Marquette Law Review

Volume 27
Article 1
Issue 4 June 1943

The Assignment of Insurance Policies

Norman Baker

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Norman Baker, The Assignment of Insurance Policies, 27 Marq. L. Rev. 171 (1943).
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MARQUETTE
LAW REVIEW

VOLUME XXVII JUNE, 1943 NUMBER FOUR

ASSIGNMENTS OF LIFE INSURANCE

POLICIES
NORMAN BAKER*

A POLICY of life insurance is a contract to pay money upon the

happening of an event. It is a chose in action and the general
principles of law relating to assignments of choses in action are
applicable. It is everywhere assignable except as restricted by law,
by the provisions of the policy, or by collateral agreement.
The contract of life insurance has its own characteristics. A
distinguishing characteristic is that it must involve an actual "in-
surance risk." I Its purpose is to relieve one or more from loss that
may result from the untimely death of the insured. It, therefore,
has its beneficiaries who are the persons to be protected, and in its
most frequent form is a contract between the insurer and insured
for the benefit of persons not parties to it.
*LL.B., University of Wisconsin 1895; former Assistant District Attorney, repre-
senting Milwaukee County in civil matters; Assistant Counsel, Northwestern
Mutual Life Insurance Company.
'Helvering, Commissioner, v. Edith LeGierse, 312 U.S. 531, 85 L.Ed. 996, 61 S.Ct.
646 (1941).
 THE MARQUETTE LAW REVIEW [Vol. 27

If it were not for this feature of protection from loss resulting

from insured's death, the contract would be a wager based upon
the length of another's life, with no other incentive on the part of
the beneficiary than to win the wager, and everywhere contrary to
public policy. Therefore, every policy of life insurance must be
based upon an insurable interest in the life of the insured.
Naturally the power to appoint beneficiaries is vested in the in-
sured by the form of the policy, either subject to revocation and
change or not as may be provided. The policy vests various other
powers in the insured, such as to borrow the reserve upon or sur-
render the policy for its cash surrender value, to determine how
dividends upon the policy shall be paid or applied, to determine
whether the proceeds shall be paid in cash at maturity or in install-
ments under specified methods of settlement offered to insured and
to the beneficiary if the power has not been exercised by insured.
Any or all of these powers may be waived or may be vested in the
beneficiary who takes out the policy or the beneficiary appointed
by, or the transferee of, the insured.
These and other characteristic features or provisions of the
policy must be considered in applying general principles of law in
respect to the assignment of choses in action. The problems pre-
sented to the insurer by assignments of policies generally involve
some of these characteristics or special provisions of the contract
and this paper is directed particularly to such problems.

RESTRICTIONS

In a few of the states no assignment of a policy to one having no

insurable interest in the life of the insured is permitted or valid. In some
of these states the insured may not designate as beneficiary or assign
the policy to one not having an insurable interest in his life even though
he continues to control the policy and to pay premiums upon it.2 In
other states a transfer of a policy to those having no insurable interest
in insured's life is not invalid where the insured continues to pay the
premiums upon it.3
But in most of the states it is considered that as the insured has
an insurable interest in his own life, he may transfer a policy taken
out by him in good faith upon his life, to anyone he chooses either
with or without an insurable interest; and that continuity of insur-

2 Griffinv. McCoach et al., 123 F. (2d) 550 (C.C.A. 5th, 1941) ; National Life and
Accident Insurance Co. v. French, 144 S.W. (2d) 653, (Texas 1940) ; Newton
v. Hick's Adm'r. 282 Ky. 226, 138 S.W. (2d) 329 (1940).
3 Weresozinski v. Prudential Ins. Co., 339 Pa. 83, 14 A. (2d) 279 (1940) ; Penn
Mutual Life Insurance Co. v. Slade et al., 47 Fed. Supp. 219 (D.C. Ky., 1942);
Allen v. Aetna Life Insurance Co., 228 Mo. App. 18, 62 S.W. (2d) 916 (1933).
19431 ASSIGNMENTS OF LIFE INSURANCE POLICIES

