Smith v. Penn Mut. Life Ins. Co. , 244 Ala. 610 ( 1943 )

I am of opinion that our statutes regulating the sale of collateral have no application to loans on life insurance policies of this class. By the contract, the loan is an advance on the policy alone. The borrower is not personally liable. He may repay the loan at his option. If not paid, the policy remains pledged until maturity, unless sooner terminated, and the loan is liquidated from the proceeds. This includes principal and interest. There can never arise an occasion to sell the policy as collateral. Penn Mutual Life Ins. Co. v. Bancroft, 207 Ala. 617, 93 So. 566, 28 A.L.R. 1102.

I am unable to concur with the majority in their construction of the stipulation of the policy, which reads: "Interest shall accrue on the principal amount of this certificate and alladditions made thereto in accordance with its provisions at the rate of six per cent (6%) per annum on March 25, 1932, and annually thereafter, with the understanding that any interest not paid when due shall be added to the principal."

I think this provision clear and unequivocal, not subject to two interpretations. The clause must be read as a whole. To say "all additions made thereto" means only additional loans, is to strike out the last clause, which specially declared interest not paid when due shall be "added to the principal." It seems to me this can only mean this is one of the "all additions" to be added to the principal and bear interest as part thereof.

When the terms of an accumulation policy of this kind are considered, this is a fair stipulation. The table of cash or loan values, and dividend provisions accrue to the policy holder who has a loan thereon, the same as a non-borrower; and the borrower who pays interest on his loan receives no greater dividend or accumulation in cash value than the borrower who does not pay his interest. That all shall share alike, the annual interest, if not paid by the borrower, is paid from his accumulations, still in the hands of the insurer. The investment is thus increased, just as it would be increased by paying in the annual interest, enhancing the fund for investment on behalf of the policy-holder. Unless unpaid interest installments become part of the principal and bear interest, the non-paying borrower shares in the returns for investments to which he has not contributed. In effect, he is favored over those who do pay the interest on their loans. The stipulation here aims at equality of burden where there is equality of benefit. 8 Couch Encyclopedia of Ins. Law, § 1943. It is not a case of compound interest solely for the benefit of the lender.

On Rehearing.