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A policy of life insurance which stipulates for the payment of an annual premium by the
assured, with a condition to be void on non-payment, is not an insurance from year to year like a common fire policy ; but the premiums constitute an annuity, the whole of which is the consideration for the entire assurance for life; and the condition is a
condition subsequent, making void the policy by its non-performance. But the time of payment in such policies is material, and of the essence of the con
tract ; and failure to pay involves an absolute forfeiture, which cannot be relieved against in equity. If failure to pay the annual premium be caused by the intervention of war between the
territories in which the insurance company and the assured respectively reside, which makes it unlawful for them to hold intercourse, the policy is nevertheless forfeited if the company insist on the condition; but in such case the assured is entitled to the equitable value of the policy arising from the premiums actually paid. This equitable value is the difference between the cost of a new policy and the present
value of the premiums yet to be paid on the forfeited policy when the forfeiture occurred, and may be recovered in an action at law or suit in equity. The doctrine of revival of contracts, suspended during the war, is one based on consider
ations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or inequitable to revive, as where time is of the essence of the contract, or
the parties cannot be made equal. The average rate of mortality is the fundamental basis of life assurance, and as this is
subverted by giving to the assured the option to revive their policies or not after they have been suspended by a war (since none but the sick and dying would apply), it would be unjust to compel a revival against the company. Mr. Justice BRADLEY delivered the opinion of the court.
The first of these cases is a bill in equity filed to recover the amount of a policy of life assurance, granted by the defendants (now plaintiffs in error) in 1851, on the life of Dr. A. D. Statham, of Mississippi, from the proceeds of certain funds belonging to the defendants attached in the hands of their agent at Jackson, in that state. It
appears from the statements of the bill that the annual premiums accruing on the policy were all regularly paid until the breaking out of the late civil war; but that, in consequence of that event, the premium due on the 8th of December, 1861, was not paid ; the parties assured being residents of Mississippi, and the defendants a corporation of New York. Dr. Statham died in July, 1862.
The second case is an action at law brought in the same court against the same defendants to recover the amount of a policy issued in 1859 on the life of one Henry S. Seyms, the husband of the plaintiff. In this case also the premiums had been paid until the breaking out of the war, when
NEW YORK LIFE Ins. Co. v. STATHAM.
by reason thereof they ceased to be paid, the plaintiff and her husband being residents of Mississippi. Seyms died in May, 1862.
The third case is a similar action at law brought in the same court against the Manhattan Life Insurance Company of New York to recover the amount of a policy issued by them in 1858 on the life of C. L. Buck, of Vicksburg, Mississippi ; the circumstances being substantially the same as in the other cases.
The policies in all the cases were in the usual form of such instruments, declaring that the company, in consideration of a certain specified sum to them in hand paid by the assured, and of an annual premium of the same amount to be paid on the same day and month in every year during the continuance of the policy, did assure the life of the party named, in a specified amount, for the term of his natural life. The policies contained various conditions upon the breach of which they were to be null and void ; and amongst others the following: “That in case the said (assured) shall not pay the said premium on or before the several days hereinbefore mentioned for the payment thereof, then and in every such case, the said company shall not be liable to the payment of the sum insured, or in any part thereof, and this policy shall cease and determine.” The Manhattan policy contained the additional provision, that in every case where the policy should cease or become null and void, all previous payments made thereon should be forfeited to the company.
The non-payment of the premiums in arrear was set up in bar of the actions, and the plaintiffs respectively relied on the existence of the war as an excuse, offering to deduct the premiums in arrear from the amounts of the policies. We
agree with the court below, that the contract is not an assurance for a single year, with a privilege of renewal from year to year by paying the annual premium, but that it is an entire contract of assurance for life, subject to discontinuance and forfeiture for non-payment of any of the stipulated premiums. Such is the form of the contract, and such is its character. It has been contended that the payment of each premium is the consideration for insurance during the next following year, fire policies. But the position is untenable. It often happens that the assured pays the entire premium in advance, or in five, ten, or twenty annual instalments. Such instalments are clearly not intended as the consideration for the respective years in which they are paid ; for, after they are all paid, the policy stands good for the balance of the life insured, without any further payment. Each instalment is, in fact, part consideration of the entire insurance for life. It is the same thing, where the annual premiums are spread over the whole life. The value of assurance for one year of a man's life when he is young, strong, and healthy, is manifestly not the same as when he is old and decrepit. There is no proper relation between the annual premium and the risk of assurance for the year in which it is paid. This idea of assurance from year to year is the suggestion of ingenious counsel. The annual premiums are an annuity, the present value of which is calculated to correspond with the present value of the amount assured, a reasonable percentage being added to the premiums to cover expenses and contingencies. The whole premiums are balanced against the whole insurance.