able interest is not necessary, and, therefore, in all cases where the
policy when issued is based upon an insurable interest in the life of
the insured, it may thereafter be transferred to anyone even though
the assignee has no insurable interest in the life of the insured. 4
However, if the policy is taken out by the insured pursuant to an
agreement or understanding that it is to be assigned to one having
no insurable interest, it will be considered not taken out by him in
good faith and not supported by the insurable interest insured has
in his own life, and as a mere attempt to evade the requirement of
insurable interest and a wager upon the life of the insured and,
therefore, invalid. 5
There are few attempts of those having no insurable interest to
acquire such invalid insurance. Frequently, however, policies are
applied for which cannot be issued because of lack of insurable in-
terest. For instance, a corporation may desire to acquire policies
on the lives of stockholders to aid in the purchase of their stock in
case of their death and proposes that each stockholder shall take
out insurance upon his own life and assign it to the corporation. As
to the stockholders who are not actually engaged in the business
of the corporation and deemed essential to its success, the corpora-
tion has no insurable interest in their lives and cannot in that man-
ner secure and hold such policies.
There are instances of regulatory laws which in some of the
states restrict the transfer of life insurance policies. The purpose
of some of them is to make more secure to married women or wives
of parties insured the right to enjoy the benefits of life insurance
policies. It is not within the scope of this paper to consider such
regulatory laws. Such laws of the various states must ever be borne
in mind, but they present no serious difficulties to the insurer in
determining the rights of the insured and of the beneficiaries.
Arizona, California, Louisiana, Nevada, New Mexico, Texas and
Washington have community property laws under which property
acquired during coverture with earnings of either spouse or other
community property funds, including policies of life insurance, is
community property; the same is true optionally in Oklahoma. The
community resembles a partnership of which the husband is the
manager. Each spouse has a vested interest in the community prop-
erty. The husband as manager of the community proper may trans-
fer or assign it for a valuable consideration, but is precluded from
giving it away. Therefore, his designation of beneficiaries under or

4 Grigsby v. Russell, 222 U.S. 149, 56 L.Ed. 133. 32 S.Ct. 58 (1911).

5 Wagner v. National Engraving Co., 307 Ill. App. 509, 30 N.E. (2d) 750 (1940);
Banker's Reserve Life Co. v. Matthews, 39 F. (2d) 528, (E.D.S.C. 1941) ; Home
Life Insurance Co. v. Masterson, 180 Ark. 170, 21 S.W. (2d) 414, (1929).
 THE MARQUETTE LAW REVIEW [Vol. 27

assignment of community property policies as a gift and not as a

sale for full value is subject to the community property interest of
the wife unless she expressly waives or joins in the transfer of her
interest. Upon dissolution of the community by death of either
spouse, the community property interest of the wife descends to
her children in some of the states and is subject to testamentary
disposition, I believe, in all of them at the present time. If the com-
munity is dissolved by divorce, it is made the duty of the court to
divide the community property between the spouses, and in the
absence of such division by the decree, the divorced husband and
wife become owners in common of all property that was com-
munity property, including life insurance policies, and the interest
of either is assignable. The result is that the insured may not as-
sign or otherwise dispose of the policy on his life without the con-
currence of others interested in the policy-perhaps his children or
his divorced wife or those who have succeeded them in interest. He
may assign his half interest in such a policy.
This law presents difficult questions, for the insurer must make
inquiry concerning various questions, such as whether the policy
was in fact community property or whether by waiver or assign-
ment it has become the separate property of either husband or wife.
And where the policy has become owned in common upon dissolu-
tion of the community, serious questions arise under the circum-
stances, as to the rights of the parties where one of the owners has
voluntarily or pursuant to some understanding paid the premiums
upon the policy.
Perhaps I may refer to the restriction upon the power of the
insured to make a gift inter vivos of a life insurance policy, by the
1942 amendment of Sec. 811(g) of the Internal Revenue Code re-
specting liability of the proceeds of life insurance, to the estate tax.
This law if valid prescribes that if the insured pays premiums upon
the policy, he can never escape liability of his estate to the estate
tax even though he makes an absolute assignment of the policy. It
is the effect of this law that in proportion to the premiums paid by
him his estate will be liable to an estate tax, even though he had
no incidents of ownership at the time of his death. It is considered
also that even if the wife or someone else takes out the policy and
there has been no transfer of it by the insured, still the insured's
estate will be subject to the estate tax in proportion to the prem-
iums paid by him. This law must be based upon the assumption
that a life insurance policy because its benefits are payable upon
insured's death, is comparable to a testamentary disposition or that
the gift takes effect only upon and by reason of the death of the
1943] ASSIGNMENTS OF LIFE INSURANCE POLICIES

