Smith v. Penn Mut. Life Ins. Co.

*612 BROWN, Justice. Action of assumpsit by appellant against appellee for a sum of money alleged to be due on a policy of life insurance issued to the plaintiff's intestate by the defendant on March 25th, 1901,, insuring the life on which all his premiums had been paid, — in short a paid-up policy. The pleas were the general issue, pleaded in short by consent, with leave to give in evidence matters of special defense as if properly pleaded. The special defense relied on, which finds support in the evidence, is that the policy automatically lapsed, without notice, under the terms of a certificate of indebtedness, evidencing an indebtedness, on account of the nonpayment of interest, alleged to have become due, on March 25, 1938. Paragraph “X” of the policy stipulates : “Loan Value. The Company will at any time, after three years' premiums have been paid in cash, while the Policy is in force by payment of premiums, lend thereon upon its satisfactory assignment as collateral security, the sum named in the table of values given below. No loans will be made for a less sum than Fifty Dollars, and only in Multiples of Five Dollars, and shall be diminished by any indebtedness outstanding against the policy.” R. p. 8. The policy issued on the written application of the insured Eugene Russell Smith, resident address Lowndesboro, Lowndes County, Alabama, on the 19th of March, 1901, and witnessed by Chas. W. Powell, Lowndesboro, Alabama. Said application was embodied in the policy as required by the statute in force at that date. Code 1896, § 2602. See Code 1940, T. 28, § 75. The certificate of indebtedness, as appears on its face, was “Signed, sealed and delivered ” in the presence of the subscribing witness R. W. Russell, by the insured “Eugene R. Smith,” in Alabama, in pursuance of the provisions of said policy No. 181126, insuring the life of said Smith. The evidence is without dispute that the defendant in lapsing the policy, in the absence of partial payments, added unpaid interest from year to year during the years 1935, 1936, 1937 and 1938, to the principal and calculated interest on the sum produced by such addition, in consequence of which, on March 25th, 1938, the loan exceeded the cash surrender value by $7.02. Nevertheless the defendant did not rely on automatic cancellation as of March 25th, 1938, but two months later, as stated in its brief, “On May 16, 1938, the Company cancelled the policy and again, although neither the policy nor the loan certificate required notice of cancellation, the Company did on May 16, 1938, so notify Dr. Smith by letter (Transcript page 30). Mrs. Smith says he did not get this either, but that is also immaterial as no notice was actually required.” On the question as to whether or not the defendant, before foreclosing the pledge and forfeiting the collateral gave the insured notice, the evidence is in dispute. That on the part of the defendant tends to show that notice was given by letter sent through the United States Mail from Philadelphia to the said Eugene R. Smith, addressed to his place of residence in Alabama, postage prepaid, and that the envelope had a return address printed on the upper left hand corner of the envelope, the correct address of the sender, for its return if not delivered, and that such letters were never returned. The letter stated the indebtedness with interest exceeded the cash surrender value by something over seven dollars. The evidence offered by plaintiff goes to show that such notices never reached the addressee. The provision of the policy defining the loan and cash surrender value, showing that such value increases with age, is an essential part of the certificate of indebtedness based on such loan value and the two writings will be construed together as the contract between the parties. Montgomery Enterprises v. Empire Theater Co., 204 Ala. 566, 86 So. 880, 19 A.L.R. 987. Under the provisions of our statute, “All contracts of insurance, the applica *613 tion for which is taken within the state, shall be deemed to have been made within this state, and subject to the laws thereof.” Code 1940, T. 28, § 10. This was the law of Alabama when these writings were entered into between the parties. Code 1896, § 2606. This statute does not offend the provisions of the Constitution of the United States, and cannot be overridden by-provisions in the contract. State Life Ins. Co. v. Westcott, 166 Ala. 192, 52 So. 344; Travelers’ Ins. Co. v. Whitman, 202 Ala. 388, 80 So. 470; Royal Ins. Co. v. All States Theatres, 242 Ala. 417, 421, 6 So.2d 494. “The statute is not directory only, or subject to be set aside by the company with the consent of the assured; but it is mandatory, and controls the nature and terms of the contract into which the company may induce the assured to enter.” Equitable Life Assur. Society v. Clements, 140 U.S. 226, 233, 11 S.Ct. 822, 825, 35 L.Ed. 497; Penn Mutual Life Ins. Co. v. Mechanics’ Savings Bank & Trust Co., 6 Cir., 72 F. 413, 418, 19 C.C.A. 286, 38 L.R. A. 33. Moreover