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These conditions have been conformed to. Industrial policies are outstanding by the millions which have been everywhere held to do just what is stated above.
The great Kentucky jurist who wrote the opinion above quoted died 18 years ago. His words words of wisdom, words of sound common sense, words of mercy and humanity-live after him. They are permanently inscribed on the records of the greatest court in the world.
The Congress of the United States is not asked to legalize any fraud. It is not asked to depart for one moment from the path of strict justice to the insurance companies. If a man wilfully deceives them as to a material matter, he deserves no sympathy, and his dependents must suffer for his misdeeds. But if an honest laborer, meaning to do the right thing, conscious of the uncertainties of life, takes out one of these policies; if he answers the questions truthfully to the best of his ability; if he tenders himself for such examination and investigation as the company elects to make; if week after week, month after month, year after year, he pays his pennies for what he believes to be insurance, and then dies, believing he had done the right thing by his family and the insurance company-if all these things have been done, surely Congress will not permit his widow and orphans to go penniless in the hour of need, or compel them to appeal to the generosity of a distant corporation organized primarily for profit. Submitted by
PERCY E. BUDLONG,
1308 Gallatin St., NW., Washington, D. C.
MEMORANDUM RE PROPOSED SUBSTITUTE FOR SENATE BILL 1903
(Brief from Metropolitan Life Insurance Co.)
This bill would compel radical changes in the practice of industrial life insurance, the effect of which would be (1) to facilitate uninsurable risks and dishonest claims; (2) to defeat the purpose of the insurance.
UNDERWRITING AND ADMINISTRATION OF INDUSTRIAL INSURANCE
Life insurance is a system or device for equalizing the risk of death among sound lives. Individuals of impaired health are ineligible. Industrial policies are issued upon the basis of information concerning health and previous medical history furnished by the insured, which is set forth in an application made by him. Only in cases of the older ages and larger amounts is there any medical examination. This application is not attached to the policy, as in the case of ordinary policies. Instead, certain warranties or conditions as to sound health and freedom from medical treatment and from specified classes of disease are inserted in the policy, breach of which avoids the contract. The applications, not being attached to, and therefore not incorporated into the contract, are not ordinarily admissible in evidence to establish defenses based upon misstatements therein in suits for the enforcement of claims under industrial policies. The rule against varying a written instrument by extrinsic evidence, prohibitive statutes (sec. 657, District Code 1901), and policy provisions required by the laws of most of the States, separately or collectively exclude the application as evidence in such cases.
The narrower range and scope of these warranties and conditions, and the absence of personal odium incident to deliberate misrepresentations contained in the application, undoubtedly make breach of such warranties or conditions a defense less effective before a jury than the flagrant dishonesty and fraud which could otherwise be shown. It is therefore self-evident that the only reason for the companies' reliance solely upon warranties or conditions is the cost and physical difficulties attendant upon attaching applications to industrial policies.
On the score of expense, it is estimated that it would cost 10 cents per copy to make and attach to each industrial policy a photostatic copy of the application therefor. Upon the basis of the number of policies issued in the District of Columbia in 1929, the annual cost would be approximately $3,000.
For comparison with such cost, there are given below the statistics of the Metropolitan's industrial claims in the District of Columbia for the last four
In these four years the number of industrial claims allowed and paid in full was 11,748; while the number disputed for all causes was 10; and the cost of attaching applications to policies would have been three times the cost of all contested claims. This ratio of compromised or disallowed claims to cost of attaching applications to policies prevails consistently throughout the company's entire business. It may well be assumed that the State legislatures would follow the lead of Congress in imposing this requirement. This attachment of copies of the application to an annual issue of 5,000,000 policies, at 10 cents per copy, would cost $500,000-a sum which not only greatly exceeds the total of all industrial claims compromised or disallowed in any of the last four years, but also a considerable sum, even to a great life-insurance company. In short, the requirement would cost several times the amount of all contested claims, without benefiting a single deserving claimant.