insured. This assumption is inconsistent with the fact. An assign-

ment of a life insurance policy by the insured is immediately effec-
tive. The beneficiaries are appointees of the assignee and not of the
insured. There is no transfer that becomes effective upon death.
There is no gift that is not effective immediately upon the assign-
ment. The fact that payment becomes due on the event of death is
not characteristic solely of life insurance policies and that fact has
nothing whatever to do with the question of title tcr the contracts.
The benefits of a policy are not received by the beneficiary because
of the death of the insured, but because the beneficiary has owned
all such benefits from the time of the gift of the policy. It is incon-
sistent with the law which has always recognized gifts inter vivos
of life insurance policies as perhaps the most common of such gifts.
The decisions of the highest courts unanimously hold that such a
gift is effective at the time it is made and that from such time the
donee is the owner of the policy entitled to all of its benefits and
vested with all its powers, and consequently there is no possible
basis for considering that there is a transfer of benefits from the
insured at or in consequence of his death. This law, it is believed,
is unconstitutional as a violation of rights protected by the 5th
Amendment, because it is an absurd, arbitrary and whimsical dis-
crimination against a single form of property and the owner
thereof.
Restrictions upon the power to assign are frequently found in
policy contracts. 6 A very common one, though generally introduced
into the contract by an endorsement when the policy is transferred
by the insured, is that there shall be no assignment of the policy to
one who does not have an insurable interest in the life of the in-
sured. Sometimes there is in the policy an absolute prohibition of
any assignment of it. It is interesting to note that such a provision
has been held inoperative where the regulatory law declares that
life insurance policies shall be assignable. 7 Frequently policies re-
quire that assignments shall be made in a prescribed form or man-
ner or only with the consent of the insured or upon notice to it, or
that the insurer shall not be bound by any assignment unless it is
in writing and filed with the insurer. Such provisions, however, are
generally considered solely for the protection of the insurer and
not to restrict the legal rights of the policyholders to assign in any
manner that the law permits. It is held, therefore, that such provi-
sions may be and frequently are waived by the insurer or that the
informal assignment is valid as between the parties and binds the

6 Immel v. Traveller's Insurance Co., 373 IIl. 256, 26 N.E. (2d) 114 (1940).
7 Cook v. Cook, 111 P. (2d) 322 (Cal. 1941).
 THE MARQUETTE LAW REVIEW [Vol. 27

insurer if it has actual or constructive notice of it. Where the policy

expressly prohibits assignment of it, an assignment may be con-
sidered valid as an equitable assignment.8
Such restrictions upon the right to assign the policy do not ap-
ply to the matter of assignment of the proceeds after the maturity
of the policy, but the policy may include restrictions upon the
rights of beneficiaries to assign their interests in the proceeds.
Where the insured selects a settlement under which the insurer
holds the proceeds and pays them in installments according to the
settlement, it is a common practice in accordance 'vith a very com-
mon desire of the insured to include a provision which precludes
the beneficiaries from either voluntarily or involuntarily alienating
the installments to which they are entitled. The right of an insured
to deprive the beneficiary of any power to assign the benefits is
recognized everywhere and the restriction against voluntary aliena-
tion is everywhere valid. But it has been considered in some states
that to prevent involuntary alienation or to preclude creditors of
the beneficiary from reaching installments to which the beneficiary
is entitled, is contrary to public policy. In many of the states there
are enactments which expressly permit provisions to be inserted
that prevent assignments by the beneficiary and his creditors from
reaching the installments to which he is entitled. These statutes, of
course, express the public policy of the state. It is considered that
one should have the right to dispose of his property under such con-
ditions as he chooses. In the states where there is no express au-
thorization for such provision, the insurer is frequently asked to
include it. If the spendthrift trust is in any such state not contrary
to public policy, it may be considered perhaps that the inclusion of
such a provision is valid. It has been so held at least in one case.'
Therefore, it is a practice of insurers to include such a provision
conditioned upon its not being contrary to law. But such a restric-
tion was not enforced where the spendthrift trust had not been
held valid.10
FORMS OF ASSIGNMENT
Conventional forms of written assignments are generally not
necessary. Policies may be assigned absolutely or as security by
parol. n The written assignment may be so informal that it is un-
8
Klebba v. Struempf, 224 Mo. App. 193, 23 S.W. (2d) 208 (1930).
9 Michaelson v. Sokolove et al., 169 Md. 529, 182 A. 458 (1936).
10 Chelsea-Wheeler Coal Co. v. Marvin et al., 131 N.J. Eq., 76, 24 A. (2d) 403
(1942).
31 Sundstrom v. Sundstrom, 129 P. (2d) 783 (Wash. 1942) ; Union Mutual Life
Insurance Co. v. Broderick et al., 196 Cal. 497, 238 P. 1034 (1925); Opitz v.
Karl 118 Wis. 527, 95 N.W. 948, 62 L.R.A. 982 (1903) ; Phillips v. Phillips, 226
S.W. 447 (Tex. Civil App. 1920) ; Continental Life Insurance Co. v. Sailor, 47
F. (2d) 911 (D.C.S.D. Cal. 1930).
19431 ASSIGNMENTS OF LIFE INSURANCE POLICIES

