Case Name: In the Matter of Nationwide Life Insurance Company, Appellant, v. Superintendent of Insurance of the State of New York, Respondent
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1965-10-28
Citations: 16 N.Y.2d 237
Docket Number: 
Parties: In the Matter of Nationwide Life Insurance Company, Appellant, v. Superintendent of Insurance of the State of New York, Respondent.
Judges: 
Reporter: New York Reports
Volume: 16
Pages: 237–245

Head Matter:
In the Matter of Nationwide Life Insurance Company, Appellant, v. Superintendent of Insurance of the State of New York, Respondent.
Argued September 20, 1965;
decided October 28, 1965.
Adolf A. Berle, Rudolf P. Berle, Thorold J. Deyrup and William Pozefsky for appellant.
I. There was no evidence of violation of the agreement pursuant to section 216 (subd. 6, par. [b]) of the Insurance Law. The Insurance Law does not direct or require annual allocation by Nationwide to its stockholders of the “ permitted charge ” (the larger of [a] 10% of the profits or [b] 50 cents per thousand per year on participating life insurance). II. The rule of law (or implied term of the contract) asserted by the Superintendent does not exist. (People ex rel. Brown v. Woodruff, 32 N. Y. 355; Matter of Barry v. O’Connell, 303 N. Y. 46; Matter of Faith for Today v. Murdock, 11 A D 2d 718, 9 N Y 2d 761; Matter of Morrissey v. New York State Employees’ Retirement System, 298 N. Y. 442.) III. The provisions of subdivision 6 of section 216, requiring “ exhibiting ” of policyholders’ surplus, do not justify implication of a rule of law that failure annually to allocate the permitted charge to stockholders forfeited such charge to policyholders’ reserve or amounted to an election to waive it. Nothing in the Insurance Law is basis for a determination that failure to “ exhibit ” participating policyholders’ surplus works forfeiture of the accumulated permitted charges allowable to stockholders. (Matter of Picone v. Commissioner of Licenses, 241 N. Y. 157.) IV. Nationwide made no “ election” not to take advantage of the permitted charges and no waiver occurred. (Rudkowsky v. Equitable Life Assur. Soc. of U. S., 145 Misc. 765, 238 App. Div. 704.) V. Forfeiture of the accumulated permitted charges required by the Superintendent’s order cannot flow from any facts found in this record. (Matter of Benedict v. La Guardia, 252 App. Div. 540; Berger v. City of New York, 260 App. Div. 402; Miller v. Town of Irondequoit, 243 App. Div. 240; Leppard v. O’Brien, 225 App. Div. 162, 252 N. Y. 563.) VI. The rule requiring annual allocation of the permitted share of profits to stockholders on pain of forfeiture, if within the Superintendent’s power, could only be made effective by a regulation prescribed in writing and duly filed, and no such regulation was prescribed or filed. (People v. Cull, 10 N Y 2d 123; People v. Calabro, 7 Misc 2d 732.)
Louis J. Lefkowikz, Attorney-General (Samuel A. Hirshowitz, Joel Lewittes and Michael Rauch of counsel), for respondent.
I. The statute mandates (a) annual allocation of policyholders’ surplus and annual exercise of the option to allocate to stockholders any proportion of the surplus within the statutory maximum limitation, and (b) that these allocations be reported annually. The result of appellant’s admitted failure to comply with these requirements was that the surplus not annually allocated to the stockholders and reported as such passed irrevocably into the policyholders’ surplus account. (Kern v. John Hancock Mut. Life Ins. Co., 8 A D 2d 256, 8 N Y 2d 833; People ex rel. Hegeman v. Corrigan, 195 N. Y. 1; Matter of Toeplitz, 205 Misc. 869; Sylvander v. Taber, 19 Misc 2d 1005, 9 AD 2d 1019, 8 N Y 2d 835, 364 U. S. 629; Ohio Nat. Life Ins. Co. v. Struble, 82 Ohio App. 480; Belden v. Union Cent. Life Ins. Co., 143 Ohio St. 329.) II. The statutory provisions by which appellant stipulated to abide prohibit retroactive allocation of divisible surplus to the stockholders. The Superintendent properly rejected appellant’s attempt to declare stockholder dividends retroactively in derogation of the rights of the participating policyholders. (Matter of Royal Ins. Co. v. Thacher, 38 Misc 2d 1097, 19 A D 2d 864, 14 N Y 2d 745; Ohio State Life Ins. Co. v. Clark, 274 F. 2d 771, 363 U. S. 828; Matter of Massachusetts Mut. Life Ins. Co. v. Thacher, 15 A D 2d 242, 11 N Y 2d 923; Guttmann v. Illinois Cent. R. R. Co., 189 F. 2d 927, 342 U. S. 867; Welch v. Atlantic Gulf & West Indies S. S. Lines, 101 F. Supp. 257, 200 F. 2d 199, 345 U. S. 951; New York, Lake Erie & Western R. R. v. Nickals, 119 U. S. 296; Wabash Ry. Co. v. Barclay, 280 U. S. 197; Matter of B’rith Abraham v. Thacher, 43 Misc 2d 129; Matter of Marsh [Catherwood], 13 N Y 2d 235; Matter of Young v. Bragalini, 3 N Y 2d 602; Matter