CASES

IN THE

SUPREME COURT

OF

TENNESSEE.

CONTINENTAL FIRE INSURANCE CO. v. WHITAKER. [112 Tenn. 151, 79 S. W. 119.]

CONSTITUTIONAL LAW-Insurance. - A statute provid. ing that no misrepresentation or warranty, unless made with actual intent to deceive, or unless the risk or loss is thereby increased, shall defeat or avoid an insurance policy, is not unconstitutional as class legislation, and is a valid exercise of the police power, although it applies only to nonassessment insurance companies. (p. 921.)

INSURANCE - Fire-proof Safe Clause-Failure to Observe Warranty.-A warranty in a fire insurance policy that the insured will keep his books of accounts and inventories securely locked in a fire-proof safe at night, and when the building is not actually open for business, or in some place not exposed to fire which would destroy the building insured, is directly within the terms of a statute providing that no misrepresentation or warranty, unless made with actual intent to deceive, or, unless the risk or loss is thereby increased, shall defeat or avoid an insurance policy. Hence, failure to observe the warranty contained in the fire-proof safe clause does not necessarily avoid the policy.

(p. 922.)

INSURANCE—Misrepresentations—Evidence.-If the appli cant for insurance makes correct statements to the insurance agent, who puts them down incorrectly, and the application is signed by the insured without reading it, he may prove such facts, and is then exonerated from the charge of misrepresentation. (p. 923.)

INSURANCE-Encumbrances-Misrepresentations.-If the insured makes no statements as to encumbrances, and signs the application for insurance without reading it when such application is written by the insurance agent, the insured is not guilty of misrepresentation, although the application falsely states that there is no encumbrance upon the insured property. (p. 923.)

INSURANCE.—Misrepresentation as to Encumbrances will not, under the statute of Tennessee, avoid an insurance policy, since an encumbrance does not increase the risk. (p. 923.)

INSURANCE—Delay in Making Proof of Loss.—If a policy of insurance provides that notice and proof of loss must be furnished

within a certain time after loss has occurred, but does not impose a forfeiture for failure to furnish them within the time prescribed, nor impose a forfeiture for a failure to comply with other provisions of the contract, the insured may maintain an action, though he does not furnish notice and proof of loss within the prescribed time, provided he does furnish them at some time prior to commencing his action, although the policy provides that no action can be maintained until after full compliance with all of its requirements. (p. 924.)

CONSTITUTIONAL LAW-Insurance-Penalties.-A statute imposing a penalty upon insurance companies refusing in bad faith to pay policies, and on the insured for bringing suit in bad faith on policies, is valid and not unconstitutional as class legislation. (p. 929.)

T. R. Myers, for the appellant.

W. B. Bates and B. D. Kingree, for the appellees.

155 NEIL, J. This suit was brought by Whitaker & Dillard, the defendants in error, in the circuit court of Bedford county, against the Continental Fire Insurance Company, seeking to recover on a policy issued by that company to them on May 21, 1901, insuring a storehouse at the sum of one hundred dol-lars with fixtures therein at one hundred dollars, and a stock of merchandise therein at fifteen hundred dollars; in all sev enteen hundred dollars. The property was destroyed by fire on September 9, 1903. The case was tried at the August term, 1903, of Bedford circuit court, when the jury rendered a verdict of seventeen hundred dollars, the full amount of the policy, and for the additional sum of two hundred and fifty dollars attorneys' fees, under acts of 1901, page 248, chapter 141. The insurance company has appealed and assigned errors.

The first error assigned is that there is no evidence to sustain the verdict. Under this are comprehended the following points, viz. That the defendants in error warranted that they owned the legal title to the property, whereas the testimony shows that they did not; that they warranted that the storehouse was unencumbered, 156 when in fact it was heavily encumbered; that the policy contained what is known as the "iron-safe clause," and the testimony shows that this was not complied. with; that the policy provided that the proofs of loss should be furnished within sixty days from the date of the fire, and that this provision was not complied with. It is insisted that all of these were warranties by the terms of the policy, and a failure to comply with either of them avoided the policy.

Another assignment raises the question of the constitutionality of section 22 of the Tennessee insurance act of 1895 (chap.

ter 160, page 332, of the acts of that year). This section is reproduced as section 3306 of Shannon's Code of Tennessee. Other assignments raise the question of the constitutionality of chapter 141, page 248, acts of 1901.

We shall consider these objections in the following order: 1. As to the constitutionality of section 22, chapter 160, page 332, acts of 1895 (Shannon's Code, section 3306).

This section reads as follows: "No written or oral misrep resentation or warranty therein made in the negotiation of a contract or policy of insurance, or in the application therefor by the assured, or in his behalf, shall be deemed material or defeat or void the policy or prevent its attaching, unless such misrepresentation is made with actual intent to deceive, or unless the matter represented increase the risk of loss."

157 This section has been twice approved and applied in reported cases: Light v. Insurance Co., 105 Tenn. 480, 58 S. W. 851; Hartford Life Ins. Co. v. Stallings, 110 Tenn., 72 S. W. 960. In both of these cases the validity of the legislation was tacitly assumed, but in neither of them was the question of constitutionality directly raised. Some presumption of constitutionality, of course, arises from the above-mentioned decisions applying the law as a valid one; but this does not relieve us of the duty of considering and determining the question when directly made.

