CHAPTER XXVIII

LEGAL INTERPRETATION OF THE POLICY AND

APPLICATION

General Rules Underlying Court Decisions Affecting Life Insurance.- Policy forms are necessarily general in character, and are drawn to meet a general situation and not with reference to particular cases. Yet, it is apparent that innumerable instances arise which require a special interpretation of the general terms of the contract in order to realize the essential purpose of the contract, viz, to protect against loss. There is scarcely a provision in the policy to-day which has not been the subject of interpretation by the courts, and there are few provisions concerning which, chiefly because of ambiguity in the wording, varying circumstances surrounding the loss, or statutory requirements, there are not conflicting opinions. Frequently also the interests of the insured seem at variance with the interests of the insurer, with the result that the attitude of state legislatures has often been one of hostility. Under these conditions, it is to be expected. that disputes will frequently occur as to the interpretation which shall be given to the general provisions of the policy when unexpected circumstances surround the particular loss. But however great the conflict of authority has become, there are certain legal principles which underlie the interpretation of the application as well as policy provisions, and which are kept in mind by the courts as guiding principles in their efforts to interpret the contract. Briefly summarized, the important principles to which reference is had are the following:

1. Unlike fire-insurance contracts, life-insurance policies, although the indemnification of the value of the human life in case of premature death should be their essential object,

cannot be regarded by the courts as purely contracts of indemnity. Instead, these contracts are held to be "contracts to pay a certain sum in the event of death." This general ruling has an important bearing upon the subject of insurable interest in life insurance, and will be referred to further in the chapter on "Insurable Interest." The chief difficulty that the courts have encountered in disposing of this legal phase of the subject seems to have presented itself in those cases where creditors (or persons similarly situated) take out policies on the lives of their debtors with a view to securing the indebtedness. In such instances some leading authorities hold that life-insurance contracts are for indemnity only.

2. Whenever the wording of any provision in the contract permits of more than one construction the courts will give the benefit of the doubt to the insured on the ground that the insured is obliged to take the form of policy offered by the companies and which was framed by them in their own interest. Forfeitures are not favored by the courts, and conflicting provisions or ambiguous language will, therefore, be so construed as to give effect to the contract. As the United States Supreme Court has ruled: "Where a policy of insurance is so framed as to leave room for two constructions, the words used should be interpreted most strongly against the insurer. This exception rests upon the ground that the companies, attorneys, officers, or agents prepared the policy and it is their language that must be interpreted."

Admitting that this is a reasonable rule where the company is free to frame the policy, the question arises as to whether this same ruling should be applied where the policy form, or portions thereof, are prescribed and made compulsory by law." Judging from the case of Matthews v. American Central Insurance Company (154 N. Y. 449), which decided the question

1 Liverpool Insurance Company v. Kearney, 180 U. S. 132.

2 At a recent date New York and Ohio had statutes providing for standard clauses in life-insurance policies, while a number of other states have statutes providing for standard policies which "may be issued and delivered."

favorably to the insured as regards the New York Standard Fire Policy, it would seem probable that a similar construction might be extended to standard life-insurance policies.3

3. Since policy forms are necessarily general in character and cannot meet all particular contingencies, although this is not so generally true in life insurance as in fire and other forms of property insurance, it follows that special or written agreements must often be indorsed on the contract with a view to modifying the original terms of the policy form. Where this is done, it is a universally recognized principle that whenever there is a difference in meaning between any indorsement and the policy form itself, the superimposed parts of the contract, whether written, stamped, or printed, control the regular provisions of the policy. This principle is based on the theory that indorsements on the policy must be considered as later in date than the policy itself, thus representing the latest agreement between the parties. If ambiguity exists in the wording of any such indorsements, the insured must again be given the benefit of the doubt. Similarly, if the written portion of the regular policy is inconsistent with the printed portion, the former will be upheld since it refers to this particular contract as distinguished from the general form which the parties frequently do not bother to revise in conformity with the written portion.