of Mounting & Finishing Co. v. McGoldrick, 294 N. Y. 104; Matter of Colgate-Palmolive-Peet Co. v. Joseph, 308 N. Y. 333; Matter of Kolb v. Holling, 285 N. Y. 104; Faingnaert v. Moss, 295 N. Y. 18; F. H. A. v. The Darlington, Inc., 358 U. S. 84.) III. The position taken by the Superintendent was not rendered vulnerable by the absence of a promulgated rule. (Securities Comm. v. Chenery Corp., 332 U. S. 194; Matter of Smith v. Cole, 270 App. Div. 675, 296 N. Y. 614; Matter of Guardian Life Ins. Co. v. Bohlinger, 284 App. Div. 110, 308 N. Y. 174; Matter of People [Int. Workers Order], 199 Misc. 941, 280 App. Div. 517, 305 N. Y. 258, 346 U. S. 857, 346 U. S. 913; Matter of Hauser v. Wilson, 2 AD 2d 427, 2 N Y 2d 709; Federal Trade Comm. v. Keppel & Bro., 291 U. S. 304; F. P. C. v. Idaho Power Co., 344 U. S. 17; People v. Cull, 10 N Y 2d 123; California v. Lo-Vaca Co., 379 U. S. 366.) IV. The determination by the Superintendent was an authorized disposition of the judicial review of an examiner’s report. (People v. Automobile Transporters Welfare Fund, 17 A D 2d 448, 13 N Y 2d 814, 376 U. S. 908; Matter of Union Ins. Agency v. Holz, 1 A D 2d 945,1 N Y 2d 921, 2 N Y 2d 727, 353 U. S. 932; Matter of Traders & Travelers’ Acc. Co., 68 Misc. 440; Hoopeston Co. v. Cullen, 318 U. S. 313.)

Opinion:
Bergan, J.
Petitioner is an Ohio stock legal reserve life insurance company admitted in 1939 to do business in New York. In 1940 it was given a special permit by the Superintendent of Insurance to issue participating policies in New York (Insurance Law, § 216, subd. 6, par. [b]).
This statute requires that such a 11 special permit ' ' to issue participating policies shall be conditional on the company's agreement, approved by its directors, that so long as there are outstanding participating policies held by New York residents "no profits on" such policies "shall inure to the benefit of the stockholders " in excess of 10% of the profits or 50 cents per year per thousand dollars of such insurance in force at the end of the year, whichever is larger. Such an agreement was made by petitioners as a condition of the issuance of the 1940 permit.
The statute (Insurance Law, § 26, subd. 1) requires insurance companies to file annually with the Superintendent on or before March 1 a statement of their condition at the end of the prior year in such form and containing such matters as the Superintendent shall prescribe. When a special permit has been issued and the agreement under section 216 (subd. 6, par. [b]) has been made, the statute also requires that the company " shall exhibit the amount of participating policyholders' surplus " in its annual statement (§ 216, subd. 6, par. [b], third unnumbered paragraph).
During the years 1940 through 1957 the petitioner filed annual statements with the Insurance Department. In these reports it allocated certain amounts to stockholder dividends and certain amounts to policyholder dividends and carried the remainder of its divisible surplus as "Unassigned surplus". It has been stipulated between the parties that in the years in question petitioner did not maintain a stockholders' surplus account or a participating policyholders' fund account. It paid out, however, from time to time during the 18-year period 1940 through 1957 dividends to its stockholders which in part were derived from profits on the participating life insurance policies.
These payments were not made annually as the profits were realized. But the amounts thus paid never at any time exceeded the total amount which under the statute the company was entitled to pay in dividends to stockholders, either for the year in which it was paid, or from the accumulated amounts from prior years. And it is not disputed that during all this 18-year period policyholders received in dividends all they were entitled to receive.
The Superintendent has disapproved this method of operation by petitioner during the 18-year period and has imposed a heavy sanction by way of penalty. The company has been directed to deduct from its surplus account and to credit to the policyholders' surplus account the amounts thus paid in dividends which, under an arithmetical process not in dispute but stipulated, would amount to over $2,000,000.
The main basis for the Superintendent's decision is that the statute (§ 216, subd. 6) and the agreement require contemporaneous annual action by the board of directors of the company authorizing the payment of stockholders' dividends from the profits on participating policy business and also require the payment of those dividends annually. On failure of such specific authorization and payment the Superintendent contends the right to pay the dividends is forfeited and this portion of the profit must be placed in the policyholders' surplus.
