Aetna Life Insurance v. Dunken

delivered the opinion of the Court.

This is an action brought by the defendant in error upon a policy of insurance issued by the insurance company on the life of W. J. Dunken. The insurance company is a Connecticut corporation. When it issued the policy it was doing business in Tex,as under the laws of that State, of which Dunken then was a citizen and inhabitant.

The Texas statute provides:

“ Any contract of insurance payable to any citizen or inhabitant of this state by an insurance company or cor

poration doing business within this state shall be held to be a contract made and entered into under and by virtue of the laws of this state relating to insurance, and governed thereby, notwithstanding such policy or contract of insurance may provide that the contract was executed, and the premiums and policy (in case it becomes a demand) should be payable without this state, or at the home office of the company or corporation issuing the same.” Art. 4950, Rev. Civ. Stats., 1911.

The statute further provides that where loss occurs failure to make payment within thirty days after demand shall render the company liable to pay the holder of the policy in addition to the amount of loss twelve per cent, damages on the amount of such loss, together with reasonable attorney fees for the prosecution and collection thereof. Art. 4746.

These provisions, together with others, are declared to be conditions upon which foreign insurance companies shall be permitted to do business within the State and any such corporation engaged in issuing insurance policies within the State is deemed to have assented thereto as a condition precedent to the right to engage in such business. Art. 4972.

The policy in question was issued under the following circumstances: On December 17, 1910, H. B. Alexander, manager for the insurance company in the State of Tennessee, took the application of Dunken, then a resident of Tennessee, for a seven-year term policy. The policy was duly issued in Connecticut and delivered in Tennessee to Dunken. By its terms, at the sole option of the insured, upon any anniversary of its date, without medical reexamination, it was convertible, among other forms of insurance, into a twenty payment life commercial policy, bearing the same date and issued at the same age, on payment of the difference between the premiums already paid and those required under the converted policy. On February

The judgment below is challenged upon these grounds: (1) The policy as shown by the undisputed evidence never became a completed or binding contract; (2) it was a Tennessee or Connecticut contract and, since under the laws of those States no penalty or attorney’s fee was recoverable, the Texas statute as construed and applied, violates the contract impairment clause, the full faith and credit clause, and the several clauses of § 1 of the Fourteenth Amendment of the Federal Constitution; and (3) assuming it to be a Texas contract, plaintiff having demanded and sued for substantially more than she recovered, the suit was rightfully defended and the statute as construed and applied to that situation violates the same provisions of the Federal Constitution.

Defendant in error moves to dismiss the writ of error or affirm the judgment of the state court upon the ground that the asserted federal questions are so lacking in substance as to be frivolous. This motion must be denied. Other matters aside, the contention that the contract is controlled by the law of Tennessee or Connecticut — in which event the Texas statute in respect of penalty and attorney’s fee as construed and applied, is unconstitutional — clearly presents a substantial question under the full faith and credit clause of the Constitution. Royal Arcanum v. Green, 237 U. S. 531 , 540, 541. See also, New York Life Ins. Co. v. Head, 234 U. S. 149 , 159-160. And the cause is properly here on writ of error, under § 237 of the Judicial Code as amended September 6, 1916, c. 448, 39 Stat. 726 . Kansas City So. Ry. Co. v. Road Imp. Dist. No. 6, 256 U. S. 658 .

First. Coming then to the merits, the first contention to be considered presents a pure question of fact, which

We proceed at once to the consideration of the second ground, since if that is well founded it will be unnecessary to consider the first. Whether a subsequent contract made in pursuance of the provisions of an earlier one is to be regarded as separate, detached and independent, or as a continuation and in effect the same, is a matter not always free from difficulty. . The question as applied to substituted policies of insurance has not heretofore arisen in this Court and apparently has seldom arisen in the state courts. In Dannhauser v. Wallenstein, 169 N. Y. 199 , 208, where a ten payment life policy provided that after the payment of two or more equal premiums, notwithstanding default in payment of subsequent premiums, the company would grant a paid-up policy for a proportionate part of the original amount of the policy, it was held that such paid-up policy when issued was not an independent contract. The court said:

“ It was simply a continuation of the original contract under the option which gave the holder thereof the right, after two or more annual premiums had been paid, to cease paying the annual premiums and take a paid-up policy in exchange for the first one. It was a change in the mere form of the contract expressly provided for by its own terms. It is true that the first policy, the original evidence of the contract between the insured and the com

pany, was * surrendered to the company and canceled ’ when the paid-up policy was issued, but this was simply a part of, and in compliance with, the terms of the original contract. The contract was continued as it provided that it might be, in the form of ,a paid-up policy, such as was accepted by the defendant. It was not a modification, but a fulfillment of the original contract.”

