement as to such contracts other than as plainly expressed in the policy issued thereon; * * * nor shall any person knowingly receive as such inducement, any rebate of premium, or any special favor or advantage in the dividends or other benefits to accrue thereon, * * * not specified in the policy."

The question which we have to decide upon the agreed statement of facts is whether this law has been violated. The purpose of the statute, appearing upon its face, is to compel insurance companies to treat alike all who have the same kind of policy issued under the same or similar conditions.

On the 13th day of June, 1927, the New York Life Insurance Company issued a policy upon the life of Artrude L. Westerheide for $2,000, which was later split up into two policies of $1,000 each. For the purpose of this opinion we shall deal with one of these two policies dated the 6th day of July, 1934. The policy is a contract, and we may assume that it complies with section 89 of the Insurance Law, in that the contract of insurance or agreement is plainly expressed in the policy and is none other. Thus in plain and simple language, the company agrees to pay $1,000 upon the receipt of due proof of the death of Artrude L. Westerheide, the insured, "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."

On the second page of the policy are the provisions relating to total and permanent disability, the second paragraph from the bottom reading as follows: "The total premium stated on the first page hereof includes an annual premium of $2.96 for Disability Benefits."

The reason for this explanation or statement regarding the premium is a regulation of the New York Insurance Department which requires every policy containing disability benefits to include "a statement showing separately the amount of extra premium charged for total and permanent disability * * * benefits." I do not find this regulation within the agreed statement of facts, but it is referred to in the opinion of the Appellate Division and is contained in the appellant's brief, without any contradiction from the respondent. We are justified, therefore, in saying that the insurance company was obliged by the regulations of the Insurance Department to specify in a policy of this nature the amount of the premium for the life insurance and the amount for the disability insurance.

Whether we consider the policy as one contract or as two contracts is entirely immaterial. The New York Life Insurance Company agreed to insure the life of Artrude L. Westerheide for $1,000 at an annual premium of $27.34, and also to furnish disability insurance on the terms therein stated for $2.96. During the period of the policy the company could charge neither more nor less than these premiums.

Included in the agreed statement of facts is a policy exactly like the one in question, with the disability feature omitted. In every respect it contains the same figures and agreements. It is called by counsel for convenience and for the sake of comparison and argument "the twin sister policy." It is issued to Mary Doe, insuring her life for $1,000, the premium being $27.34. All the provisions, conditions and privileges are the same. The table of loan values for each $1,000 is exactly in the same figures. The surrender values which are guaranteed are the same.

We, therefore, have a life insurance policy of $1,000 issued to the plaintiff (now Mrs. Rhine) in every respect the same as that issued of like kind, age and amount, without the disability feature.

Reading this policy in the light of these facts, the insured would naturally suppose — and would be justified in supposing — that under the Insurance Law of this State she would be treated alike in every particular, and that when the company annually divided its surplus, adjusting the amounts between its various classes of policies, she would, so far as life policies of her class were concerned, be given the same dividend. On the face of the policy the premium of $27.34 related to the life insurance, and the premium of $2.96 paid for the disability benefits. The only way in which these two features of insurance were linked together is in the fact that they were included in the one policy. Although the company would not issue disability insurance unless the insured also took life insurance neither added nor subtracted anything from the other when once they were made.

The plaintiff by this action has questioned the division of the surplus to which she was entitled under the provisions of her policy and section 83 of the Insurance Law. She claims that it was inequitable. The policy contains a paragraph headed:

"PARTICIPATION IN SURPLUS — DIVIDENDS

"The proportion of divisible surplus accruing upon this Policy shall be ascertained annually. Beginning at the end of the second insurance year, and on each anniversary thereafter, such surplus as shall have been apportioned by the Company to this Policy shall at the option of the Insured be either

"(a) Paid in cash; or

"(b) Applied toward payment of premiums; or

"(c) Applied to purchase a participating paid-up addition to the sum insured (herein referred to as Dividend Additions); or

"(d) Left to accumulate at such rate of interest as the Company may declare on funds so held, but at a rate never less than three per cent compounded and credited annually. Such accumulated dividends (herein referred to as Dividend Deposits) may be withdrawn in cash by the Insured on any anniversary of the Policy or shall be payable at the maturity of the Policy to the person entitled to its proceeds.

