Hiscock v. Mertens
Headline: Bankruptcy rule allows insured debtors to keep life insurance policies by paying insurer-stated cash surrender values, even when policies do not promise surrender payments, limiting trustees’ automatic claims on those policies.
Holding: The Court held that a life insurance policy may have a legally recognized cash surrender value based on an insurer’s established practice, even if the policy does not expressly state such a value, under section 70.
- Allows bankrupts to retain life policies by paying insurer-stated surrender values.
- Limits trustees’ ability to seize policies that insurers uniformly honor with surrender payments.
- Makes insurers’ uniform practices decisive in determining policy value for bankruptcy estates.
Summary
Background
The dispute involved a man (Mertens) and his sons who were declared bankrupt and the trustee of their estate. At the time of the bankruptcy there were four life insurance policies with the Equitable Life Assurance Society; one policy payable to the wife was dropped, and three payable to Mertens remained in dispute. The trustee sought to treat the three policies as estate assets, while Mertens argued each had a cash surrender value determined and paid as a matter of the company’s regular practice and that he could pay that value to keep the policies.
Reasoning
The central question was whether a policy must expressly promise a cash surrender value in writing, or whether a company’s established practice of determining and paying such a value is enough under section 70 of the Bankruptcy Act. The Court explained that the proviso aimed to let a bankrupt keep a policy by paying its surrender value and that the value could exist by the insurer’s uniform practice, not only by express contract language. The Court relied on earlier decisions and the practical understanding of surrender value as accumulated reserves and held that company practice could create a cash surrender value recognized by the statute. The practical result is that, when the insurer states the value to the trustee, the bankrupt may pay or secure that sum within thirty days to retain the policy.
Real world impact
The ruling affects bankrupt individuals with life insurance, trustees, and insurers: a debtor can preserve policies by paying the insurer-stated surrender amount, and trustees cannot automatically take such policies without that stated value being paid or secured.
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