CHAPTER VIII.

CREDITORS.

45. Introduction.-In the chapter on insurable interest, the interest of a creditor in the life or property of his debtor was ascertained. However, we have not considered the rights of creditors to levy execution on rights under insurance policies, nor the ability of the creditor to obtain all of the amount of a policy which he has procured on the life of his debtor.

46. Property insurance.-Creditors of one who has insured his property may attempt to seize the rights of the latter under the policy either before or after the property is destroyed.

(1) Before loss. Assume that a debtor owns a building in one state but keeps his fire insurance policy in another state in which he and his creditor reside, and also the insurer, and that the policy insures the building for five years. It is customary, in fire insurance policies, to provide for a repayment of any unearned portion of the premium upon a cancellation of the policy and for a right of cancellation by either the insurer or the insured upon five days' notice. Can the creditor, in such a case, force a cancellation and payment over to him of this unearned portion of the premium? There appears to be no reported case in which this question has been decided. We might complicate matters by assuming that the

building is the homestead of the insured and is exempt from the claims of creditors. This proposition may never be determined owing to the small amount which is generally involved.

(2) After loss. After the loss occurs, the right to the insurance money is regarded as vesting in the debtor. Being a chose in action in which the insurer is the obligor, the creditor may institute the usual proceedings in such cases for attaching it. But there is difficulty here, if the property destroyed is exempt from seizure by creditors. Though there is a conflict of authority, the generally accepted rule is that if the property destroyed is exempt, the insurance is also free from seizure.

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However, the following qualifications have been annexed by certain courts to the rule that such insurance money is exempt: (a) The owner must intend to reinvest in similar property. (b) The debtor has a reasonable time within which to use the insurance money to replace the exempt property if he has not used other means for this purpose.

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47. Life insurance.-The rights of creditors in the insurance on the life of the debtor vary in the three following classes of cases: (1) Where the insurance is made payable to the estate of insured; (2) where the insurance is made payable to one other than the debtor or creditor; (3) where the insurance is made payable to the creditor.

48. Same subject-Debtor as the beneficiary.— Where insurance on the life of X is made payable

46 Puget Sound, etc., Packing Co. v. Jeffs, 11 Wash. 466; 27 L. R. A. 808. 47 Cooney v. Cooney, 65 Barb. 524 (N. Y.). The rights of mortgagees as creditors were discussed in the previous chapter on Beneficiaries.

to the debtor, D, and has been procured by a third party, T, the creditor, C, of the debtor-beneficiary may be unwilling to await the death of X in order that he may satisfy his claim out of D's rights to the insurance.

If the insured has reserved the right to change the beneficiary, it is clear that C can secure nothing before the maturity of the policy.

If D is unconditionally designated and the policy has not matured, C could get nothing from the insurer if there is no surrender value. But if the policy has a surrender value, and the insurer is bound to pay the money on surrender to D, the creditors could, no doubt, obtain this amount, unless a statute prevents it, as, for instance, in proceedings in bankruptcy.

However, D may be the insured, and also the one to whose estate the insurance is to be paid on the death of X. There is probably no difference between this case and one in which D insures his own life under the same circumstances. If the policy has matured and the rights of D have thus vested, the creditors will have no difficulty in securing the money. But if the policy has not vested, there are at least two possibilities which may arise: the policy may have a surrender value, or it may not.

The following rule, established in the present National Bankruptcy Act, is just and in accord with the probable rule in the absence of statute. This act requires that insurance shall pass as assets to the trustee for the benefit of creditors if it has a cash surrender value payable to the bankrupt, his estate,

or personal representatives. If it has no surrender value the creditors derive no benefit from it, since it is not regarded as part of the bankrupt's assets.19

The bankrupt law, in addition to the foregoing requirement, makes a salutary provision for the redemption of the bankrupt's life insurance by paying the amount of the surrender value to the trustee within a limited time after bankruptcy.

49. Same subject-Debtor as the insured.-A knowledge of the law of trusts is necessary to solve the problem which arises when a man steals money and buys with it life insurance payable either to himself or to a third party. To express an opinion as to what is the sound rule on the question would be merely a statement of what one thinks the law of trusts ought to be in this class of cases. Where the thief uses the stolen money to pay premiums on insurance already issued, there is some confusion, not peculiar to insurance law, and capable of solution by the application of the principles found in the law of trusts and property. Investment in life insurance is but one form of investment, which may yield immense profits to the investor.50

The following question in regard to a debtor as the insured has caused much conflict of opinion: Can a man who knows he is insolvent procure insurance in favor of those who are dependent upon him for support? Two or three principles should first be stated before attempting a solution of this ques

48 National Bankruptcy Act of 1898, § 70 (5).

49 Morris v. Dodd, 110 Ga. 606, 50 L. R. A. 33.

50 Holmes v. Gilman, 138 N. Y. 369, 20 L. R. A. 566, 34 N. E. 205, LEADING ILLUSTRATIVE CASES.

tion. (1) Though the principles which have grown up around the rule forbidding fraudulent conveyances are very rigid in regard to gifts of one's property when one knows he is insolvent, such rules, in the interest of humanity and justice, would probably never be carried to the extent of making it either criminal or fraudulent for any purpose for an insolvent debtor to make very modest presents, at least at certain seasons of the year, to his wife or children. (2) The luxuries of yesterday become the necessities of today. Though silk hose may have been the mark of aristocracy two hundred years ago they have lost their probative force. And so it has been with life insurance. At first though it may have been a luxury indulged in by the few, today it may be regarded as in every sense of the word a household necessity. The force of this statement is perceived when the slight annual cost of many forms of life insurance is considered.

Hence, we should not be surprised to find that the United States Supreme Court has decided that a married man, though insolvent, may rightfully devote a moderate portion of his earnings to the insurance of his life, and thus make reasonable provision for his family after his decease, without being guilty of defrauding his creditors, provided no such fraudulent intent is shown to exist in fact or can be inferred from the surrounding circumstances.51 In other words, the fact that he is insolvent in such a case is not conclusive evidence of fraud. Actual fraud must be shown to enable the creditor to have the 51 Washington Bank v. Hume, 128 U. S. 195