"If no option is selected, the dividend will be applied to the purchase of a dividend addition to the sum insured. The Insured may surrender any dividend addition for cash at any time not later than three months after any default in the payment of premium, and the cash value thereof shall never be less than the original cash dividend."

The method of arriving at the surplus to be distributed in dividends to the policyholders is fully set out in the agreed statement of facts and may be briefly referred to as follows:

"Under the mutual plan, (a) all the members [or policyholders] pay their moneys into a common fund, the sums paid being based on age and the character of insurance desired; (b) the officers of the company manage the money as it is paid in, investing and reinvesting it; pay out the company's death and disability claims, matured endowments, surrender values, loans, taxes, expenses, etc.; set aside as an inviolable fund the Reserve (which is the amount required by law to be held for the future protection of members and which is calculated by pure mathematics to the exact dollar), and (c) what is left over (after setting aside sufficient funds to cover other liabilities, such as unpaid death and disability claims, etc., and other amounts properly held such as the Contingency Reserve) is returned to the members, from time to time, now generally annually, as their equitable share of the Divisible Surplus of the insuring company, which share so distributed to the members is commonly called a Dividend." (This is quoted from the agreed statement of facts.)

To continue: "The surplus of the New York Life has been created and accumulated by virtue of the premium payments made to it by millions of policy-holders in the forty-eight States of the Union, and in foreign countries. The fund so created is one general fund created by all the policy-holders, and each policy-holder is entitled to his equitable share of the Divisible Surplus and in such Divisible Surplus the equitable share of policy-holders of the same `class,' must be determined by precisely the same methods, principles and factors. * * *"

The ascertainment of the amounts which must be deducted from the premiums received in order to ascertain a surplus or a divisible surplus is a matter for the actuaries. The parties have agreed in stating it thus: "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 is stated in a word to be "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."

Perhaps for the purpose of this opinion I can summarize that which has been set forth at length and in detail. The only income that a mutual insurance company has is from the premiums on its policies and the investment of the funds. The premiums more than pay for the insurance. The amount of premium is determined by tables of experience covering long periods of years and many individuals of like age with similar policies. In a word, the company first determines by these mortality tables or disability tables what the premium should be to cover any given insurance and be on the safe side. The result is that the premium more than pays for the insurance and the risk, for the reason that the elements entering into the calculation exceed the actualities. Thus not so many people have died within a certain period as had been figured; not so many losses, therefore, have to be paid as had been calculated. The interest upon investments is generally more than had been assumed.

We are not particularly interested in the way in which the surplus is determined. Sufficient for this case that there is a surplus, a large surplus, from which the company is bound to take out certain reserves, as they are called, to cover future liabilities. After these and all expenses, including the contingency reserve permitted by section 87 of the Insurance Law, have been deducted, we have at last a divisible reserve which is to be paid back to the policyholders. The method used to determine the amount which each policyholder should receive is a matter for the actuary as the policyholders are necessarily divided up into various classes, dependent upon age and nature of the policies.

The distribution of the divisible surplus is made according to the "contribution method." The fundamental characteristic of the contribution method is that it relates the distribution of divisible surplus to the various sources from which such surplus is derived so that the company returns its divisible surplus to its policyholders (as dividends) in the proportions in which each policyholder has contributed to the creation of such surplus. These brief references I am sure will suffice for the points which must be considered. The method for arriving at the divisible surplus and the complicated but no doubt very fair contribution method whereby each policyholder receives a dividend proportioned — practically proportioned — to the amount he has contributed, are matters which we must assume have been properly applied in these cases. What the divisible surplus shall be is a matter for the insurance companies and their boards of directors under supervision of the Insurance Department, without interference from the courts. (Greeff v. Equitable Life Assur.Society, 160 N.Y. 19.)