The statute does not impose a requirement for annual allocation and payment of dividends to which stockholders, are entitled and its language gives no suggestion that this was the intention of the draftsmen. It is, rather, in terms a limitation on profits. It lays down a boundary beyond which there is deemed to be an excess. It uses the term "inure to the benefit of the stockholders". The word "inure" admits the possibility of accumulation and suggests a total effect of more than one benefit. The word in context seems to negate a requirement' for immediate or contemporaneous payment.
However it is read, the statute is not so manifest a denunciation of accumulation as to warrant the heavy penalty which the Superintendent has imposed because the profits were allowed to accumulate and then paid, rather than declared and paid immediately as they became available.
In part the Superintendent's sanctions seem to have rested on the inadequacy of petitioner's reporting its method of disposing of profits on participating policy business in its annual statements during the 18 years in issue. The statute (Insurance Law, § 26, subd. 1), as it has been seen, requires all insurance companies to file the annual statement of their condition in a form prescribed by the Superintendent; and section 216 (subd. 6) specifically requires a company in petitioner's status to " exhibit the amounts of participating policyholders' surplus " in the annual statement.
In discussing the statutory obligation of the petitioner to limit its profits to stockholders, to allocate gains and expenses to participating policies, and to exhibit the amounts of participating policyholders ' surplus, the Superintendent seems to suggest that "Schedule NP — Life " was the appropriate place in the annual statements filed by petitioners to reflect these matters.
The Superintendent's brief argues that "Schedule N.P., which has been in use for many years, is designed to reflect these statutory requirements. Appellant admittedly left the report blank on these matters."
But the form of annual statement prescribed by the Superintendent (Schedule NP—Life) announced in large type that its purpose was to show "separation of accounts" between participating and nonparticipating business. Since the petitioner had no nonparticipating business and hence no such " separation of accounts ", it filled in " none " on the succeeding pages of Schedule NP.
One section of this schedule prescribed by the Superintendent was entitled " Stockholders' Surplus Account Exhibit" which was also filled in "none" by petitioner during the disputed years. It is here, the Superintendent seems to suggest, petitioner should have exhibited, as the statute prescribes, the amounts of the participating policyholders' surplus. The precise exhibit of the schedule related to a " Stockholders' Surplus Fund Account" and the Superintendent's instructions stated that this exhibit need only be filled in " when such an account is maintained on the company's records ". Concededly no such account was maintained on the petitioner's books.
These bare areas left by the reporting methods of petitioner were at least arguably within the exact form which the Superintendent had prescribed for the annual statement. If the effect had been to conceal an actual breach of the statutory ceiling in stockholders' dividends or a deprivation of dividends belonging to policyholders from the profits, a more rigid standard to measure the reporting practices of the company might be justified.
The Superintendent, of course, could have imposed, and can now prescribe, requirements for additional and precisely segregated accounting of the distribution of these profits; and he could have laid down an enforcible rule that if a company wants to distribute such profits to its stockholders it must do so annually as the profits become manifest and on due annual formal vote of its directors. But he ought not to do this retroactively and punitively in an area where the legal duty of the company is fairly debatable.
In commenting in his decision on the scope of his own powers, the Superintendent noted that he is " not powerless to remedy the injustice done by an insurance company to New York participating policyholders in violation of statute during the period the company has operated under a New York license and permit." But no injustice whatever to participating policyholders has been demonstrated or is to be seen in the agreed statement of facts upon which this record is based. Nor has any " violation of statute " been clearly spelled out. The controversy between the Insurance Department and the petitioner is at bottom a sterile dispute over form.
In exercising the administrative powers of wide breadth given to him, the Superintendent is required, nevertheless, in imposing a penalty for a statutory violation to follow the statute the way it reads (Matter of Barry v. O'Connell, 303 N. Y. 46) in the absence of some permissible rule promulgated by him and consistent with the statute (People v. Cull, 10 N Y 2d 123). See, also, Matter of Picone v. Commissioner of Licenses (241 N. Y. 157, 162), and Matter of Faith for Today v. Murdock (11 A D 2d 718, 720, affd. 9 N Y 2d 761) which follows Picone.
The statute is the charter of the Superintendent's authority (Matter of Morrissey v. New York State Employees' Retirement System, 298 N. Y. 442). The penalty imposed upon petitioner would usually be required to rest on a rather clear showing of some statutory violation. (Cf., e.g., Berger v. City of New York, 260 App. Div. 402, affd. 285 N. Y. 723; Miller v. Town of Irondequoit, 243 App. Div. 240, affd. 268 N. Y. 578; Leppard v. O'Brien, 225 App. Div. 162, affd. 252 N. Y. 563.)
On the argument in this court counsel for petitioner asserted categorically that the petitioner did what " concededly it could have done ' ' year by year and that ' ' it has made no difference to anyone ' '. The Superintendent has not come to grips with this argument and, aside from a tenuous contention, it is left largely unrefuted.
The order should be reversed and the determination of the Superintendent annulled in accordance with the stipulated facts, with costs to appellant in this court and in the Appellate Division.
Chief Judge Desmond and Judges Dye, Fuld, Van Voorhis, Burke and Scileppi concur.
Order reversed, etc.