Opinion ID: 1348878
Heading Depth: 1
Heading Rank: 6

Heading: The Impairment of Contract Claim.

Text: The Society's second constitutional claim is that the challenged provisions of chapter 512A impair its ability to contract guaranteed it under the federal and state constitutions. The federal Constitution provides that [n]o State shall ... pass any... Law impairing the Obligation of Contracts. U.S. Const. art. I, § 10, cl. 1. The Iowa constitution similarly provides that [n]o ... law impairing the obligation of contracts shall ever be passed. Iowa Const. art. I, § 21. The Society thinks there is no legitimate reason for having a cut-off date for incorporation under section 512A.9. The Society contends that in effect the statute interferes with its membership contracts, some of which date back to 1941. The division counters that the public interest demands such a cut-off. Preliminarily, we note that the guarantee of the contract clause in the federal and state constitutions must yield to a reasonable exercise of the police power for the public good. See Atlantic Coast Line R.R. v. City of Goldsboro, 232 U.S. 548, 558, 34 S.Ct. 364, 368, 58 L.Ed. 721, 726 (1914) (all contract and property rights are held subject to the fair exercise of the police power); accord Amana Soc. v. Colony Inn, Inc., 315 N.W.2d 101, 112 (Iowa 1982). Were this not so, one would be able to obtain immunity from state regulation by making private contractual arrangements. Exxon Corp. v. Eagerton, 462 U.S. 176, 190, 103 S.Ct. 2296, 2305, 76 L.Ed.2d 497, 510 (1983). In Arnold, 426 N.W.2d at 159, we adopted a three-step analysis for evaluating contract clause challenges to legislation: (1) If the state law operates as a substantial impairment of a contractual relationship, (2) the state must have a significant and legitimate public purpose behind the regulation, which (3) adjusts the contracting parties' rights and responsibilities based on reasonable conditions appropriate to the public purpose. Steps two and three deal, of course, with the police power of the state. Assuming without deciding that the contracts between the Society and its members have been impaired, we nevertheless think there is a significant and legitimate public purpose behind the challenged provisions. We agree with the division and the district court that chapter 512A is intended to protect the public from the instabilities [that] are characteristic of benevolent societies. The district court wisely noted one plausible explanation for enactment of section 512A.9, the cutoff provision for incorporation: one inherent problem [that] arises is that as the members of a particular club age and [the club] decreases in size, assessments sharply increase and can be prohibitive for the remaining members to pay. Members tend to drop out, leaving the remaining members without benefits, causing forfeiture of assessments already paid. Added to this is the fact that members are not legally obligated to pay assessments, even after receiving notice under 191 Iowa Administrative Code section 8.4(1). Under these circumstances, it is apparent why the legislature has sought to prohibit the licensing of benevolent societies under [section] 512A.9. Long ago our court illustrated the same shortcoming this way: Mutual insurance has its own natural limitations. It is not the equivalent of what is usually known as old line insurance. It can give no guarantee. It has no assets, and is entitled to none. Whatever it collects belongs to some beneficiary of a death loss. It has the merit of cheapness and the demerit of uncertainty.... We are told that, when [the defendant-fraternal beneficiary association] first came into being, it was simply an undertaking by approximately 2000 persons that, while his membership continued, each would pay a dollar to the beneficiary of every death loss.... The first man died, and the surviving 1999 paid their dollars. This proved to be insurance, at least for the first man.... If this membership were to remain stationary, surely the last man could not hope for any benefits to his beneficiary. His only hope would rest upon the continuing increase of the association and the taking in of new members .... [I]t is of the very essence of mutual insurance and of the efficiency thereof that it shall grow, and that it shall continue to receive new and younger blood. This is the only chance for the two thousandth man. When growth sickens or dies, mutual insurance depreciates accordingly. Tusant v. Grand Lodge, 183 Iowa 489, 504-05, 163 N.W. 690, 694 (1917). One administrative regulation attempts to guard against this particular risk by requiring a licensed benevolent association to merge with other licensed benevolent associations when membership falls below fifty percent of its size as set forth in the plan of operation. See 191 Iowa Admin.Code § 8.9 (1986). The financial risks inherent in benevolent societies are highlighted when comparing them to level premium life insurance companies operating in this state. For example, level premium life insurance companies maintain mortality-based reserves to keep premiums for funding death benefits constant. In contrast, benevolent societies have no surplus and reserve requirements. Compare Iowa Code section 508.1 (1991) (covering [e]very life insurance company upon the level premium ... plan); sections 508.5 and 508.9 (requiring such company to maintain combined capital and surplus of $5,000,000); and section 508.36(1) (requiring reserves for all outstanding life insurance policies) with Iowa Code section 512A.6 (benevolent associations may operate without the establishment of reserves or surplus). Obviously, the $5 million surplus requirement for chapter 508 life insurance companies is to protect policyholders from potential insolvency of the company. If such insolvency does occur, a guaranty association, made up of all licensed insurers, assumes the obligations of the insolvent insurer. See generally Iowa Code ch. 508C. Members of benevolent societies have no such protection because benevolent societies are excluded from this association. See Iowa Code § 508C.3(3)(e). In the late 1920s, this court upheld a mutual assessment company's decision to become a legal reserve or level premium company under permissive legislation. See Wall v. Bankers Life Co., 208 Iowa 1053, 1068, 223 N.W. 257, 264 (1929). Under the permissive legislation, level premium holders were not subject to assessment to pay death losses of the old assessment certificate holders. Id., 223 N.W. at 265. This court held that such a result did not constitute an unconstitutional impairment of contract. Id., 223 N.W. at 264. Significantly, the court based its decision on the financial instability of mutual assessment companies and on the fact that mutual assessment schemes are actuarially unsound. Id. These two factors led the court to view the permissive legislation as necessary for the public good. Id. The significance of the Wall decision is that mutual assessment companies and benevolent societies operate on the same principle: They rely on voluntary assessments to pay death benefits. Both share a common scheme: success based on continual growth in membership, especially younger membership. The inherent financial instability and uncertainty of such a scheme was graphically illustrated earlier in the cited language from Tusant. For all these reasons, we agree with the district court that guaranteeing the financial integrity of an insurer is a legitimate exercise of the State's police power for the public good. That leaves the final prong of the three-step analysis in Arnold: whether the impairment of the parties' contractual rights and obligations is based on reasonable conditions and of a character appropriate to the public purpose. The district court ordered the transfer of existing contracts to other benevolent societies that are properly licensed and regulated under state law. So members are allowed to continue their contracts if they wish, but under less risky conditions. We think this is reasonable and appropriate, given the legitimate public purpose of protecting those who wish to join benevolent societies. We concede that the Society finds itself between a rock and a hard place. Because it can no longer qualify as a licensed benevolent society in Iowa, it must choose another statutory route of incorporation to stay in business here. See, e.g., Iowa Code ch. 508. However, we fail to see how this may potentially drive the Society out of business completely, as it seems to imply. We say this because the Society's own exhibits boast a membership of 12,000 people. Only 1500 are in Iowa. We seriously doubt that a loss of 1500 members will mean the demise of the Society. Though we recognize the dilemma facing the Society, we also recognize this dilemma is of the Society's own making. The Society had between July 1, 1967, and July 1, 1988twenty-one yearsto bring itself into compliance with chapter 512A. This goes far to soften the blow the Society complains of now.