the defendant, although a foreign corporation, qualified to transact its insurance business in Alabama, was for this purpose a resident of Alabama. Barrow Steamship Co. v. Kane, 170 U.S. 100, 18 S.Ct. 526, 42 L.Ed. 964; Dunlap Pneumatic Tyre Co. v. Actien-Gesellschaft, etc. [1902] 1 K.B. 342; Royal Ins. Co. v. All States Theatres, supra. The majority opinion in New York Life Ins. Co. v. Dodge, 246 U.S. 357, 38 S.Ct. 337, 62 L.Ed. 772, Ann.Cas.1918E, 593, based on the concept that the right to contract was a part of the liberty secured by the Constitution of the United States, and not subject to regulation or control of the police power of the state, sustained the contract in that case against a Missouri statute, on the ground that the contract, according to its provisions, was made in and governed by the laws of New York. This concept of liberty was repudiated in our case which, following the drift of modern civilization, held that the right to contract is subject to the police power of the state; State v. Polakow’s Realty Experts, 243 Ala. 441, 10 So.2d 461; Royal Ins. Co., Ltd., v. All States Theatres, Inc., 242 Ala. 417, 6 So.2d 494. In the Dodge case, supra, a strong and more logical opinion by Mr. Justice Brandéis, concurred in by Justices Day, Pitney and Clarke, held that the contract was made in Missouri and governed by the laws of that state, notwithstanding the provisions in the contract to the contrary. In Hoopeston Canning Co. et al. v. Pink, 63 S.Ct. 602, 605, 87 L.Ed. —, decided March 1, 1943, by the Supreme Court of the United States, the principles of the dissenting opinion in the Dodge case are in effect approved. It was there said: “ * * * To insure the protection of state interests it is now recognized that a state may not be required to enforce in its own courts the terms of an insurance policy normally subject to the law of another state where such enforcement will conflict with the public policy of the state of the forum. Griffin v. McCoach, 313 U.S. 498, 61 S.Ct. 1023, 85 L.Ed. 1481, 134 A.L.R. 1462. “ * * * Nothing in the Constitution requires a state to nullify its own protective standards because an enterprise regulated has its headquarters elsewhere. The power New York may exercise to regulate domestic insurance associations may be applied to foreign associations which New York permits to conduct the same kind of business. The appellants can not, ‘by spreading their business and activities over other states * * * set at naught the public policy’ of New York. Great Atlantic & Pacific Tea Co. v. Grosjean, 301 U.S. 412, 427, 57 S.Ct. 772, 778, 81 L.Ed. 1193, 112 A.L.R. 293. Where as here the state has full power to prescribe the forms of contract, the terms of protection of the insured, and the type of reserve funds needed, ‘the mere fact that state action may have repercussions beyond state lines is of no judicial significance.’ Osborn v. Ozlin, supra, 310 U.S. [53], at page 62, 60 S.Ct. [758] at page 761, 84 L.Ed. 1074. Neither New York nor Illinois loses the power to protect the interests of its citizens because these associations carry on activities in both places. Alaska Packers Association v. Industrial Accident Commission, supra [294 U.S. 532, 542, 55 S.Ct. 518, 79 L.Ed. 1044] * * *.”-[Brackets supplied.] And in Royal Insurance Co., Ltd., v. All States Theatres, Inc., supra, 242 Ala. 421, 6 So.2d 497, it was observed: “In Bankers’ Fire & Marine Ins. Co. v. Sloss, 229 Ala. 26, 155 So. 371, it is declared on *614 the authority of State Life Ins. Co. v. Westcott, 166 Ala. 192, 52 So. 344, 345, supra, and many other decisions there cited, that the business of insurance is recognized generally as affected with a general or public interest, and is within the police power of the state to reasonably safeguard and protect, and that this right is exercised as indicated in the Westcott case, supra, and by the statutes in question.” That is to say, the statute [Code 1940, T. 28, § 10] “is mandatory, and controls the nature and terms of the contract into which the company may induce the assured to enter.” 166 Ala. 196, 52 So. 345. [Italics supplied.] In the instant case, as we have shown, the certificate of indebtedness shows on its face that it was executed and delivered in the presence of the subscribing witness to Smith’s signature, in Alabama. 29 Am. Juris. 