Putnam's Handy Law Book for the Layman

Life Insurance. The contract of life insurance is a mutual agreement whereby the insurer agrees on the payment of a fixed sum or premium to pay to a person designated in the policy on the happening of a contingency, usually death, a sum of money. By another form of insurance the insurance may be made payable at a fixed time, or before, should the insured die before that period.

The contract to be valid must be for the benefit of one having an insurable interest, otherwise the contract is a wager, which the law condemns. This is sufficient if the person taking the insurance has such an interest arising from his relation to the insured as creditor and surety, or from the ties of blood or marriage that will justify a reasonable expectation of advantage or benefit from the continuation of his life. It is not needful that this expectation or benefit should possess a pecuniary valuation. The mutual legal rights and liabilities of father and minor child are sufficient to create an insurable interest on the part of each in the life of the other; also the relationship of brother and sister, and that of husband and wife. Likewise a man and a woman who are engaged to be married; and a creditor has an insurable interest in the life of his debtor. And this interest covers not only the amount of the indebtedness, but also future advances, and the cost of taking out and keeping up the insurance. A partner who has advanced the capital of the business has an insurable interest in the life of his partner. More generally any person who invests money relying on the efforts of another to produce a return has an insurable interest in such person's life. A surety therefore has an insurable interest in the life of his principal; an executor in the life of a person who has granted an annuity to the testator; a common carrier even may insure against loss from injuries to passengers. But the relationship between uncle or aunt, nephew and niece and that of cousin is not sufficient to support a policy taken by one in the life of the other.

A policy may be assigned to one who has no insurable interest if made in good faith, and not as a cloak for the procuring of insurance by one having no insurable interest. This rule does not prevail everywhere, but the courts which do not accept this rule usually protect the assignee who has paid the premiums to the amount of his payments, while the estate of the insured takes the balance that may come from the insurer, whenever the assignment of the policy is not invalid. An assignment to one who has an insurable interest as relative, creditor and the like, is always valid.

A general agent, says Justice McClain, "may bind the company by an agreement as to rate of premiums, or other terms of the contract, even as against the express provisions of a policy subsequently issued, there being no negligence on the part of the insured in failing to advise himself as to the terms of the policy; but if the want of authority of the agent to vary the terms of the application is brought home to the applicant, oral communications of the insured to the agent are not to be considered in determining the validity of the insurance. If the agent has exceeded his authority as to the terms of the proposed contract, the company cannot reject that part which the agent [169]was without authority to make and enforce the rest, but must accept or reject in toto."

Until a proposition for insurance has been accepted by the company there is no contract. Delay in accepting an application which is subject to approval does not effect an acceptance. There may be a binding contract of insurance as soon as the company has accepted the application, or on the delivery and acceptance of it by the company's agent, when he has authority to do so. In order to complete the contract before issuing the policy there must be an agreement to this effect, and before the death of the applicant. The receipt by an agent for the first premium, or of a note therefor, subject to the approval of the application by the company, does not effect a contract between insurer and insured.

Some states have enacted statutes prescribing requirements for life insurance policies, or standard forms. Delivery to a third person for the insured may be sufficient. The contract becomes complete when the policy is put in the mail, postage prepaid, for delivery in due course to the insured. Delivery to the insured for examination of course does not effect any engagement on the part of the insurer, nor does a delivery on condition.

It is often stated that the delivery shall not be effectual to create a contract unless the insured is alive and in good health when the policy is delivered and the first premium is paid. Indeed, how could it be valid if the insurer is dead? And if the contract is with a person other than the insured as beneficiary, it would be void on the ground of mistake. Likewise, under such a condition, a policy does not become effective, without a waiver, if the insured is in ill health at the time of its delivery or payment of the premium.

[170]Unless waived by the company, there is usually a stipulation to the effect that the company shall not become bound until the first premium has been actually paid and accepted by the company or its authorized agent. But if the premium is actually paid by the agent of the company for the insured by virtue of an agreement between them, this will bind the company. The payment of the premium by a third person without the knowledge of the insured does not have the same effect.

A general agent has authority to waive the stipulation, that the policy shall not take effect until the first premium is paid, though of course he may be restricted in this regard, but a special agent cannot waive this stipulation; though if he acts otherwise and the company ratifies his act, it is bound. A provision also that a policy shall not be valid unless the premium is paid when the insured is in good health may be waived by an agent who has authority to take applications, collect premiums and deliver policies.

Passing to the nature of the contract, if made in violation of a statute, or if contrary to public policy and this is known by both parties, it is void. Thus a stipulation that a policy shall be payable though the insured may be executed for a crime is contrary to public policy and is therefore void. The same is true of a stipulation insuring against death by suicide while sane. It is against public policy to allow one person to have insurance on the life of another without his knowledge. A policy issued on a person beyond a specified age is prohibited by statute.

What is the effect of fraud in negotiating and issuing policies? If the company or its agent perpetrates a fraud whereby one is induced to take [171]out a policy, he can at his option declare it void, unless so negligent in acting as to work an acquiescence of it. But if acting in a proper way and time he can set up fraud as a defense in an action to get the premium for which the contract has stipulated; or he may sue to have the policy declared void and his premiums returned to him; or he may bring an action against the company or its agent, or both, to recover the damages he may have sustained by the fraud that has been practiced on him.

On the other hand, if the insured has been wronged, the courts furnish relief, and perhaps may set the policy aside. Mistake is a common ground of relief; it must in all cases be clearly proved. And if a policy is susceptible of two constructions, the ambiguity is to be resolved in favor of the insured. As the company framed the policy all of its provisions in its favor are strictly construed. It may be added that the construction which the parties themselves have put upon a contract of life insurance will be generally followed in determining their intention. Again, the entire contract is to be construed together for the purpose of giving effect to each clause and as between general and specific provisions relating to the same matter the specific provisions control.