certain whether an assignment or a change of beneficiary is in-

tended. Sometimes it is held that the instrument is operative as a
request for the change of beneficiary, although it is not valid as an
assignment, and on the contrary it has been held that an informal
instrument intended to effect a change of beneficiary, but not valid
in view of the prescribed method for changing the beneficiary, is
effective as an assignment. It may not be effective as either. This,
however, is purely a matter of construction of the instrument. To
be valid the assignment must be made in accordance with the re-
quirements of the law. To be valid as a change of beneficiary, it
must comply with the method prescribed in the policy for changing
the beneficiary. It must be borne in mind that the right to designate
or change the beneficiary is the right to exercise a contract power
to appoint, reserved to the policyholder by the provisions of the
policy, and it, therefore, must be exercised in accordance with the
method prescribed by the policy for effecting the change.' The
right to exercise such power is unilateral. An assignment, however,
is a right secured by law and governed by the principles of law in
respect to assignments. It involves two parties-the assignor and
the assignee. It requires delivery and a meeting of the minds, but
in the case of written assignments, the delivery of the policy is not
necessary provided the instrument of assignment is actually or
constructively delivered. The delivery may be made to a third
party, as, for instance, filed with the insurer for the benefit of the
assignee, and in such case it may constitute a valid delivery even
though unknown to the assignee, for it may be presumed that as it
is beneficial to him he has accepted the act of delivery. 13 However,
in the case of parol assignments either intended to transfer the
policy or to create a pledge of it, there must be a delivery of the
policy itself.14 But more than delivery is necessary to establish a
parol or equitable assignment.' 5
There may be assignments by contract. The appointment of a
beneficiary even though no power to change is reserved is not an
assignment. The insured under most forms of policies still has in-
terests in them. The forms generally terminate the vested rights
of the beneficiary in case of death in the lifetime of the insured. But
where insured vests in the beneficiary the right to exercise all pow-
12Mutual Benefit Life Insurance Co. v. Clark, 81 Cal. App. 546, 254 P. 306 (1927).
13 Mutual Life Insurance Co. v. Wright, 153 Wis. 252, 140 N.W. 1078 (1913).
141n re Bickford's Estate, 38 N.Y.S. (2d) 785, 265 App. Div. 266 (1942); Ratsch
v. Rengel, 23 A. (2d) 680 (Md. 1942).
15 Blount v. Metropolitan Life Insurance Co., 192 Ga. 325, 15 S.E. (2d) 413
(1941) ; Mutual Benefit Life Insurance Co.; v. Clark, supra; Loewenstine v.
Loewenstine, 42 N.E. (2d) 1007 (Ohio 1942); Joseph v. New York Life Insur-
ance Co., 308 Pa. 460, 162 A. 441 (1932).
 THE MARQUETTE LAW REVIEW [Vol. 27