A further real, though less weighty, objection to the requirement lies in the fact that the application could not be effectively attached to the industrial policy without making it a clumsy document. This is especially so when the industrial policy form comprehends either a small folio or a single sheet as is usually the case. It seems unjustifiable, in absence of necessity, to mutilate and encumber for all time a document of such permanent character as a policy of life insurance for the temporary purpose of attaching to it an application the maximum duration of whose effectiveness as part of the contract is the two years during which the policy is by its terms contestable. That attachment of the application to the industrial policy is not necessary has, we think, already been shown.
The foregoing explanation is made because it is one of the purposes of this bill to induce industrial companies to substitute for this plan the use of applications which shall be attached to the policy and form a part thereof. Sections 2 to 8, inclusive, apply exclusively to policies on this latter plan. Although these provisions seem to us to be subject to insuperable objections, for the practical reason of our not being affected by them, we shall confine our criticisms and objections to subsequent sections of the bill which directly affect our business.
COMMENT ON SECTIONS BY NUMBER
9c. Sound health condition made ineffective by requirement of proof that (1) applicant or insured "knew insured's health to be seriously impaired, or diseased"; (2) such impaired health or disease caused or substantially contributed to loss.
(1) An applicant for insurance frequently has not been informed and may not know that his health is seriously impaired or that he has the particular disease with which he is afflicted. For professional and other reasons a physician often withholds from his patient the true nature or seriousness of the ailment treated.
Such facts are none the less pertinent to the insured and material to the risk because of this circumstance. It is an injustice to the insurer, and, in the case of mutual companies, an injustice to other insurable policyholders. to compel them to carry the burden of impaired or uninsurable lives without premiums commensurate to the risk.
(2) The limitation on defense of impaired health or disease unless it caused or substantially contributed to the loss is unscientific and unfair, because the
regular premium does not cover the impaired risk, and the policy would not have been written if the true facts had been disclosed. The policyholder. in such case, is not entitled to insurance. Whether the policy were obtained by active fraud, by failing to volunteer information, or innocently, is almost a matter of indifference. Honest policyholders in sound health from whose premiums, in the main, the losses on impaired lives are paid, suffer equally thereby. While a distinction may well be made and commonly is made be tween honest and dishonest claims, the innocent uninsurable risk can not readily be placed in a position of having rights as matter of law without conferring the same right upon dishonest insurants. The distinction seems too delicate and difficult to be drawn by statute. Certainly, this provision does not succeed in doing so. Technical defenses are frequently the only prac ticable defense to fraudulent claims. We believe that it should be left to the policyholders of the companies, as represented by their officers, to establish and carry out the proper policy with respect to the waiver of technical defenses in cases of honest claims.
11. Assignments.-(a) By insured. Assignments are forbidden by the policy because they are usually undesirable from the point of view of both insured and company. Exceptions are, however, made in meritorious cases. The purpose of the provision is to protect the policyholder and the insurance from any improvident disposition of the policy.
(b) By claimant under facility of payment clause. This would, in effect, enable one of several claimants to convert himself or his assignee into a position of absolute right, without regard to the equities of others, seemingly even of beneficiaries. The Metropolitan is constantly assailed with demands by undertakers, in the main, for remission of the rule against the recognition of attempted assignments of policy proceeds. It is needless to detail the objections to them, further than to say that they are wholly in the interest of the insured and with a view to protecting the insurance moneys from improvident expenditure or dissipation.
12. Estopple by medical examination.-The most rigorous medical examination is often insufficient to detect facts of which the insured is well aware. It is common knowledge that the applicant for insurance knows his own state of health better than the doctor. For financial and practical reasons, the medical examination of an industrial applicant is little more than an inspection of the risk. It is, therefore, much less likely than ordinary examination to bring to light latent or concealed impairments. Company rules call for such examinations only in cases of the older adult ages and larger amounts of insurance. The reason for this is obvious. The minimum fee for a medical examination of the character deemed requisite in the case of ordinary insurance is $3. This exceeds the annual premiums on a 5-cent industrial policy by 40 cents. It is therefore obvious that industrial insurance can not afford more than the expenditure of the nominal fees which prevail for mere medical inspection, viz., 50 cents in cases of less than $500 and $1 in cases between $500 and $1.000. If medical examinations are to stop the companies to question the health of the insured as proposed in this section, undoubtedly they will be discontinued altogether.