In determining who is the beneficiary under the terms of a policy of life insurance the courts are governed by the intentions of the parties. They need not be named if they can be otherwise identified, and may be designated in a separate paper prepared for that purpose. The amount named in the policy generally fixes the liability of the company. To obviate the wager feature, the amount of insurance effected for a creditor on the life of his debtor ought to be limited to the amount of the debt with [172]interest and premiums during the expectancy of the life insured.

The risk is presumed to begin from the date of the policy and to continue until the happening of the contingency or time when payment is to be made by the insured. It may be added that words or figures written or printed on the margin of a policy of life insurance, on its back, or on a slip, with reference to the terms and conditions of the contract, constitute a part of it and must be considered in deciding its meaning. But representations made in a prospectus or circular issued by a life insurance company are no part of a contract.

The payment of premiums to a general agent without notice of any limitation of his authority to receive payments will bind the company, but a different rule applies to a special agent. The premiums may be paid by the insured, or the beneficiary, or by the agent of the company whenever he has agreed to pay them for the insuring party. A discount allowed by the company for the punctual payment of premiums belongs not to the agent, but to the insured. Cash is usually paid, though other arrangements also exist for taking notes, that are ultimately paid in cash or from the earnings of the company, and belong to the insured and would be paid to him. In mutual life insurance companies a portion of the premium is often paid in this manner.

A policy of life insurance payable to the insured, or in the event of his death to his personal representatives, may be assigned unless forbidden by statute, therefore a policy payable to the wife of the insured, or another may be assigned by the united act of the insured and the beneficiary. Thus a policy taken out for a wife's benefit is often assigned [173]by her and her husband to his creditors to secure their debts. In some states statutes forbid the assignment of such policies for the benefit of creditors. The written assignment must be delivered to the assignee to be effective. On some occasions assignments have been declared valid where the intention was clearly proved though both the written assignment and the policy remained in the possession of the assignor. An assignee who holds a policy as security is entitled on its payment only to the amount of his claim and advances with interest, including premiums paid to keep the policy alive and thus preserve his security. More generally premiums paid for this purpose are chargeable on the proceeds of the insurance, but a mere volunteer who pays the premiums acquires no lien on the proceeds of the policy when it is paid. Nor can one who ought to pay the premiums give a lien on the policy to another for money advanced by him to pay them; and an assignee who has promised to pay the premiums may be liable should he fail to keep the policy alive.

Contracts of reinsurance are often made by all insurance companies. In some states the reinsuring company becomes liable to an action by the beneficiary named in the original policy. Where the reinsuring company, by agreement, undertakes to reinsure the members of the other company should they execute applications for that purpose, any member who does this is not required to be reexamined or comply with other conditions respecting his age or health.

A policy may be canceled or surrendered by mutual agreement. After the death of the insured the rights of the parties become fixed, and there can be no cancellation. During his lifetime the [174]insured may abandon his contract by refusing to pay the premiums, but an intention to abandon will not be presumed, nor will the taking out of a second policy before his failure to pay the premiums on the other establish an abandonment. If both parties treat the contract as void, neither can revive it without the consent of the other. As the beneficiary has a vested or definite interest in the contract, the insured cannot, by surrendering the policy, cut off the rights of the beneficiary without his or her consent unless permitted to do so by the contract itself.

A surrender or cancellation of a policy may be avoided on the ground of mutual mistake. But the insured cannot seek cancellation on the ground that he thought it was something else when his mistake was simply his own in not reading the release.

A policy may be rescinded whenever fraud has been practiced by either party. Thus, should a greater premium be demanded than that stated in the contract this would be a good reason for rescinding on the part of the part of the insured. Likewise, if he was induced to take out the insurance by the fraud of the company or its agent, unless he has lost his right to rescind through inaction or negligence. Likewise, the company may rescind for fraud practiced by the insured by misrepresentation or other fraudulent acts concerning his age, health, etc. Concealment of facts may and often does operate as a fraud on the company. Says Justice McClain: "If the applicant has answered the questions asked in the application he is justified in assuming that no other information is desired. On the other hand if he wholly fails to answer questions the company waives information as to matters thus asked for by accepting the application [175]without objection. If, however, the applicant purports to answer a question by giving only an incomplete answer, concealing facts which should properly be stated in response to the question, and these concealed facts are material, the policy is voidable." If a material change for the worse in the health of the applicant takes place after the application and medical examination, it is the duty of the applicant to disclose it. The failure to disclose facts of which the applicant is ignorant, or which are immaterial to the risk, is not ground for avoiding the policy.

When a policy is surrendered or canceled by the contract or by statute, the insured may be entitled to the surrender value of his policy. The amount is to be determined by the period for which the policy has to run, the amount of the annual premium, the age of the insured, and the probability of the continuance of his life stated in the usual life tables. The value of an immatured paid-up policy is the unearned premium called the reserve and is to be computed in the same manner as that of a policy on which annual premiums are paid. The beneficiary is entitled to the surrender value as against the insured, as well as the creditors, unless the beneficiary has consented to giving them the preference.

By a clause in the contract of insurance or by statute, the insured can convert his policy into a paid-up policy for such an amount as the premiums would have secured. These conversions often happen where the insured is unable or unwilling to continue to pay the premiums required to maintain the policy. Formerly on the failure of the insured to pay, policies lapsed or were forfeited, and the insurance companies gained large sums from this [176]source. This led to legislation and to the creation of paid-up policies. These are issued on somewhat different terms, but the principle in all of them is the same.

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