Merion v. Kentucky Home Mut. Life Ins. Co. , 283 Ky. 249 ( 1940 )

It is admitted that, had Merion's net equity in the coupon dividends been added to the cash surrender value before the $219 loan was deducted, the amount remaining would have been sufficient to carry the policy beyond the date of his death. I think this should have been done. It was said in the case of Commonwealth Life Ins. Co. v. Gault's Adm'rs, 256 Ky. 625,76 S.W.2d 618, 620:

"It is an accepted rule: 'If an insurer is indebted to an insured, and has, or should have, in its hands, sufficient funds belonging to and due him, to pay an assessment or a premium when due, it cannot forfeit its policy or certificate for non-payment; rather, it should appropriate such funds to prevent a forfeiture, no matter from what source such funds were derived.' Citing cases."

See also Cheek v. Commonwealth Life Insurance Co., 277 Ky. 677, 126 S.W.2d 1084. In other words, it is the duty of the insurer, in case of the lapse of a policy because of the failure to pay premiums, to use such funds of the insured as are in the hands of the insurer under the insurance contract to the best interest of the insured.

The appellee insists, however, that this rule has no application here, and in so doing stresses the contractual provisions of the policy as to the use of the coupon dividends and also the Gault case, supra. In that case Gault and his brother secured a loan of $8,000 from the Commonwealth Life Insurance Company on certain real estate. As security for the loan they executed a mortgage on their real estate, and as additional security assigned to the Company life insurance policies which it had issued to them in the amount of $8,000 each. At the time Gault's policy lapsed for non-payment of premiums the loan on the real estate had been reduced to about $4,100 and he had a $1,040 loan on his policy. It was contended the Company had money in its hands due Gault which should have been applied to the payment of a premium note. Dividends amounting to $428.42 had accrued under the policy. The policy provided that the dividends could be left with the Company and that:

"Should The Insured not elect the Special Provision or the Additional Special Provision as contained in this Policy, then each dividend may be used in reduction of the premium then due, or if the premium be paid in full may be used to purchase paid-up additions payable with the Policy, or left with the Company to accumulate at interest. Should the premiums be paid in full and the dividends allowed to remain with the Company at interest, then said unpaid dividends, with compound interest at the rate of 3% per annum for each full year after the dividend was due, will be added to the face of the Policy in event of the death of the Insured, or paid in cash upon presentation to the Company, Paid-up additions shall be non-forfeitable and will participate in the surplus as provided above. Such additions may be reconverted into cash at the end of any anniversary upon request by the Insured, while this Policy is in full force."

In holding that the pledge of the policy to secure the loan on the real estate carried with it the dividend additions or dividend coupons, this Court said:

"Gault had assigned the policy, and by this provision of the mortgage pledged it to secure the real estate loan. This pledge inevitably carried with it the dividend additions to secure the same loan, and therefore there was nothing in the company's possession out of which his premium could have been paid. To allow Gault the benefit of the dividend additions or dividend coupons for the purpose of paying the premium or any part thereof, as evidenced by the series of premium notes, would be contrary to the express provisions of the policy and a violation of this clause of the mortgage.

"Gault having failed to elect to direct the disposition of the annual dividend and thereby allowed the same to become under the express provisions of the policy 'paid up additions payable with the policy,' his assignment of the policy to the company to secure the real estate loan carried with it, and pledged the paid-up additions or dividend coupons as collateral to secure the real estate loan. At the date of his failure to pay the installment premium note due January 1st, the insurance company, by virtue of the assignment of the policy, and the language of the mortgage, had an enforceable lion on the paid-up additions or dividend coupons, the same as it had on the policy itself. Forman v. Proctor, 9 B. Mon. 124; Parks v. Parks, 9 Ky. Law Rep. 346; Osborn v. Taylor, 9 Ky. Law Rep. 495. The insurance company having under its assignment and the provision of its mortgage a lien on the policy to secure the real estate loan, the paid-up additions or dividend coupons were not funds in the possession of the company to which Gault was entitled for the purpose of paying the premium note or notes."

In commenting upon the Gault case, Judge Richardson, who was also the author of that opinion, said in the case of Yutz v. Commonwealth Life Ins. Co., 264 Ky. 142, 94 S.W.2d 326,327, that:

"* * * The decisive question in that case [Gault case] was, the insured had assigned to the insurer the policy to pay a debt which he owed it, other than that commonly known as a 'policy loan,' and we ruled he was without right, therefore, to require the insurer to surrender its lien on the dividends existing by virtue of his assignment of the policy, for the purpose of paying the defaulted premium."

It can be seen, therefore, that the circumstances in the Gault case are materially different from those in the case at bar. Here there was no assignment of the policy, merely a policy loan. It seems to me that the Court is departing somewhat from the rules laid down in the Gault case.

While there may be technical distinctions between the terms dividend additions," "dividends" and "conpons," I think that the coupon dividends in Merion's policy come within the purview of Section 659 of the Statutes. The coupon dividend provisions of the policy, as well as those relating to disability and double indemnity benefits, all grew out of and were parts of the insurance contract relationship between Merion and the Company. New York Life Ins. Co. v. McCane, 276 Ky. 712,124 S.W.2d 1057. Furthermore, these coupon dividends were considered a part of the policy when the 60 per cent lien was applied to coupons 3 and 4 under the reinsurance agreement. The agreement also provided for the withholding of the insured's equities in the coupons for a stated period. While the facts and circumstances in the cases of Northwestern Life Ins. Co. v. Barker's Ex'x, 241 Ky. 490, 44 S.W.2d 292, and Commonwealth Life Ins. Co. v. Haskins, 259 Ky. 780, 83 S.W.2d 457, are not on all fours with the case at bar, those cases support the views stated herein. See also Forman v. Mutual Life Ins. Co.,173 Ky. 547, 191 S.W. 279, L.R.A. 1918F, 330, Ann. Cas. 1918E, 880.

It is obvious that the following wording in the loan agreement executed by Merion has no bearing on the question: "In no case shall coupon values be used in determining or calculating extended or paid up insurance." See also Commonwealth Life Ins. Co. v. Haskins, supra. The coupon dividends should have been used in reducing the loan, leaving the remainder of the cash value for the determination and calculation of the amount of extended or paid up insurance.

For the foregoing reasons, I dissent from the conclusions reached by the majority of the Court.