that could be used for the purchase of extended term insurance.
When the face amount of the policy was reduced by the indebtedness due the company for the purpose of determining the amount of extended term insurance the indebtedness was not thereby extinguished. The indebtedness was liquidated by charging it against the reserve or cash value. The provision of the policy was designed so that a borrower who defaulted in the payment of premium would not have a greater benefit than one who did not. In each instance the beneficiary receives in settlement the face amount of the policy less any indebtedness due the company.
In Pacific Mut. Life Ins. Co. v. Davin, 4 Cir., 5 F.2d 481, 483, a similar contention was raised. The reasons given by the court are particularly applicable here. It held:
'It is to be remembered that the policy is forfeited for nonpayment of premium, or would be, except for the provision in it with which we are now concerned. In the absence of statute, the parties may agree for whatever grace, be it great or small, the company may be willing to give and the assured is willing to accept. It is a pure matter of contract. Moreover, whether the company shall agree that the extended term insurance shall be for the amount of the face of the policy, or for an amount less than the face, does no harm to the insured. The provision is that he is to get paid-up term insurance for so long as the net amount to the credit of his cash reserve will suffice to pay. That is to say, if the face of his policy was $ 20,000 and he owed the company $ 10,000 and the amount to the credit of its cash reserve would presumable buy paid-up term insurance for $ 20,000 for one-half the time, it would buy it for $ 10,000, so that whatever the insured lost in the amount of the paid-up policy he gained in the length of time during which it would be in force. * * * '
'It is said, however, that in this way the company received a double payment of its indebtedness: First, by deducting the indebtedness from the cash reserve; and, second, by again deducting it from the face of the policy as has already been pointed out. Deduction from the face of the policy is an altogether immaterial matter, for, as already pointed out, what the insured loses in the amount of the policy he gains in the time for which it is extended. Quite obviously, for the protection of the company, it must deduct any indebtedness due the company from the cash reserve before it can apply the cash reserve to buying extended insurance, for if it did not do so, the insured would get insurance for which he had not paid, and for which if he did not happen to die, within the period of extension, he never would pay and never could be compelled to pay.' 5 F.2d at page 484.
The same conclusion was reached in New England Mut. Life Ins. Co. v. Olin, 7 Cir., 114 F.2d 131, certiorari denied 312 U.S. 686, 61 S. Ct. 612, 85 L. Ed. 1123, where the court held: 'When, therefore the policy lapsed into extended insurance on September 29, 1931, the indebtedness chargeable against the policy was deductible both from the face of the policy and from the available reserve value. Such a construction of the policy is sound, consistent with settled insurance practices, and manifestly fair to both parties. It gives to the insured what the statute would secure for him, namely, the reserve value. He may borrow it for the payment of premiums (premium loans) or for other purposes (cash loans). He may cause the policy to lapse and apply it to the purchase of extended term or paid-up insurance. He may surrender his policy and claim it in the form of cash surrender value. It is for his benefit, and he may do with it as he wills, but he can not use it up and have it too. In this regard the policy gives to the insurer what the statute would not take from him, namely, protection against paying out the reserves twice.' 114 F.2d at page 139.
In the present case the cash surrender value at the time the policy lapsed would have been $ 2,315.60 if there had been on indebtedness. However, the insured then owed the defendant $ 2,279, leaving as a net value of the policy only $ 36.60. Had the insured elected them to take the cash surrender value this is the sum which he would have been entitled to receive. Having failed to exercise any option under the policy, the automatic extended term insurance came into force, and this sum then became the factor upon which the term of such insurance should be calculated. To hold otherwise would not only violate the plain and unambiguous term of the policy, but would, in effect, fasten upon the defendant an obligation for extended insurance without premium or compensation. See Omaha Nat. Bank v. Mutual Ben. Life Ins. Co., 3 Cir., 84 F. 122; Annotations: 113 A.L.R. 606, 23 L.R.A.,N.S., 82, L.R.A.1918A, 906.
The motion of the defendant is granted and judgment should be entered in its favor.
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