The only question which we must determine on the facts here presented is whether the divisible surplus having been ascertained the plaintiff got her share; whether she has been equitably treated, which means that we must determine whether she has received less than others of her same class having policies of like age and nature, or, to put the question in another form, whether the insurance has cost her more than agreed.

The parties concede that if it were not for the disability provisions in her contract the plaintiff would have received for the last four or five years increased dividends.

Commencing with 1919, and continuing through the calendar year 1930, the company without exception paid the same dividends in dollars and cents per one thousand face amount of insurance on all otherwise similar life insurance policies, regardless of whether or not there had been issued in connection with them and were outstanding disability benefits. During this period there were heavy losses from the disability insurance. The premiums which the company had charged for the disability branch of the business had not covered its liabilities and, during the ten years in which these losses occurred, the company had treated these losses just the same as it had other losses of management. It reduced the total amounts paid as dividends and equitably distributed its disability losses among all policyholders, regardless of whether their policies contained disability benefits. It did not compel the holder of a policy containing disability benefits to pay more than the disability premium for the disability benefits, even though the cost to the company of the disability benefits was in excess of such premium. Of course it could not change its outstanding contracts in this particular.

Since 1931, however, the company has compelled every holder of a policy with disability benefits to pay the full difference between the average cost to the company of such disability benefits and the disability benefit premium specified in his policy. Payment of this additional amount has been exacted from him by deducting it from the dividends payable on the life insurance in his policy. In the agreed statement of facts we have the following: "The New York Life applied to Mrs. Rhine's policies, and all other similar policies with Death and with Disability Benefits, exactly the same factors as it applied to all similar policies issued in the same year, at the same age, with Death but without Disability Benefits, — except in the one single particular, to wit: the Company applied the Disability factor to Mrs. Rhine's `group,' but it did not apply the Disability factor to policieswithout Disability Benefits."

The disability factor represents the estimated losses which from that time on were charged up or against the life policies containing the disability provisions in estimating dividends. These losses were not taken into consideration in calculating the dividend on policies of similar nature not having the disability insurance. This resulted in the plaintiff receiving a lesser dividend on her life policy than she would have received if the disability feature had not been a part of it. The explanation is given in the following words taken from the agreed statement: "Beginning in 1931, the Directors and Officers of the New York Life became convinced that although the premiums received by the Company, over a series of years for the Disability Benefits in its life insurance policies, exceeded the actual cash disbursements on account of disabled policyholders, such provisions were not contributing to the Surplus; and in the exercise of their reasonable and best judgment they decided that while the experience of the prior eleven years (1920-1930) was not conclusive, they should no longer continue to use a zero factor; and, therefore, they decided that the New York Life should use, and thereafter it did use, a negative Disability factor in the ascertainment and apportionment of Divisible Surplus among those Death Benefit policies containing Disability Benefit provisions which were a drain upon the Surplus of the Company."

The zero factor and the negative factor may be described by their results. Although the disability losses existed between 1920 and 1930, the company apparently treated these losses, in arriving at its divisible surplus, the same as any other losses, that is, they were classed with expenses, costs and other deductible elements; treated as a general loss to be borne by the company as a whole. The remaining divisible surplus was apportioned equitably among both the disability and non-disability policyholders. Beginning with 1931 the company used the negative factor, which in result meant, as above stated, that the disability losses were charged up solely to the disability policyholders, those who had the life and disability policies.

From 1920 to 1930, inclusive, the New York Life paid to the holders of policies containing life insurance and disability benefits the same dividends in dollars and cents per one thousand dollars face amount of life insurance as on all other identical life insurance agreements. Since 1931, holders of policies with disability benefits of the type involved in this action have been receiving less in dividends than holders of exactly similar life insurance agreements in policies which do not contain disability benefits. The net difference is produced by the use of the so-called "disability factor" which measures the difference between the cost to the company of the disability benefits and the premium collected for such disability benefits.