The facts were held to justify an opposite conclusion in Gans v. Aetna Life Ins. Co., 214 N. Y. 326 . There the original policy contained a provision to the effect that if the insured should commit suicide within one year from the date thereof the policy should be void. It allowed, among other options, an exchange for another policy bearing the same date upon payment of a sum equal to the difference between the premiums-actually paid and those which would have been earned by the substituted policy. The substituted policy, however, bore the date of its issue and by its terms the suicide provision ran for “ one year from the date hereof.” It was contended that, since the assured might have exercised his option so as to have made the date of the original policy the date of the substituted policy, the option actually exercised should be construed to that effect. But the court replied that, the parties having agreed that the date of the new policy should be that of its issue and so made it, and the premium payable being adapted to the kind of policy selected and to the then insuring age of the assured, it must be held to be an independent contract to be construed without reference to the options not exercised.

Under different circumstances the same question came before the Supreme Court of Tennessee, in Silliman v. International Life Ins. Co., 131 Tenn. 303 . There a five-year term policy provided that the insured might at any premium date exchange it for any form of policy then in use at the premium fixed by his age at the time of the exchange or at the age in the original policy by paying the

While this Court has not passed upon the precise question here presented, it had before it an analogous question in New York Life Ins. Co. v. Dodge, 246 U. S. 357 , and Mutual Life Ins. Co. v. Liebing, 259 U. S. 209 . The Dodge Case dealt with an insurance policy issued in Missouri to a resident and citizen of Missouri by a New York corporation with a Missouri license. The policy provided

“ It should be noted that the clause in the policy providing ' cash loans can be obtained by the insured on the sole security of this policy on demand, etc.,’ certainly imposed no obligation upon the company to make such a loan if the Missouri statute applied and inhibited valid hypothecation of .the reserve as security therefor as defendant in error maintains. She cannot, therefore, claim anything upon the theory that the loan contract actually consummated was one which the company had legally obligated itself to make upon demand.”

The decision proceeds upon the theory that the provision in respect of loans did not constitute an absolute promise to make a loan upon simple demand at all events;

“ The policy now sued upon contained a positive promise to make the loan if asked, whereas in the one last mentioned [the Dodge Case] it might be held that some discretion was reserved to the company.”

In the light of these decisions, then, we inquire whether the second policy issued to Dunken is to be controlled by Tennessee or Texas law. The contract contained in the original policy was a Tennessee contract. The law of Tennessee entered into it and became a part of it. The Texas statute was incapable of being constitutionally applied to it since the effect of such application would be to regulate business outside the State of Texas and control contracts made by citizens of other States in disregard of their laws under which penalties and- attorney’s fees are not recoverable. New York Life Ins. Co. v. Head, 234 U. S. 149 ; Overby v. Gordon, 177 U. S. 214 , 222. The second policy here was issued in pursuance of, and was dependent for its existence and its terms upon, the express provisions of the contract contained in the first one. By those provisions, upon the simple application of the insured, the new policy must issue. Nothing was left to future agreement. The terms of the new policy were fixed when the original policy was made. In effect, it is as though the first policy had provided that upon demand of the insured and payment of the stipulated increase in premiums that policy should, automatically, become a twenty payment life commercial policy. It was issued not as the result of any new negotiation or agreement but

From these premises it necessarily results that the second policy follows the status of the first for which it was exchanged, and is not subject to the Texas statute relating to penalties and attorney’s fees but is controlled by Tennessee law. The judgment below, therefore, in so far as it gives effect to the Texas statute by imposing a penalty of twelve per cent, and allowing attorney’s fees, is erroneous, in that the Texas statute cannot constitutionally be applied to a Tennessee contract.

Third. This conclusion renders it unnecessary to consider the third contention urged as ground for reversal.

The judgment below must be reversed and the cause remanded for further proceedings not inconsistent with this opinion.

Reversed.