## Facts

- An insurer issued two $5,000 life insurance policies on the life of Reese Smith Stewart, naming his son and wife as beneficiaries.
- Each policy included an incontestability clause making the policy incontestable after two years, except for nonpayment of premiums.
- Stewart died about three months after issuance.
- The insurer alleged Stewart procured the policies through fraudulent misrepresentations in the application.
- Before beneficiaries filed any action to collect, the insurer filed two federal equity suits seeking rescission/cancellation for fraud, asserting the incontestability period could expire before a judicial contest could occur if it waited to be sued.
- Afterward, the beneficiaries filed an action at law on the policies; the parties stipulated to stay that action pending resolution of the equity suits.

## Issues

1. Whether an insurer may maintain an equity action to cancel a life insurance policy for fraud when no action at law has yet been brought, but an incontestability clause may soon bar a fraud defense.
2. Whether “contest” in an incontestability clause is satisfied by repudiation/notice or requires a present judicial contest.
3. Whether proceeding first in equity, despite a later-filed action at law, improperly denies the beneficiaries a Seventh Amendment jury trial.

## Decision

- The Supreme Court reversed the court of appeals and reinstated the district court’s decrees canceling the policies.
- Equity jurisdiction was proper because the insurer’s legal remedy was not adequate where beneficiaries could delay suit until the incontestability period ran, thereby foreclosing a fraud defense.
- A “contest” under an incontestability clause generally requires a present contest in court, not merely notice of intent to resist liability.
- Once equity jurisdiction properly attached, it was not defeated by the beneficiaries’ subsequent filing of an action at law.
- Proceeding in equity did not violate the Seventh Amendment because rescission for fraud is historically an equitable remedy, and equity need not yield to later legal actions in these circumstances.

## Legal Principles

- Equity may rescind/cancel an insurance policy for fraud when waiting to raise fraud defensively at law is practically unavailable due to an impending incontestability bar.
- Under an incontestability clause, a “contest” ordinarily means a judicial contest initiated or pending within the specified period; repudiation or notice alone does not suffice.
- Equity jurisdiction, once properly invoked based on inadequacy of the legal remedy at filing, is not displaced by later events that would otherwise supply a legal remedy.
- The Seventh Amendment does not require a jury trial where the claim is equitable in nature and historically tried in chancery, even if related issues might be triable to a jury in a later action at law.

## Conclusion

The Court held that, because an incontestability clause could extinguish the insurer’s fraud defense if beneficiaries delayed suing, the insurer could proceed in equity to cancel the policies for fraud within the contestable period; a valid “contest” requires judicial action, and the equity court could decide the matter first without violating the Seventh Amendment.


Am. Life Ins. Co. v. Stewart, 300 U.S. 203 (1937)