14. Cancellation of policy within six months.-Although this provision is presumably intended as a benefit or protection to the insurer, the Metropolitan is not in favor of it. It seems to be of no practicable value to the companies, and we think it would operate unjustly to policyholders. Under its provisions. the insurer could arbitrarily cancel the policy of every policyholder who fell sick during the first six months, without regard to the validity of the insurance, and unless the insured should die within the year, it would escape liability. On the other hand, the company being liable for a year, notwithstanding cancellation, the perpetrators of the most flagrant graveyard insurance, where the insured dies promptly, as anticipated, would realize on their fraud at absolutely no cost in premiums. Speculators in graveyard or death bed insurance usually reckon on the occurrence of death within a year.
It is impracticable on account of expense and by actual experience the Metropolitan finds it unnecessary to check up more than five or six per cent of its industrial applications. Inspectors visit each district periodically, and, selecting at random applications submitted by the staff during the interval since their last visit, test the work of each agent by, inspecting a few of the policyholders and verifying the facts set forth in their applications for insurance. Unless this test indicates the necessity of a thoroughgoing investigation of a particular agent's business, the inspectors thereupon leave the district.
in the policy when issued in 1883. Although there was no provision in the policy for change of beneficiary, it was the practice of the company to permit such change, and blanks were provided for that purpose. In 1888 the insured designated the defendant Mary E. Cooling as beneficiary instead of the beneficiary originally designated. The original beneficiary claimed a vested right analogous to that of a beneficiary named without reservation of the right of revocation under an ordinary policy. At page 470 of the opinion the court held:
"To recognize any such equity would, I think, require an extension of the law of judicial decision in a direction toward which it should not proceed, as I have already indicated, and might involve industrial insurance in difficulties which would impair its usefulness. The main object of a large proportion of these small industrial policies is to provide money; not for the use of the beneficiary or other person who may be empowered to collect the same, but to pay the burial expenses of the deceased. This well-known fact sharply distinguished these industrial policies from ordinary life policies where the amount is intended to be paid to the beneficiary for his own use. The application to these little policies of the principle or theory that something is vested in the beneficiary' while the policy stands payable or possibly payable to him-that some irrevocable gift has been made to him by the party who contracts with the insurance company and pays the entire consideration of the contract-would produce inconvenient results if the policy should remain outstanding as in this case over 14 years, and during that period, in order to accomplish the real purpose of the insurance, three or four or more changes of beneficiary should be made."
VOLUME OF INDUSTRIAL INSURANCE
The practice of industrial life insurance which prevails in the District of Columbia and the forms of industrial policies here employed are uniform within the practice which prevails and the forms which are used in all of the States and in Canada. The Metropolitan Life Insurance Co., alone, has 37,408,435 industrial policies outstanding amounting to $6,729,181,723 of insurance in the two countries. The total of industrial insurance outstanding in all (over 100) American companies is estimated at $18,000,000,000 in approximately 89,600,000 policies.
Considering this volume of business, there has been relatively little litigation involving dispute of claims under industrial policies during the 50 years of industrial insurance history. Upon such occasions, however, as the courts have been called upon to consider the merits of the defenses which the companies have found it necessary to interpose against claims under industrial contracts, their comment upon and characterization of the practices of the companies have generally been favorable. Of course, mistakes have sometimes been made by company representatives in their determination of claims; and occasionally, perhaps, misunderstandings have arisen in the minds of judges whose opinions are preserved in the report as to the character of defenses made and governing motives. Nevertheless, censure and criticism are infrequent in the body of judicial decisions upon controversies involving industrial insurance policies, while judicial approval and praise are much more often encountered than their opposites in the published reports.
In most of the reported decisions, the courts have not felt called upon to do more than determine the questins of law brought before them by the cases under consideration. Of the 89 cases involving controversies arising under the facility of payment clause, which the available digests cite, 55 sustain the clause without comment; 25 comment appreciatively and approvingly upon its purpose and effect; while not above 7, including all of the cases cited by the proponent of this bill, express any semblance of dissatisfaction with the result which the courts found themselves compelled to reach, or regarding the determination which they felt compelled to make under the principles of law and authorities applicable.