75, § 38. There is no fixed date for the maturity of the debt nor when the pledge may become foreclosable. This depends on the earnings of the policy and its increasing value by lapsing time. These elements were known only to the pledgee who kept the exclusive records. Appellant’s first contention is that the stipulation in the certificate of indebtedness evidencing the loan that, “Interest shall accrue on the principal amount of this certificate and all additions made thereto in accordance with its provisions at the rate of six per cent (6%) per annum on March 25, 1932, and annually thereafter, with the understanding that any interest not paid when due shall be added to the principal”; is subject to two interpretations, and the court should apply the rule most favorable to the insured to prevent a forfeiture, and so construed the stipulation italicized as not authorizing the compounding of the interest. Protective Life Insurance Co. v. Thomas, 223 Ala. 106, 134 So. 488. The interpretation contended for by appellant is that the language "and all additions made thereto” refers to and contemplates additional loans provided for in paragraph “X” of the policy, as the cash surrender value increases by age, the amount of such additional loans to be “diminished” by any indebtedness outstanding against the policy. On the other hand, the appellee insists that the stipulation in the certificate of indebtedness is an express agreement to add unpaid interest to the original loan and compute interest on the aggregate, — that is compound the interest. While there is considerable diversity of opinion on the subject, the rule of our decisions is that an express agreement to pay interest on interest, especially when such agreement is made after the maturity of the original principal, is not unlawful unless the interest so computed exceeds the legal rate for the time, and impinges the statute against usury. Gross v. Coffey, 111 Ala. 468, 477, 20 So. 428; Paulling v. Creagh’s Adm’rs, 54 Ala. 646; 30 Am.Juris. 46, § 56; 27 R.C.L. 225, 226, § 26; Richardson v. Campbell, 34 Neb. 181, .51 N.W. 783, 33 Am.St.Rep. 633. At first blush the writer was of opinion that paragraph “X” of the policy dealing with “loan value” did not contemplate or authorize cumulative loans, but after repeated consultations with my brothers, sitting in senior section, applying the rule of strict construction against the writer of the contract — the insurer, — the opinion prevails that such loans are authorized so long as the subsequent loan when added to any existing indebtedness does not equal or exceed the then value of the policy. That the stipulation in paragraph “X” that “No loan shall be made for less sum than fifty and only in multiples of five dollars and shall be diminished by any indebtedness outstanding against the policy” simply means that the new or cumulative loan shall not be less than fifty dollars, and when, added to the existing indebtedness shall not equal or exceed such loan value. That the stipulation that interest shall accrue on the principal amount of the certificate and all additions thereto refers to additional loans, and not interest accumulated which may be added to the principal to determine when the indebtedness equals or exceeds the loan value. At best the stipulation leaves the matter of computing interest on interest to mere inference, which under the authorities will be resolved against the party who drafted the writing. 5 Alabama Digest Contracts, *®=5>155, p. 69; Minge v. Green, 176 Ala. 343, 58 So. 381. Therefore computing simple interest on the loan at the contract rate and deducting dividends conceded to be due, the indebtedness on March 25th, 1938, did not equal or exceed the loan or cash surrender value, and the policy was not subject to forfeiture. The company could not at a later date short *615 of the next interest payment period, March 25, 1939, forfeit the policy. The next contention is that the pledge of the policy could not be foreclosed and the policy forfeited without notice. There is an absence of any stipulation in the policy or the certificate of indebtedness for .notice of any kind respecting the foreclosure of the pledge and forfeiture of the policy. The stipulation is: “That if at any time additions of unpaid interest cause the total indebtedness against the above policy to equal or exceed its total loan value, the company’s liability shall automatically terminate.” By express language Chapter 3, Article 1, Code 1940, T. 9, § 9, p. 88, is made applicable to insurance companies engaged in taking pledges to secure payment of loans. The term county as used in §§ 11 and 12, as applied to foreign corporations qualified to do business in Alabama, is construed to refer to the county of the designated place of business by the foreign corporation in its declaration in qualifying to do business in this state under § 232 of the Constitution and § 192 of the Code of 1940, T. 10. That county for the purpose of engaging in business by such corporation is its place of business. Sullivan v. Sullivan Timber Co., 103 Ala. 371, 15 So. 941, 25 L.R.A. 543. There is nothing in the evidence to show that the place of residence of the pledgee [as stated above] and the residence of the pledgor was not the same. If the pledgor was a resident of the county, notice of intention to sell was required by § 11, Tit. 9, Code 1940, and § 12 of said title requires that notice of the time and place of such sale must be given by publication. Code 1940, T. 9, § 12; Code 1923, § 6746; Stanley v. People’s Savings Bank, 229 Ala. 446, 157 So. 844. Neither the policy nor the certificate of loan authorizes a foreclosure of the pledge outside of Alabama. The cited statutes, enacted in the exercise of the police power for