ers and privileges under it and the right to control the disposition
of the proceeds in case the beneficiary dies in the lifetime of the in-
sured, or, in other words, where all incidents of ownership are
vested in the beneficiary, it is considered equivalent to an assign-
ment of the policy and it is commonly referred to, sometimes in
the decisions of courts, as an assignment.
Equitable assignments of life insurance policies seem to be lib-
erally recognized by the courts. The illustrative case and that
which most commonly presents problems to the insurer is that of
an equitable assignment resulting from the property settlement
agreement in anticipation of divorce and the divorce decree. If
either or both require the insured to transfer policies upon his life
to or for the benefit of the divorced wife or their children by en-
dorsement of the policies, making them irrevocable beneficiaries,
or by an instrument of assignment, and neither of these things is
done, the courts hold that the agreement and the decree or either
of them create an equitable assignment of the policy which not
only binds the insured and his beneficiary, but also the insurer if
it has actual or constructive notice of the equitable assignment. 6
Difficult problems often confront the insurer not only when it
appears that there has been an equitable assignment and it has per-
mitted endorsements on request of the insured inconsistent with it,
but where endorsements intended to conform -with the require-
ments of the agreement or decree are not in harmony with it. Often
the endorsements may agree with the requirements of the decree,
but still fail to conform with its intent and purpose. For instance,
the decree may specifically require him to name his wife or children as
irrevocable beneficiaries when it was the intended requirement of
the agreement merely to make them irrevocable beneficiaries dur-
ing the minority of the children. This results from carelessness in
preparing either the agreement or the decree. Insured has the right
to designate his children as irrevocable beneficiaries of the policies
on his life even though he is not required to do so by the decree. In
such case they will have vested interests not only during minority,
but interests which the insured will have no power to revoke at any
time. Therefore, care must be taken by the insurer and by the at-
torneys representing the parties that the assignment or endorse-
ment exactly complies with the requirements of the decree and the
16 Chilwell v. Chilwell et a]., 40 Cal. App. (2d) 550, 105 P. (2d) 122 (1940);
Chrysler Corp. v. Disich, 295 Mich. 261, 294 N.W. 673 (1940); Kalschinski v.
Ill. Bankers' Life Association Co. et al., 311 Ill. App. 181, 35 N.E. (2d) 705
1941) ; Mutual Life Insurance Co. v. Franck et al., 9 Cal. App. (2d) 528, 50 P.
(2) 480 (1935) ; Equitable Life Assurance Society v. Wilkins, 44 F. Supp. 594
(D.C.N.Y. 1940) ; Travellers' Insurance Co. v. Gibs et al., 106 Vt. 155, 170 A,-
917 (1934).
1943] ASSIGNMENTS OF LIFE INSURANCE POLICIES

attorneys for the parties must be careful that both the endorsement
and the property settlement agreement or decree are in accord
with the intention of the parties and of the court.

RIGHTS AND INTERESTS

A policy designating insured's executors, administrators or assigns
or his heirs as beneficiaries is always assignable by insured unless
assignment is restricted by law or contract 16a Likewise a policy taken
out by the beneficiary who is vested with powers to control the policy is
assignable by the beneficiary alone. Where the insured reserves no power
to change the beneficiary or waives such power, he cannot by assignment
or in any other way affect the vested rights and interests of the irre-
vocable beneficiary. A few decisions seemingly to the contrary are
based upon a construction of the contract to expressly give the in-
sured the right to assign, to which the rights of the irrevocable
beneficiary are subject. The only real exception to the rule is that
recognized in Wisconsin based upon an ancient error to the effect
that if the insured takes out a policy designating an irrevocable
beneficiary, he may destroy the vested interests of the beneficiary
by assignment or otherwise where he has continued to hold the
policy and pay the premiums upon it.7 This, of course, is incon-
sistent with the well-established rule that the parties to a contract
entered into for the benefit.of a third party cannot destroy or re-
voke the interests of the third party without his consent. This er-
roneous rule, though repeatedly and consistently followed in the
Wisconsin decisions, has presented serious questions arising in
other states to which the insured while holding the policy has re-
moved. Thus an insured after removing to Iowa attempted to re-
voke the designation and assign the policy to others than members
of his family who were designated irrevocable beneficiaries. They,
as well as the assignee, claimed the proceeds. Insurer was uncertain
whether the Iowa court would apply the rule of that state which
was in accord with the decisions of this state in respect to contracts
entered into for the benefit of third parties, and hold that insured
had no power to divest the interests of the beneficiaries, or whether
it would follow the erroneous and inconsistent Wisconsin rule. The
interested parties compromised before an action of interpleader
was begun.
Even if the beneficiary is irrevocably designated, the insured
usually has rights and interests such as the reversionary right to

16a Anderson v. Groesbeck, 55 P. 1086, 26 Colo. 3 (1899).

17 Slocum v. Northwestern National Life Insurance Co., 135 Wis. 288, 115 N.W.
796 (1908).
 THE MARQUETTE LAW REVIEW [Vol. 27