The section quoted is assailed on the ground that it is vicious class legislation. It is said that the classification is improper, in the first place, because the rule laid down limiting the power to make binding warranties capable of forfeiting the contract is confined to insurance companies alone; and, in the second place, that it does not apply to all kinds of insurance companies operating upon the assessment plan.

The title of the act of which section 22 is a part (chapter 160, page 332, acts of 1895) indicates that it was passed for the purpose of laying down rules "to govern and regulate the business of insurance. . . . other than life and casualty insurance upon the assessment plan." The act applies to both foreign and domestic companies. The generality of the title, nothing else appearing, would justify the conclusion that it was intended to embrace all kinds of insurance except life insurance upon the assessment plan and casualty insurance upon 158 that plan; thus apparently including within its scope fire insurance companies upon the assessment plan. An attentive examination, however, of the body of the act discloses the fact

that its scope is not so broad. This clearly appears from the provisions of sections 9 and 10, fixing the terms on which foreign fire companies may do business, from which it appears that the act had in contemplation only companies possessing a capital stock. The same appears, in respect of domestic fire insurance companies, from section 13. Moreover, as to the latter the same result is reached by a comparison of the act with chapter 220, page 443, acts of 1895, which makes provision for the business of mutual or assessment fire insurance companies organized or incorporated under the laws of this state. It does not appear that any provision is made in either of the acts for the business of foreign fire companies of this character; that is, those operating on the mutual or assessment plan. The business of life and casualty companies operating upon this plan is provided for by acts of 1887, page 303, chapter 178, and acts of 1893, chapter 6.

It seems, therefore, that the classification made by chapter 160, page 332, acts of 1895, is of all insurance companies other than those operating on the mutual or assessment plan. We have, then, on the one hand, nonassessment companies; on the other, assessment companies. To the first class the provisions of section 22, above copied, apply; to the second class they do not apply. Is there a good reason underlying the classification? 159 We think there is. It is obvious, without going into the particulars of the matter, that the two classes of companies operate on principles so radically different that different and distinct regulations are required for their management. Is there a good reason why the provisions of section 22 should be made to apply to the one class, and not to the other? A sufficient reason seems to be found in the diverse relations which the policy-holders of the different classes bear to their respective companies. In the assessment companies each policy-holder is an integral part of the whole. The members mutually insure each other. In them is vested the control and regulation of the affairs of the company. There is, therefore, in those companies not so great a tendency to oppression, and to the abuse of power, as in stock companies organized for the profit of its stockholders, who need not be policy-holders. It may be well supposed that temptations to the abuse of power, so likely to arise in companies of the latter class, either would not arise at all in those of the former, or, if arising, would be corrected by the organization itself, the interest of each being, in a sense, that of all.

But, aside from this, if, upon the second division of the subject, it be found that section 22 is justified under the police power of the state, it would be immaterial that the legislature had determined to impose it upon policies issued by nonassessment companies, and had not chosen to do the same thing in respect of policies issued by assessment companies. If an act falls under the 160 police power, the legislature must judge of the objects upon which the statute shall operate. The court cannot declare it void on the ground that there are, in its opinion, other objects equally deserving of the attention of the legislature which it has omitted to notice.

That legislation of this character is justifiable under the police power, there can now no longer be any doubt.

There was a similar statute passed in Pennsylvania on June 23, 1885 (Pub. Laws, 134), reading as follows: "Whenever the application for a policy of life insurance contains a warranty of the truth of the answers therein contained, no misrepresentation or untrue statement in such application, made in good faith by the applicant shall effect a forfeiture or be a ground of defense in any suit brought upon any policy of insurance issued upon the face of such application, unless such misrepresentation or untrue statement relate to some matter material to the risk." Speaking of this statute, in Pennsylvania Mut. Life Ins. Co. v. Mechanics' Savings Bank etc. Co., 72 Fed. 413, 19 C. C. A. 286, 38 L. R. A. 33, pending in the circuit court of appeals for the sixth circuit, Taft, J., said: "That such statutes are remedial in their nature, and are quite within the police power of the legislature, is no longer a debatable question"; citing White v. Connecticut Mut. L. Ins. Co., 4 Dill. 177, Fed. Cas. No. 17,545; Society v. Clements, 140 U. S. 226, 11 Sup. Ct. Rep. 822, 35 L. ed. 497; Wall v. Assurance Soc. (C. C.), 32 Fed. 273; Eagle Ins. Co. of Cincinnati v. State, 153 U. S. 446, 14 Sup. Ct. Rep. 868, 38 L. ed. 161 778; Reilly v. Franklin Ins. Co., 43 Wis. 449, 28 Am. Rep. 552; Insurance Co. v. Leslie, 47 Ohio St. 409, 24 N. E. 1072; 4 Thompson on Corporations, secs. 5491, 5524. In commenting upon a similar statute in Missouri, Dillon, J., said: "The legislature of Missouri conceived, and, we think, wisely, that the promises held forth to the assured in the policies in general use were but too often a delusion and a snare, and, as the courts were powerless to correct the evil, it ought to be corrected by statute": White v. Connecticut Mut. Life Ins. Co., 4 Dill. 177, Fed. Cas. No. 17,545.