the protection of insurance policy holders and rights under insurance contracts made in Alabama, evidence the state’s public policy, that such foreclosure must be made in Alabama, at the company’s place of business, after reasonable notice to the insured, and not in a foreign city in a foreign state. Life insurance is a class of investment made for the security of the family or old age security, and independent of the statute above cited in respect to notice, it is the well-settled general rule, in the absence of judicial proceedings to foreclose, that reasonable notice to redeem shall be given to the pledgor. That notice to the pledgor of the intention to sell and of the time and place of sale is also necessary, unless waived by agreement of the parties. 21 R.C.L. 690, § 50; Terry v. Birmingham Nat. Bank, 93 Ala. 599, 9 So. 299, 30 Am.St.Rep. 87; 41 Am.Juris. 643, § 83. In Penn Mut. Life Ins. Co. v. Bancroft, 207 Ala. 617, 93 So. 566, 567, 28 A.L.R. 1102, it was stated by the learned Justice, now Chief Justice: “This loan was made something like 2% years before the policy was paid up, but the subsequent premiums were promptly paid and the policy became paid up in November, 1915. No part of the principal or interest of this loan has been paid, and defendant company resists this suit upon the theory that on account of the default in the payment of this in debtedness — due notice having been given to the insured — the policy had been canceled, pursuant to the stipulation set forth in the certificate of indebtedness.” The stipulation of fact in that case recited : “Under the terms of the loan agreement, interest on the loan was due on the 5th of November of each year in advance, and about 10 days before the interest became due a notice was sent by appellant to the insured notifying him that the interest would be due on that date. A copy of this notice is set _ out in the record, marked ‘Exhibit C’, on page 17 of the record. Within a reasonable time after the due date of the interest a second notice was sent to the insured notifying him that the interest was overdue and that it should be paid without delay. Within a reasonable time subsequent to the second notice a third notice was sent to the insured * * *.” In Jones v. Mutual Life Ins. Co. of New York, 216 Ala. 437, 113 So. 314, 54 A.L.R. 1068, referring to the Bancroft case, supra, it was observed: “After several renewals of the loan, and after the last premium had been paid and the policy had become a ‘paid-up’ policy, the principal and accumulated interest exceeded the loan value of the policy; and, after due notice to the insured, the company canceled the policy in accordance with the terms of the contract. It was held that the provision for cancellation was valid, and that the company’s cancellation of the policy in ac *616 cordance with its terms, prior to the death of the insured, terminated its liability thereunder and defeated the beneficiary’s right of recovery. “So far as concerns the principles involved, there is no material difference between that case and the case now before us. * * * ” [Italics supplied.] 216 Ala. 438, 113 So. 315, 54 A.L.R. 1068. Moreover the original record has been examined in the Jones case and it shows that it was also tried on an agreed statement of facts, and that reasonable notice was given by the pledgee and received by the insured of the maturity of the loan and of the intention to foreclose unless the forfeiture was relieved by payment of the interest on the loan. It further appears from the record in the Jones case that a note was given as evidencing the loan signed by Jones, the insured, and his wife, the beneficiary, payable on a date certain, with interest payable annually. In the instant case there was no fixed date on which the default authorizing a forfeiture of the pledged policy would occur; that was dependent on the accrued dividends and the constantly increasing value of the cash surrender value of the policy evidence of which was peculiarly in the hands of the pledgee — the insurance company. Pledges of “movables” is an outgrowth of the Roman Law, and where made as collateral to an existing debt or one newly created is regarded in law and equity as security for such debt, and is to be dealt with on principles of equity and justice between the parties. 41 Am.Juris. 582; 41 R.C.L. 630, § 1. And in the absence of express waiver after maturity, such collateral cannot be forfeited without demand and notice to redeem or by judicial process. 41 Am.Juris. 643, § 83. The pledge of the policy not being subject to forfeiture on March 25, 1938, for nonpayment of interest, the court erred in giving the affirmative charge for the defendant, and for this error the judgment is reversed. Reversed and remanded. THOMAS, J., concurs. GARDNER, C. J., and FOSTER, LIVINGSTON and LAWSON, JJ-, concur in the first division of the opinion dealing with the question of forfeiture for the nonpayment of interest, and holding that the pledge was not subject to forfeiture on March 25, 1938. BOULDIN, J., dissents.