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.

CONCLUSION

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 practicable 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.

15. Six months incontestable period.-This period is too short for the automatic disclosure of fraudulent insurance. No State has a shorter period than one year; and the usual period is two years. Six months is not a sufficient time for the facts as to death bed or graveyard insurance to come to light before defense is precluded. It is against public policy as well as unfair to the insured thus to facilitate fraudulent claims. Fraud, even in cases of flagrancy, is always very difficult to prove. The reservation as to fraud is delusive. Moreover, industrial policies, to which sections 9-18 of this bill apply, are not generally subject to defense for fraud because the fraudulent representations upon which such defense would be predicated are contained in the application and unavailable because not attached to the policy. For these reasons, the reservation is practically valueless.

The period of contestability provided by Metropolitan policies is two years. For several years, our practice has been to limit contests on industrial policies to one year. Our new form of industrial policy, which is about ready for issue, limits contestability to one year. Experience has, however, shown conclusively that any shorter period would be inadequate to protect honest policyholders from fraudulent claims.

16. Beneficiary, priority of on settlement. This provision would seriously disrupt the operations of the facility of payment clause, which is the characteristic feature of settlements under industrial policies. By its conscientious administration, the last wishes and purpose of the insured with respect to his insurance is most certainly effectuated. A beneficiary designation requires the procurement of forms and the transmission of the policy to the home office for endorsement, for which there is frequently insufficient time before the occurrence of death; whereas the mere delivery of policy and premium receipt book to the desired beneficiary, coupled with assumption of responsibility for the funeral expenses or other obligations, is sufficient under the facility-of-payment clause. Ofttimes, the beneficiary designation is made many months or even years before the death and the expectation of the insured as to the named beneficiary's ministratitons to his needs during the last days are wholly unfulfilled. If there be then insufficient time or reluctance formally to cancel such designation, the purpose of the insurance would miscarry.

The 5-day period accorded for the beneficiary to make claim would necessarily delay payment of claims by more than the same length of time. Moreover, there is no provision or indication as to how or to whom that claim of the beneficiary shall be made. The Metropolitan Life Insurance Co. has one home office, two detached head offices, and more than one thousand district offices throughout the United States and Canada, to say nothing of its branch offices in the British Isles. Unless specifically limited, the beneficiary, on learning of the death, by telegraph at a distance, could notify the company office nearest him of his claim under the policy, and thereby obligate the company to him. Under these circumstances, it would necessarily involve a much longer delay than the five days limited for the beneficiary to make claim, before the company could safely make payment under the facility of payment clause. 17. Settlement otherwise than with beneficiary or personal representative voidable.-Usually there is neither a beneficiary nor a personal representative with whom to make settlement under our industrial policies. Under this provision, there will be no one competent to accept the refund or premiums tendered by the company in cases where it denies liability for just cause. As a result, there would be not only the disappointment with respect to the insurance benefit, but also the loss of the premiums which could not safely be returned in such cases.

CLAIMS RECORD OF LIFE INSURANCE COMPANIES

In an address delivered by Hon. James A. Beha, superintendent of insurance of the State of New York, before the Association of Life Insurance Presidents on December 8, 1927, an analysis of the claims statistics for 1926 of 50 life insurance companies, whose claims exceeded 90 per cent of the total of death claims for the year of all legal reserve companies of the United States, Mr. Beha said with reference thereto :

"The record shows that 821,052 claims for $531,819,000 were presented during the year and that final disposition was made of 820,681, amounting to $528,284,000. Of this volume of claims disposed of during the year, the cases compromised, rejected or settled by suit amounted to only one-half of one per cent of the total number and to only one and one-quarter per cent of the amount

claimed. 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 frequently 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