4. In the absence of conflicting provisions or ambiguity in

3 The court in this case decided that: "The policy, although of the standard form, was prepared by the insurers, who are presumed to have had their own interests primarily in view, and hence, when the meaning is doubtful, it should be construed most favorably to the insured, who had nothing to do with the preparation thereof. Moreover, when a literal construction would lead to manifest injustice to the insured and a liberal but still reasonable construction would prevent injustice by not requiring an impossibility, the latter should be adopted because the parties are presumed, when the language used by them permits, to have intended a reasonable and not an unreasonable result."

language, however, no discretion can be exercised by the court to modify the contract in such a way as to bring about an adjustment which it may regard as more just than the strict enforcement of the contract as it stands.

5. Generally speaking, the construction of the contract will be according to the laws and usages of the place where the contract is made.1

The Application and Its Interpretation. An application for life insurance may be defined as the insured's proposal to the insurer for protection, and may be considered as the beginning of the policy contract. In this document the applicant is required to give true answers to a large number of questions, relating principally to his personal and family history, habits, age, total insurance already taken out, and other applications for insurance which are either pending or have been postponed or refused. The policy usually stipulates that insurance is granted in consideration of the application

4 In discussing this rule and exceptions thereto, Richards makes the following comments:

"This rule is peculiarly appropriate to this branch of the law because in insurance there may be several places where the contract is operative- one place for the payment of premiums, another for the payment of loss, and a third for the location of the subject of insurance. But if the policy provides that the premiums and loss are to be payable at the home office, the latter place would seem to be the place of performance, and there would in that case be cogent reason for holding, in analogy to the general rule, that its law is to prevail in the construction of the policy. It is often important to determine by what law the validity and effect of the policy are to be governed, because the statutory provisions, as well as usages and decisions, relating to the insurance contract vary greatly in different states, and such statutes generally have no extraterritorial effect.

"If the policy provides that it will not be binding until countersigned at a certain agency, the agency is ordinarily the place, of contract; so if the policy is sent to the agent for delivery on receipt of the premium; but if the application is accepted at the home office, and the policy mailed from there to the applicant in another state, the home office will be the place of contract. As a general thing the contract is considered made where the last act necessary to complete it is done." RICHARDS, George, Treatise on the Law of Insurance, 113-114.

for the policy, which is declared to be a part thereof, and most generally contains an additional clause to the effect that the policy and the application therefor (a copy of which is attached to the policy when issued) "constitute the entire contract between the parties." At a recent date thirteen states had also adopted laws requiring the annexation of applications to policies, on penalty of the company being estopped from denying the correctness or truth of such application; while eleven states have adopted statutes requiring every policy to contain the entire contract between the parties and forbidding the incorporation therein by reference, of any rules, application or other writings unless the same are indorsed upon or attached to the policy when issued. Since the application is the basis of the policy contract, and especially in view of the fact that the answers to the questions contained therein are frequently warranted by the applicant to be true, it is important to note the attitude of the courts in construing disputes that grow out of misstatements made by the applicant. The facts in this respect may be conveniently summarized under the following:

1. Statements as to health, freedom from disease, habits, and medical attendance.- An unusually large number of decisions have been rendered in connection with such statements, owing principally to the varying phraseology used by the companies in formulating the questions. While much depends upon the exact phraseology used in determining whether or not the contract has been violated, the courts have generally taken the view that the expression "good health," or words to that effect, does not preclude indispositions but means freedom from such diseases or ailments as tend to undermine the general healthfulness of the system. If such words as "to the best of my knowledge or belief" are used to qualify the applicant's answers, the insurer, in order to avoid the policy, must show that the insured acted in bad faith and had actual knowledge of the facts. But as Richards points

5

5 Plumb v. Pennsylvania, etc., Insurance Company, 108 Mich. 94, 65 N. W. 611.