as in Vol. IV.)
NEW YORK LIFE INs. Co. v. STATHAM.
But whilst this is true, it must be conceded that promptness of payment is essential in the business of life insurance. All the calculations of the insurance company are based on the hypothesis of prompt payments. They not only calculate on the receipt of the premiums when due, but on compounding interest upon them. It is on this basis that they are enabled to offer assurance at the favorable rates they do. Forfeiture for non-payment is a necessary means of protecting themselves from embarrassment. Unless it were enforcible, the business would be thrown into
. utter confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous undertakings. There must be power to cut off unprofitable members or the success of the whole scheme is endangered. The insured parties are associates in a great scheme. This associated relation exists whether the company be a mutual one or not. Each is interested in the engagements of all; for out of the coexistence of many risks arises the law of average which underlies the whole business. An essential feature of this scheme is the mathematical calculations referred to, on which the premiums and amounts assured are based. And these calculations, again, are based on the assumption of average mortality and of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at the option of the company. This has always been the understanding and the practice in this department of business. Some companies, it is true, accord a grace of thirty days, or other fixed period, within which the premium in arrear may be paid on certain conditions of continued good health, &c. But this is a matter of stipulation, or of discretion on the part of the particular company. When no stipulation exists it is the general understanding that time is material, and that the forfeiture is absolute if the premium be not paid. traordinary and even desperate efforts sometimes made, when an insured person is in extremis to meet a premium coming due, demonstrates the common view of this matter.
The case therefore is one in which time is material and of the essence of the contract. Non-payment at the day involves absolute forfeiture, if such be the terms of the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties by introducing equities for the relief of the insured against their own negligence.
But the court below bases its decision on the assumption, that when performance of the condition becomes illegal in consequence of the prevalence of public war, it is excused, and forfeiture does not ensue. It supposes the contract to have been suspended during the war, and to have revived with all its force when the war ended. Such a suspension and revival do take place in the case of ordinary debts. But have they ever been known to take place in the case of executory contracts in which time is material ? If a Texas merchant had contracted to furnish some northern explorer a thousand cans of preserved meat by a certain day, so as to be ready for his departure for the North Pole, and was prevented from furnishing it by the civil war, would the contract still be good at the close of the war five years afterwards and after the return of the expedition? If the proprietor of a Tennessee quarry had agreed in 1860 to furnish during the two following years ten thousand cubic feet of marble for the construction of a building in Cincinnati, could he have claimed to
New YORK LIFE INs. Co. v. STATHAM.
perform the contract in 1865, on the ground that the war prevented an earlier performance ?
The truth is, that the doctrine of the revival of contracts, suspended during the war, is one based on considerations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or inequitable to revive.
In the case of life insurance, besides the materiality of time in the performance of the contract, another strong reason exists why the policy should not be revived. The parties do not stand on equal ground in reference to such a revival. It would operate most unjustly against the company. The business of insurance is founded on the law of averages; that of life insurance eminently so. The average rate of mortality is the basis on which it rests. By spreading their risks over a large number of cases, , the companies calculate on this average with reasonable certainty and safety. Anything that interferes with it deranges the security of the business. If every policy lapsed by reason of the war should be revived, and all the back premiums should be paid, the companies would have the benefit of this average amount of risk. But the good risks are never heard from; only the bad are sought to be revived — where the person insured is either dead or dying. Those in health can get new policies cheaper than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company necessarily lose the cases which are desirable, would be manifestly unjust. An insured person, as before stated, does not stand isolated and alone. His case is connected with and corelated to the cases of all others insured by the same company. The nature of the business as a whole must be looked at to understand the general equities of the parties.
