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U.S. Supreme Court

Supreme Ruling of Fraternal Mystic Circle v. Snyder, 227 U.S. 497 (1913)

Supreme Ruling of the Fraternal Mystic Circle v. Snyder

No. 4

Submitted December 16, 1912

Decided February 24, 1913

227 U.S. 497




The state is entitled at all time to prevent the perversion of its legal machinery, and may require that it be availed of only bona fide.

To impose a penalty on those who unsuccessfully and not in good faith defend their liability on contracts does not violate the obligation of the contract. Quaere whether the state could impose such a penalty as to prior contracts as a mere consequence of unsuccessful defense. This Court will not construe a state statute as including that which it expressly excludes on the ground that the statute's practical effect will be to include cases which are so excluded therefrom.

A state statute imposing on insurance companies an additional specified proportionate amount of the policy where there has been an unsuccessful defense interposed not in good faith is not unconstitutional as violating the contract clause of the Constitution, and so held as to a statute of Tennessee to that effect.

122 Tenn. 248 affirmed.

The facts, which involve the constitutionality under the contract clause of the federal Constitution of a statute of Tennessee permitting the court to add certain amounts to the recovery on insurance policies where refusal to pay was not in good faith, are stated in the opinion.

Page 227 U. S. 500

MR. JUSTICE HUGHES delivered the opinion of the Court.

In 1887, the plaintiff in error issued a certificate or policy of insurance for $3,000 upon the life of Charles C. Snyder. His wife, the defendant in error, was the beneficiary. He died in 1908, and, liability upon the policy having been denied by the company, this suit was brought by Mrs. Snyder in the Chancery Court of Tennessee to compel payment. The court gave judgment

Page 227 U. S. 501

in her favor, and finding that the refusal to pay was not in good faith, added to the recovery twenty-five percent of the principal, or $750, which was adjudged to be "reasonable compensation and reimbursement to the complainant" for the "additional loss, expense, and injury" which had been inflicted upon her as the holder of the policy by the refusal. This addition was made pursuant to an act passed by the Legislature of Tennessee in 1901 (April 18, 1901, Acts of 1901, c. 141, p. 248). The supreme court of the state, sustaining the statute, affirmed the judgment, and the insurance company has sued out this writ of error. 122 Tenn. 248.

The sole federal question for decision is whether the above-mentioned statute, as applied, impaired the obligation of the contract in suit, and thus violated Art. I, § 10 of the Constitution of the United States.

The act in question provides:

"SECTION 1. . . . That the several insurance companies of this state, and foreign insurance companies and other corporations, firms, or persons doing an insurance business in this state, in all cases when a loss occurs and they refuse to pay the same within sixty days after a demand shall have been made by the holder of said policy on which said loss occurred, shall be liable to pay the holder of said policy, in addition to the loss and interest thereon, a sum not exceeding twenty-five percent on the liability for said loss; Provided, that it shall be made to appear to the court or jury trying the case, that the refusal to pay said loss was not in good faith, and that such failure to pay inflicted additional expense, loss, or injury upon the holder of said policy, and provided, further, that such additional liability within the limit prescribed shall, in the discretion of the court or jury trying the case, be measured by the additional expense, loss, and injury thus entailed."

"SECTION 2. . . . That, in the event it shall be made

Page 227 U. S. 502

to appear to the court or jury trying the cause that the action of said policyholder, in bringing said suit, was not in good faith, and recovery under said policy shall not be had, said policyholder shall be liable to such insurance companies, corporations, firms, or persons in a sum not exceeding twenty-five percent of the amount of the loss claimed under said policy; Provided, that such liability, within the limits prescribed, shall, in the discretion of the court or jury trying the cause, be measured by the additional expense, loss, or injury inflicted upon said insurance companies, corporations, firms, or persons by reason of said suit."

The contention is that the provision for added liability placed a burden upon the assertion of the rights which the contract secured, and thus in effect changed the contract by allowing a recovery to which the parties had not agreed, and which was not sanctioned by the law as it existed at the time the contract was made. 42 U. S. 317; Barnitz v. Beverly, 163 U. S. 118; Bedford v. Eastern Building & Loan Ass'n, 181 U. S. 227; Oshkosh Water Works Co. v. Oshkosh, 187 U. S. 437, 187 U. S. 439. It is pointed out that, in the cases in which statutes have been sustained providing for the addition to the recovery of attorneys' fees or damages, or penalties, the question arose under the Fourteenth Amendment, and that, so far as they applied to suits upon contracts, the latter had been made after the enactments. Atchison, T. & S.F. R. Co. v. Matthews, 174 U. S. 96; Fidelity Mutual Life Ass'n v. Mettler, 185 U. S. 308, 185 U. S. 322; Iowa Life Insurance Co. v. Lewis, 187 U. S. 335, 187 U. S. 355; Farmers' &c. Insurance Co. v. Dobney, 189 U. S. 301, 189 U. S. 304-305; Seaboard Air Line Railway Co. v. Seegers, 207 U. S. 73; Yazoo & Miss. Valley R. Co. v. Jackson Vinegar Co.,@ 226 U. S. 217.

What, then, is the effect of the statute with respect to preexisting contracts? It is at once apparent that it does not purport to affect the obligation of the contract in

Page 227 U. S. 503

any way. It does not attempt to change or to render nugatory any of the terms or conditions of the policy of insurance, or to relieve the insured from compliance with any stipulation it contained. It does not seek to give a right of action where none would otherwise exist, or to deprive the company of any defense it might have. If the company is not liable according to its contract, it is not required to pay. Nor does the statute permit a recovery of expenses or added damages as a mere consequence of success in the suit. The question whether the state may so provide as to prior contracts is not before us, and we express no opinion upon it.

The statute is aimed not at the rights secured by the contract, but at dishonest methods employed to defeat them. The additional liability is attached to bad faith alone. This is the necessary effect of the proviso. It is only when it is "made to appear to the court or jury trying the case that the refusal to pay said loss was not in good faith" that the added recovery may be had. It must also appear that such refusal inflicted "additional expense, loss, or injury" upon the policyholder, and it is this further expense, loss, or injury that measures the amount to be allowed, which is not to exceed twenty-five percent of the liability on the policy.

It cannot be said that this effort to give indemnity for the injuries which would be sustained through perverse methods and through an abuse of the privileges accorded to honest litigants imposed a burden upon the enforcement of the contract. Neither the contract nor the existing law which entered into it contemplated contests promoted in bad faith, or justified the infliction of loss by such means. The state was entitled at all times to take proper measures to prevent the perversion of its legal machinery, and there was no denial or burdening, in any proper sense, of the existing remedies applicable to the contract by the demand that they be availed of bona fide.

Page 227 U. S. 504

But we are asked to look behind the language of the statute and to assume that its effect is to impose the additional liability in the absence of bad faith. That is, we are to take the statute as including what it expressly excludes -- as allowing what it explicitly denies. The act does not make the mere refusal to pay sufficient evidence of bad faith, so as to justify the added recovery; it requires that the bad faith be shown, and that the consequent additional loss be shown. And the state court so construed the statute in the application that was made of it in the present case.

The trial court adjudged that the refusal of the company to pay the amount of the policy was not in good faith, and the amount allowed was determined to be a reasonable compensation for the resulting damage. The evidence before the court, save a small portion of it, is not in the record. The fact must be taken to be as found. The statute, judged by its provisions as they have been construed and applied, cannot be regarded as an impairment of the obligation of the contract.

Judgment affirmed.

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