the benefits of the policy and to control the payment of its proceeds
in case the beneficiary dies in his lifetime, or perhaps the right to
designate contingent beneficiaries and select an optional method
of settlement, which rights and interests are assignable by him.
The absolute assignment will vest in the assignee the right to
exercise all powers and privileges vested in the assignor unless by
the terms of the policy they are expressly personal or their exer-
cise is expressly limited.18
The interests of the irrevocable beneficiary are vested and as-
signable unless assignment is restricted. For instance, the irrevoc-
able beneficiary may be precluded from assigning her vested inter-
est during the lifetime of the insured separately from the insured
or without his consent. When she joins the insured in an absolute
assignment of a policy on his life, every interest in the policy will
be vested in the assignee. The assignee, of course, would have the
right to substitute any other beneficiary and as a matter of prac-
tice should do so. Even though the beneficiary may be stopped by
the as.signment from claiming the proceeds, the assignment in itself
would not effect a change of beneficiary. 9 Sometimes absolute as-
signments are given for the purpose merely of vesting all powers
in the assignee, but with no intention or purpose of substituting
beneficiaries or contingent beneficiaries for those named in the
policy. The circumstances may present a problem and, therefore, in
such case it is advisable that the assignment express its purpose to
transfer the policy subject to the beneficiary designations and ex-
pressly confer the power to revoke and change them upon the as-
signee. Perhaps this is more important in the case of the revocable
beneficiary who has no vested or assignable interest. It has been
held that though the revocable beneficiary joined insured in such
an assignment and the assignee failed to revoke the designation,
the beneficiary and not the assignee was entitled to the insurance
proceeds.2 More of the decisions are to the contrary.
In case of the collateral assignment of a policy in which a re-
vocable beneficiary is designated, for purposes of security, the
beneficiary should be changed and redesignated subject to the as-
signment. A few years ago the weight of authority seemed to be
that insured alone could not pledge a policy and that the lien of the
assignee would be subject to the rights of the beneficiary upon
I89 Thompson's Ex'rx v. Thompson, 190 Ky. 3, 226 S.W. 350 (1920).
1 Allen v Home National Bank, 120 Conn. 306, 180 A. 498 (1935); In re Hayes'
Will, 252 N.Y. 148, 169 N.E. 120 (1929); Davis v. Acacih Mutual Life Ins. Co.,
177 S.C. 321, 181 S.E. 12 (1935) ; Resneck v. Mutual Life Ins. Co., 286 Mass. 305
190 N.W. 603 (1934).
20 Mahoney v. Eaton, 205 N.Y.S. 707, affirmed 208 N.Y.S. 898, 212 App. Div. 867
(1925).
19431 ASSIGNMENTS OF LIFE INSURANCE POLICIES

maturity of the policy 2' On the other hand, a constantly increas-

ing number of cases hold that the insured may assign a policy with-
out the consent or toncurrence of the revocable beneficiary and
that the effect of his assignment is to subordinate the rights of the
revocable beneficiary to the lien of the assignee.F2 These decisions
are based upon the theory that as the beneficiary has no vested in-
terests or rights, the insured should not be required to revoke the
designation and then reinstate it subject to the assignment. Some
cases are based upon the erroneous assumption that the policy
gives the insured the right to subordinate the interests of the bene-
ficiary by his pledge of the policy? 3 Where the policy is construed
to give the insured that right, the assignee of an absolute assign-
ment may have interests superior to those of the revocable benefi-
ciary. 4 Of course, in those states where the law has not been defi-
nitely settled one way or the other, the insured should be required
to revoke the beneficiary before assigning the policy. Where the
revocable beneficiary joins the insured in an assignment of the
policy, particularly where it is for the purpose of security, it may
well be considered that she intended to subordinate her rights as
revocable beneficiary to those of the assignee.
The purpose and effect of an assignment is always subject to
proof.- An assignment even though absolute in form or which is
absolute by reason of its vesting powers of ownership in the as-
signee, when given merely for the purpose of security, creates a
pledge of the policy or a mere lien upon it, and no matter what the
form or conditions of the assignment may be, the relationship be-
tween the assignor and the assignee is that merely of pledgor and
pledgee. 5 The rights and duties of the parties as such conferred
upon them by the common law or public policy or by statute, must
be recognized by the insurer. Of course, if the insurer has neither
actual nor constructive notice and in good faith is led to believe
that the assignment is absolute in fact as well as in form, it will
not be liable for conversion of the policy where it accepts the acts
of. the assignee as owner. 6 But if insurer is chargeable with notice
21 Anderson v. Broad St. National Bank, 90 N.J. Eq. 78, 105 A. 599, affirmed 109
A. 205 (1920); Barran v. Liberty National Bank, 131 S.C. 441, 128 S.E. 414
(1925); Schoenholz v. New York Life Insurance Co., 234 N.Y. 24, 136 N.E.
2 2 227 (1922).
Farracy v. Perry, 12 S.W. (2d) 651 (Texas 1929) ; Bank of Belzoni v. Hodges
et al., 132 Miss. 238, 96 So. 97 (1923) ; First National Bank v. Security Mutual
23
Life Insurance Co., 283 Mo. 336, 222 S.W. 832 (1920).
Potter v. Northwestern Mutual Life Insurance Company, 276 Ia. 799, 247 N.W.
669 (1933).
24 St. Louis Trust Co. v. Dudley, 162 S.W. (2d) 290 (Mo. 1942).
25 Olson et ux. v. National Grocery Co. et al., 130 P. (2d) 78 (Wash. 1942) ; Allen
2 6 v. Home National Bank, 120 Conn. 306, 180 A. 498 (1935).
New York Life Insurance Co. v. Rees, 19 F. (2d) 781 (C.C.A. 8th 1926);
Wheeler v. Pereles et al., 40 Wis. 424 (1876).
 THE MARQUETTE LAW REVIEW [Vol. 27