We are of opinion, therefore, that an action cannot be maintained for the amount assured on a policy of life insurance forfeited (like those in question) by non-payment of the premium, even though the payment was prevented by the existence of the war.
The question then arises, must the insured lose all the money which has been paid for premiums on their respective policies? If they must, they will sustain an equal injustice to that which the companies would sustain by reviving the policies. At the very first blush it seems manifest that justice requires that they should have some compensation or return for the money already paid, otherwise the companies would be the gainers from their loss; and that from a cause for which neither party is to blame. The case may be illustrated thus. Suppose an inhabitant of Georgia had bargained for a house situated in a northern city, to be paid for by instalments, and no title to be made until all the instalments were paid; with a condition that, on the failure to pay any of the instalments when due, the contract should be at an end and the previous payments forfeited; and suppose that this condition was declared by the parties to be absolute and the time of payment material. Now if some of the instalments were paid before the war, and others accruing during the war were not paid, the contract, as an executory one, was at an end. If the necessities of the vendor obliged him to avail himself of the condition and to re-sell the property to another party, would it be just for him to retain the money he had received ? Perhaps it might be just if the fail
NEW YORK LIFE INs. Co. v. STATHAM.
ure to pay had been voluntary, or could, by possibility, have been avoided. But it was caused by an event beyond the control of either party, - an event which made it unlawful to pay. In such case, whilst it would be unjust, after the war, to enforce the contract as an executory one against the vendor, contrary to his will; it would be equally unjust in him, treating it as ended, to insist upon the forfeiture of the money already paid on it. An equitable right to some compensation or return for previous payments would clearly result from the circumstances of the case. The money paid by the purchaser, subject to the value of any possession which he may have enjoyed, should ex æquo et bono be returned to him. This would clearly be demanded by justice and right.
And so, in the present case, whilst the insurance company has a right to insist on the materiality of time in the condition of payment of premiums, and to hold the contract ended by reason of non-payment, they cannot with any fairness insist upon the condition as it regards the forfeiture of the premiums already paid. That would be clearly unjust and inequitable. The insured has an equitable right to have this amount restored to him, subject to a deduction for the value of the assurance enjoyed by him whilst the policy was in existence. In other words, he is fairly entitled to have the equitable value of his policy.
As before suggested, the annual premiums are not the consideration of assurance for the year in which they are severally paid, for they are equal in amount; whereas, the risk in the early years of life is much less than in the later. It is common knowledge that the annual premiums are in. creased with the age of the person applying for insurance. According to approved tables, a person becoming insured at twenty-five is charged about twenty dollars annual premium on a policy of $1,000; whilst a person at forty-five is charged about thirty-eight dollars. It is evident, therefore, that when the younger person arrives at forty-five his policy has become (by reason of his previous payments) of considerable value. Instead of having to pay, for the balance of his life, thirty-eight dollars per annum, as he would if he took out a new policy on which nothing had been paid, he has only to pay twenty dollars. The difference (eighteen dollars per annum during his life) is called the equitable value of his policy. The present value of the assurance on his life exceeds by this amount what he has yet to pay. Indeed, the company, if well managed, has laid aside and invested a reserve fund equal to this equitable value, to be appropriated to the payment of his policy when it falls due. This reserve fund has grown out of the premiums already paid. It belongs, in one sense, to the insured who has paid them, somewhat as a deposit in a savings bank is said to belong to the person who made the deposit. Indeed, some life insurance companies have a standing regulation by which they agree to pay to any person insured the equitable value of his policy whenever he wishes it. In other words, it is due on demand. But whether thus demandable or not, the policy has a real value corresponding to it, - a value on which the holder often realizes money by borrowing. The careful capitalist does not fail to see that the present value of the amount assured exceeds the present value of the annuity or annual premium yet to be paid by the assured party. The present value of the amount assured is exactly represented by the annuity which would have