The following are excerpts from opinions of the courts in several jurisdictions which evidence an understanding and approval of industrial insurance as practiced in the United States:
Bishop v. Prudential Insurance Co. of America. 118).)
(1919, 217 Ill. App. 11 (117,
That the so-called industrial policies of life insurance, containing what is known as a facility-of-payment clause, are usually issued for small amounts,
Furthermore, the record shows that 44 companies paid 91.4 per cent of their claims within one day from the receipt of completed proofs of claim. The analysis of claims compromised or rejected reveals only sound reasons for the action of the companies. Surely this record justifies my earlier statement. "If the insured fulfills the conditions of his policy, no contract is more certain of fulfillment-both in letter and spirit-than is the contract of a legal-reserve life-insurance company."
The following is a paragraph from the report on the last official examination of the Metropolitan Life Insurance Co. which was published at page 250 of Part III of the Annual Report for 1929 of the insurance department of the State of New York:
"Schedule F'-Resisted Claims. All cases reported by the company in Schedule 'F' for the year 1927 were examined, with the exception of a small number of cases which could not be located in the files. In addition, all cases listed in the 1926 schedule as resisted prior to and disposed of during that year were reviewed. In every case the action of the company appeared to be warranted by the facts disclosed in the files."
The Facility of Payment Clause provides:
The company may make any payment or grant any nonforfeiture privilege provided herein to the insured, husband or wife, or any relative by blood or connection by marriage of the insured, or to any other person appearing to said company to be equitably entitled to the same by reason of having incurred expense on behalf of the insured, or for his or her burial; and the production of a receipt signed by either of said persons, or of other proof of such payment or grant of such privilege to either of them, shall be conclusive evidence that all claims under this policy have been satisfied."
The sole purpose of this clause is to sanction and assure payment of the proceeds of the policy in the most equitable manner and with the least possible delay. Through its operation, the insured is enabled to effectuate his wishes regarding payment of policy proceeds by the simple and practical process of entrusting policy and premium receipt book to the individual to be preferred, who need only qualify under the facility of payment clause as a relative, or by incurring expense on behalf of the insured or for his or her burial" in order to be assured of payment. A designated beneficiary, who can likewise qualify under the facility of payment clause and surrender the policy and premium receipt book, is no less certain of payment.
Appointment of an executor or administrator is never required by the companies, unless there are encountered conflicting claims to the proceeds of the policy, which it finds itself unable to adjust or determine, or unless the insurance moneys seem likely to be diverted, by attachment for the debts of claimants or by other process, to purposes not contemplated by the insured. Industrial policies are regarded as family property, available to serve immediate needs upon the death of the insured. Whether a named beneficiary be designated in the contract or not, the premiums are often paid from family funds. These policies are also frequently entrusted to one member of the family after another, as time progresses, each of whom, successively, pays the premiums until such time as absence or other exigency induces further devolution of stewardship.
Designations of beneficiaries usually occur at times long anterior to the death of the insured. The circumstances which existed at the time of such designation have usually changed. Previously existing relations of dependence or mutual confidence have often terminated before death occurs. It fre quently happens that the beneficiary designated by the insured has predeceased the insured or is absent at a distance, or has disappeared. Still more, frequently, the named beneficiary is not the one who has been paying the premiums, or who actually affords support or relief to the insured during his last illness, or becomes responsible for burial expenses.
The preference which section 16 of this bill would accord by law to the individual who happens to have been desingnated as beneficiary would complicate and delay settlements under these policies, and, in many cases, thwart their purpose, which can be effected with greater certainty through the untrammelled exercise by the company of the discretion vested in it by the policy. This principle is recognized in many judicial decisions.
Metropolitan Life Insurance Company v. Hoopel (74 Atl. 467) was a suit in interpleader to adjudicate between rival claimants to the proceeds of a policy of industrial insurance which contained the usual facility of payment clause. The defendant, John Hoopel, was designated beneficiary in the application and