of the character of the assignment, it as well as the assignee, may

be liable for conversion of the policy. The insurer is surrounded
with danger, for it may have in its files information which should
prompt inquiry concerning the effect of the assignment. The pur-
pose may be suggested by the assignment itself, by correspondence
between the parties interested, or by the fact that insured continues
to pay premiums upon the policy. It was held in one case that an
assignment to a national bank should be presumed given for col-
lateral security while in another case that fact alone was held
insufficient.
The use of an absolute assignment by banks to evidence a mere
pledge of policies is common. It is thought that the absolute assign-
ment increases the rights and powers of the assignees, but legally
it does not change the powers of the assignee from those of a mere
pledgee. On the other hand, it often proves less desirable, for it does
not identify the indebtedness secured or provide for indebtedness
subsequently created. It fails to provide any remedy for default and
in some states this may require foreclosure by action rather than
in accordance with the rules of the common law.
It is sometimes considered that these dangers in the use of the
absolute assignment form are avoided by an assignment which
though stated to be given for purposes of security purports to vest
in the assignee powers of ownership such as the right at any time
without notice to surrender the policy for its cash surrender value.
Insurer will not permit the exercise of such a power, for the exer-
cise of it would clearly be a conversion of the policy. It is incon-
sistent with the legal rights and interests respectively of a pledgor
and a pledgee. Such a provision is invalid under the common law
and the statutes of no state permit it. Any provision in a collateral
assignment that purports to give the assignee the right to ap-
propriate the property pledged, without notice and irrespective of
default is invalid. As a remedy for default the right to surrender
the policy may be given the pledgee in lieu of the common law right
to sell it where that right has not been changed by statute. But if
the power to surrender is given, it should be exercised only upon
notice to the pledgor affording a reasonable opportunity to redeem
and comparable to the notice of sale required by the common law.
The right to surrender a policy for the reserve or its cash surrender
value is not the same as the sale of it and, therefore, the power to
surrender as a remedy for default must be expressly provided in the
assignment. It has been held that the power to surrender as a
remedy for default must be exercised strictly in accordance with
the power given. For instance, where power to surrender upon de-
1943] ASSIGNMENTS OF LIFE INSURANCE POLICIES

fault is given, it may be considered waived and lost unless exercised

promptly upon default27
Problems arise in determining the rights of pledgees in respect
to the payment of policies. Pledgees often claim the right, and
sometimes their forms of assignment include the right, to receive
the entire proceeds even though the secured indebtedness is less.
They often claim that where several policies are assigned, they
have the right to select the policy the proceeds of which shall be
applied to the indebtedness. This claim is made sometimes for the
very purpose of favoring the beneficiaries of one assigned policy to
the prejudice of those of another. For instance, the pledgee cooper-
ating with the beneficiary entitled to receive the proceeds in a sin-
gle sum will insist upon the payment of its entire indebtedness from
other policies payable to other beneficiaries, perhaps infants, under
a settlement requiring the insurer to hold the proceeds for their
benefit. Of course, if the indebtedness exceeds the proceeds of all
policies pledged to secure the indebtedness, the pledgee is entitled
to receive the entire proceeds. Even where there is other collateral
not available for immediate application to the indebtedness, the
pledgee is entitled to satisfy its indebtedness from the funds avail-
able and is not required to await an opportunity of applying the
proceeds of other collateral. Therefore, the insurer is entitled to
proofs of the interest of the pledgee.
It must be recognized that in respect to some forms of collateral
in the nature of choses in action, the pledgee is entitled to receive
and does receive the full amounts paid upon such collateral. This
right is based upon convenience and not upon any absolute right of
the assignee to receive payments in excess of its indebtedness. Its
absolute right is merely to recover the secured indebtedness. A life
insurance policy generally designates beneficiaries. It sometimes
provides, at the election of insured, that the proceeds shall be held
by insurer and paid to the benefiiciaries in installments. The power
to elect such a settlement, if not exercised by the insured, may be
exercised by the beneficiary. Surely, the pledgee should not be per-
mitted uselessly to prevent the exercise of such rights. The insurer
should not surrender its duty to make payment in accordance with
the policy upon the assumption that the pledgee will distribute the
proceeds in excess of the indebtedness in accordance with the
policy. Of course, it cannot do so where such a settlement has been
selected.
27 Toplitz et al., v. Bauer et al., 161 N.Y. 325, 55 N.E. 1059 (1899) ; Stevens et al.
v. Mutual Life Insurance Co., 183 App. Div. 629, 171 N.Y.S. 296 (1918).
 THE MARQUETTE LAW REVIEW [Vol. 27

