This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
If the insurer is domiciled in the territory of one of the belligerents and the insured is domiciled in the territory of the other belligerent power, the outbreak of war is said not to operate as a dissolution of the contract of insurance of itself, and if the premiums are paid, the contract of life insurance remains in force in spite of the fact that the insured has become an alien enemy,1 although it has been said that this rule applies only if the insured is a non-combatant.2 While was entitled to recover from the insurer the so-called equitable value of his policy, by which the supreme court apparently meant the difference between the amount of premiums which the insured would have to pay over his original policy, and the amount which he would have to pay if he had taken out a new policy for the first time when the original policy lapsed.6
2 Grinnan v. Edwards, 21 W. Va. 347.
3 Grinnan v. Edwards, 21 W. Va. 347.
4 Bicher v. Rio Tinto Co. , A. C. 260; Zinc Corporation v. Hirsch , 1 K. B. 541, L. R. A. 1917C, 650; Naylor v. Krainische Industrie Gesellechaft , 2 K. B 486 [affirming (1918), 1 K. B. 331; and citing, Bieber v. Rio Tinto Co. (1018), A. C. 260].
5 Bieber v. Rio Tinto Co. , A. C. 260; Zinc Corporation v. Hirsch
, 1 K. B. 541, L. R. A. 1917C, 650; Naylor v. Krainische Industrie Gesellschaft , 2 K. B. 486 [affirming (1018), 1 K. B. 331; and citing, Bieber v. Rio Tinto Co. (1918), A. C. 2601.
6 Lindenberger Cold Storage & Canning Co. v. Lindenberger, 235 Fed. 542.
1 Sands v. New York Life Ins. Co., 50 N Y. 626, 10 Am. Rep. 535.
2 New York Life Ins. Co. v. Clopton, 70 Ky. (7 Bush.) 170, 3 Am. Rep. 290.
6 New York Life Insurance Co. v. Statham, 03 U. S. 24, 23 L. ed. 789.
"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 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 resell 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 failure 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 aequo 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 nonpayment, they can not 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 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 to be paid on a new policy - or, thirty-eight dollars per annum in the case supposed, where the party is forty-five years old; whilst the present value of the premiums yet to be paid on a policy taken by the same person at twenty-five is but little more than half that amount. To forfeit this excess, which fairly belongs to the assured, and is fairly due from the company, and which the latter actually has in its coffers, and to do this for a cause beyond individual control, would be rank injustice. It would be taking away from the assured that which had already become substantially his property. It would be contrary to the maxim, that no one should be made rich by making another poor.
The fourth theory resembles the third in that it regards the war as operating as a discharge of the contract for the purpose of preventing an absolute forfeiture; but it differs from the third theory with reference to the amount which is due under such policy on that the annual premiums are increased 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 one thousand dollars, 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 a value on which the holder often realizes money by borrowing. The the theory of quasi-contract. Under the fourth theory, the insurer has the option between reinstating the policy upon payment of the premiums which are in arrears with interest thereon, or paying the equitable value of the policy,7 and the amount of such equitable value is said to be the amount of the premiums actually paid in by the insured, less the actual value of such insurance for each year.8 The criticism of the third theory advanced where the fourth theory is adopted, is that the amount of recovery under the third theory is too favorable to the insurance company, since it gives to them the profit for the time during which the policy was in force, which profit it ought not to retain if it elects to treat the policy as terminated.9
"We are of opinion, therefore, first, that as the companies elected to insist upon the condition in these cases, the policies in question must be regarded as extinguished by the nonpayment of the premiums, though caused by the existence of the war, and that an action will not lie for the amount insured thereon.
"Secondly, that such failure being caused by a public war, without the fault of the assured, they are entitled ex aequo et bono to recover the equitable value of the policies with interest from the close of the war." New York Life Insurance Co. v. Statham, 93 U. S. 24, 23 L. ed. 789.
7 Abell v. Penn Mutual Life Ins. Co., 18 W. Va. 400.
8 Abell v. Penn Mutual Life Ins. Co., 18 W. Va. 400.
9 In speaking of the opinion in the case of New York Life Insurance Co. v. Statham, 93 U. S. 24, 23 L. ed. 780, the court said: "The views of Justice Bradley are in the main in my judgment sound, but are too favorable to the insurance company. Thus when he lays down, that the fundamental basis of life insurance 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 or dying would apply), and therefore it would be unjust to compel a revival against the company, he reaches a correct conclusion, but his reasoning is not altogether sound; for it is not true that none but the sick or dying would apply. On the contrary, it would generally be to the interest of the assured to apply after the war, though he were then in good health, because if the policy was permitted to remain forfeited, he would forfeit all that he had paid prior to the war, and if he had paid his premiums for a considerable length of time the company would be profit-ted, not injured, by his not applying. It is true that if he had paid his premiums for a short time oaly, the company might be injured by his not applying, as the forfeiture of all the premiums he had paid might not com-pensate the company for the loss of the profits which would accrue to it from a continuance of the policy. In one important respect I think the views of the supreme court are untenable. When carefully analyzed, and especially when the mode of ascertaining what ex aequo et bono ought to be repaid by the company to the insured is considered, it will appear that when the company efects to annul the contract. the parties are not, as in my judgment they should be. placed in exactly the position in which they were before the policy was taken out, excepting only that as the assured had been insured for a number of years the company should be allowed to retain of the money paid to it by assured a sum just sufficient to compensate it for the actual risk it had run; but by this opinion of the supreme court the company after being fully compensated for the risk it had run is on such annulling of the policy in a decidedly better position than it would have been in had it never issued the policy. It is permitted to retain in effect more than a sum sufficient to compensate it for the risk it had run. It is really permitted to retain not only this, but a large additional sum for profits, which it appears the court thought it was entitled to for carrying the risk prior to the war. This is the necessary result which follows from the court holding that the assured is entitled, when the contract is annulled, to be paid only the then market value of the policy.