Before CHASE, CLARK and FRANK, Circuit Judges.
In 1928 and 1929 William D. Frad, a resident of New York City, purchased three policies of insurance upon his life from The Columbian National Life Insurance Company, a Massachusetts corporation. The beneficiary named in each of these policies was his wife, Ella Frad, and the aggregate amount of the insurance was $20,000. Each of the policies provided that the contract should be incontestable, except for non-payment of premiums, after it had been in force for one year, and each also provided that upon proof of total and permanent disability of the insured before he became sixty years old the company would waive the payment of future premiums and would make designated disability payments to him monthly.
The premiums on all of these policies had been paid and they were in full force and effect when, on November 15, 1935, the insured, not being sixty years of age, applied to the company for a waiver of premiums and for disability payments, presenting therewith proof of total and permanent disability. The company, after investigation, approved the application on January 10, 1935, waived the premiums which were due on December 3, 1935, and began to make disability payments to the insured in the amount disignated in the policies, the first being as of January 5, 1936.
Meanwhile the company learned that, although Frad had represented when he applied for each policy that he was a mercantile salesman, he had in fact been a "professional" gambler at cards for high stakes, and that he had resumed that vocation on a cruise he had taken in 1936.
On August 4, 1937, it notified the insured that it believed that he had engaged, or had become able to engage, "in an occupation for remuneration or profit," and advised him that it would no longer waive premiums or make disability payments, although it would "give proper consideration to any proofs of total and permanent disability he might desire to submit in the future as provided in the contracts."
Frad, however, insisted that he was entitled to a continuance of the waiver of premiums and the disability payments and, failing so to persuade the company, he sued it in the City Court of the City of New York. This suit was not brought on for trial until June, 1939, and at that time the company elected not to defend it. Instead, it paid Frad $4,696.55 in full settlement of his claim for disability payments to that month and for premiums he had paid since the refusal to waive them.
Thereafter, the company continued to waive premiums and to make disability payments until it gained further information that Frad was gambling extensively at cards. It then, on May 3, 1940, advised him again that it refused to continue to do so, and on June 11, 1940, he brought suit against it in the Municipal Court for the City of New York to recover disability payments then claimed due for the months of April, May, and June, 1940. In this action the company filed a counterclaim seeking to recover, because of fraud, all waived premiums and all disability payments except the amount paid in compromise of the previous suit.
Before the suit was tried and in January, 1941, Frad applied to the Colonial Trust Company for a loan to be secured by the policies. The Trust Company advised the insurer of the application and requested pertinent information concerning each policy. The insurance company in reply acknowledged that on January 16, 1941, each policy was in force with no premiums in arrears and no loans outstanding, and that the combined loan and cash surrender values substantially exceeded the loan sought. The Trust Company then made the loan to Frad and, on January 11, 1941, the policies were assigned to it as security, with the knowledge and consent of the insurer. The assignments provided that the Trust Company should have the sole right to surrender the policies for their cash value and the sole right to obtain loans on the policies.
On September 2, 1942, while the action in the Municipal Court was still pending, the insurer wrote Frad that because the waiver of premiums and the disability payments had been fraudulently obtained by him, it had "elected to consider the waiver of all premiums commencing with those of December, 1935, as now void and of no effect and to treat the policies as lapsed since December, 1935 and July, 1936, respectively." It enclosed with this letter its check drawn to his order for the amount, with interest, of all premiums he had paid since its refusal to waive the payment of premiums in 1940. A copy of the letter was sent to the Trust Company. Frad refused to accept the check and returned it to the insurer, and either he or the Trust Company continued, despite the insurer's rejection, to tender the premiums as they fell due until the policies were surrendered as noted below, the Trust Company insisting that the insurer was as to it estopped to repudiate its representations that the policies were in full force and effect when it made the loan to Frad.
In accordance with the position it had taken in this letter of September 2, 1942, the insurance company amended its counterclaim in the Municipal Court action by eliminating its claim for the recovery of premiums waived and by pleading, instead, an equitable defense based upon the lapse of the policies for non-payment of premiums in 1935 and 1936. When the suit was tried in October, 1942, this equitable defense was dismissed for lack of jurisdiction, and the cause was submitted to a jury which returned a verdict against Frad on his claim for disability payments the insurer had refused to pay and against the insurer on its claim to recover disability payments it had made. On appeal by both parties the judgment against Frad was affirmed and that against the insurer was reversed. On reargument, the counterclaim was severed and that cause remanded for a retrial, but the action was discontinued without further proceedings.
On January 19, 1943, the Trust Company's loan to Frad became due and he failed to pay it. Attorneys for the bank then notified Frad and his wife, as the beneficiary under each policy, that they would advise the bank to surrender the policies for their cash value to pay the amount due it. Frad applied to the insurer for a loan on the policies with which to pay the bank and that was refused. The bank and the insurer had negotiations which resulted in an understanding that the insurer would, and it did, advise the bank that an application by it for a loan on the policies would be refused, but that it would pay to the bank $6,525.30 as their cash surrender value in settlement of the bank's claims and, over the protest of Frad, it was paid and the policies were surrendered to the insurer for cancellation on April 24, 1943.
On July 26, 1943 Frad brought suit in the Supreme Court for the State of New York to have the amount paid the bank declared to be a loan on the policies and to compel the reinstatement of the policies upon the payment, within a reasonable time to be fixed, of premiums due for the period since the surrender of the policies to the insurer. The defendant removed the suit to the district court. In an amended answer it denied all liability on the policies and counterclaimed to recover the disability payments it had made; to have its settlement of the first suit set aside for fraud; to have the policies declared lapsed for non-payment of premium; and to have the surrender of the policies held valid.
Before the suit was tried Frad died. By stipulation Ella Frad, the beneficiary, was substituted as the plaintiff and, having been appointed her husband's executrix, she ...