Where insured has assigned different policies, perhaps in dif-

ferent companies, and providing for payment to different benefi-
ciaries or in different shares, the pledgee has no power to select the
proceeds of particular policies for application to the indebtedness.
Immediately upon death the various beneficiaries in such case have
vested rights to the proceeds of the respective policies, subject only
to the required payment to the assignee. If there are various funds
owned by different beneficiaries immediately available for payment
of the indebtedness, the pledgee may be required to accept in ac-
cordance with the rule in equity for marshalling of assets, or a
beneficiary may be subrogated to remedies of the pledgee against
others.28 It is the duty of the insurer to protect beneficiaries of its
policies and their rights under the several policy contracts and to
insist that the proceeds be applied in accordance with equitable
principles, performing as far as possible its contract with the in-
sured.
Similar problems arise in the case of parol and equitable assign-
ments. Regardless of insurer's efforts to relieve itself from liability
unless written assignments are filed with it, it will be held respon-
sible to those entitled to the benefits of the policies under such as-
signments if it has actual or constructive notice of them. 9 The in-
surer may have notice that there has been a divorce between the
insured and beneficiary and a change of beneficiary is asked which
apparently is made pursuant to some property settlement agree-
ment or decree of divorce. The insurer who does not examine such
an agreement and decree and endorse its policies accordingly, may
find itself liable, after payment of its policies to the beneficiaries, to
others who are held equitable assignees. It must exercise care not
only to determine the rights of such equitable assignees, but to re-
quire its policy provisions in respect to payment to accord with the
requirements of such agreements and decree. It is confronted with
the same difficulties in respect to other contracts that amount to
equitable assignments or at least restrictions upon the power of
insured to assign policies on his life.30 To illustrate, the insured
may designate trustees of an express trust as beneficiaries of his
policies expressly reserving the right to revoke their designation.
A valid trust may expressly provide that the insured may recall the
policies he has thus placed in trust and the power can be exercised.31
28
Ex parte Boddie, 21 S.E. (2d) 4 (S.C. 1942); Mutual Life Insurance Co. v.
Illinois National Bank et al., 34 Fed. Supp. 206 (Mich. 1940).
29Bennett v. Union Central Life Insurance Co. et al., 220 Ia. 927, 263 N.W. 25
(1935) ; New York Life Insurance Co. v. Rees, 19 F. (2d) 781 (Okla. 1927).
30 Mass. Linotyping Corp. v. Fielding, 43 N.E. (2d) 521 (Mass. 1942).
s1 Gurnett v. Mutual Life Insurance Co., 356 Ill. 612, 191 N.E. 250 (1934) ; In re
Soper's Estate, 196 Minn. 60, 264 N.W. 427 (1935) ; Sussman v. New York Life
Insurance Co., 32 Fed. Supp. 88 (D.C. Pa. 1940).
19431 ASSIGNMENTS OF LIFE INSURANCE POLICIES

Insured may exercise such power even though the trust agreement
has no such provision and is irrevocable. On the other hand, the
trust agreement may amount to an actual or equitable assignment
of the policies. 3 2 In some cases the trust agreement employs con-
ventional terms of assignment. In other cases it may effectively
provide that the rights of the trustee under the policies may not be
revoked, or it may otherwise prevent insured from exercising the
power to revoke the designation. In such cases, it may be consid-
ered that the power is held by insured only in trust.3 3 The trust
agreement must be examined before insured is permitted to revoke
the designation of trustees as beneficiaries, for the insurer may be
considered to have constructive notice of such equitable assign-
ment or limitation upon the powers of the insured.

32 St. Louis Union Trust Co. v. Dudley, 162 S.W. (2d) 290 (Mo. 1942). -
33
Williamson v. Williamson Paint Mfg. Co., 169 S.E. 408, 113 W. Va. 744 (1933).