The result in figures, as applicable to the plaintiff's policy, is this: The premium paid for life insurance from 1931 to 1934 was $27.34 each year. The dividend received in 1931 was $6.60; in 1932, $5.35; in 1933, $4.82; in 1934, $4.82; total, $21.59. The dividend on a similar policy, without the disability insurance, was or would have been, in 1931, $7.35; in 1932, $10.08; in 1933, $6.62; in 1934, $6.62; total, $30.67. The difference is $9.08. If the plaintiff had not taken the disability insurance she would have received in these years $9.08 more.

It is conceded by counsel that if she had discontinued the disability insurance at any time she would thereafter have received these additional amounts as dividends on her life policy. She would not have received the same amounts, but the disability factor would not have been applied, and she would have received the same dividends as other life policyholders without disability insurance. In other words, when she dropped the disability insurance her dividend returns went up. Whether we consider this as an inequitable distribution of the divisible surplus or as an extra charge to the plaintiff for disability insurance is entirely immaterial. The words mean nothing; the reality is apparent. Because the plaintiff had disability insurance along with her life policy she either gets less money as a return premium on her life policy, or is charged more for her disability insurance. The former violates the Insurance Law, which is part of her contract; and the other increases her premium, contrary to the terms of the contract. Whichever way we look at it the defendant has failed to keep its contract.

Bear in mind that our Insurance Law expects the endowment policy plainly to express the contract. We have said in this court many times that policies of insurance are contracts to be interpreted like any other agreement. This policy insured the plaintiff's life for $1,000 at a premium of $27.34; it also gave her disability insurance for $2.96. Unless these figures meant something the regulations of the Insurance Department were meaningless. The company was required to state the premium for each kind of insurance so that people would know what they were paying for and what it was they were to get. If this premium of $2.96 can be increased so as to amount in four years to $9.08, why state any figure at all? It was a useless formality leading to misunderstanding. We must take the policy as it reads. The disability insurance, whether profitable or unprofitable, was to be furnished, as therein stated, for $2.96, and the premium could not be increased, directly or indirectly. It could not be raised directly by increased premium for disability, neither could it be raised indirectly by changing the terms of the life policy. That life policy for a premium of $27.34, read in conjunction with section 83 of the Insurance Law, gave to the plaintiff the $9.08 which other like policyholders received as dividends or return premiums. This is the equality required by that section. In his supplemental brief the attorney for the defendant says: "Of course the New York Life is obligated to supply the Disability Benefits; — but it is not obligated to supply them for a premium of $2.96 annually." This is the whole question, the answer to which settles the controversy. I disagree with counsel and hold, for the reasons stated, that such is the obligation.

The reason suggested by the defendant for the inequality is the fact that the disability insurance is printed upon the same paper as the life insurance policy, and that such form of policy creates a class by itself; in other words, that a life policy, identical with others, becomes different in nature and class because it also contains disability insurance complete in terms to be furnished for $2.96 as a premium.

The company and its agents failed to inform the plaintiff that her life policy was any different in any of its features than other similar life policies, or, that because of the disability feature, she might receive less return premium. The probability of return premiums is always considered in figuring the cost of mutual policies. The stated premium is supposed to be reduced, as in the past, by a certain amount of return premium — a division of the surplus. If this is to be less in life policies carrying disability insurance than in those without the disability feature, then in fairness it should be so stated.

The amount involved in this submitted case is small, but the defendant has called our attention to the large sums which may ultimately be dependent upon our decision. Such considerations may cause us to ponder well before arriving at a conclusion but must not modify a contract clearly expressed and intended to comply with the Insurance Law.

The judgment of the Appellate Division should be reversed, and judgment directed for the plaintiff, in accordance with the stipulation of the parties. No costs.

O'BRIEN, HUBBS, CROUCH and LOUGHRAN, JJ., concur with LEHMAN, J.; CRANE, Ch. J., dissents in opinion, in which FINCH, J., concurs.

Judgment affirmed.