Court Opinion

ID: 7811370
Source: CourtListenerOpinion
Date Created: 2022-09-07 17:13:14.250525+00
Date Added: 2024-06-11T16:30:28.829718
License: Public Domain

Smith, J. Appellees, who were plaintiffs below, are corporations organized under the laws of the various States of the Union, and all of them are doing a fire insurance business in this State; and all of them were so engaged on December 31, 1919; and most of them have been so engaged for a period of more than five years prior to December 31, 1919. All these corporations are members of the Arkansas Fire Prevention Bureau, and are all the insurance companies now doing a stock fire insurance business in this State. These corporations brought this suit to have adjudicated the duties of the Insurance Commissioner of the State under act No. 163 of the acts of the General Assembly approved March 3, 1919, and appearing in Crawford .& Moses’ Digest as sections 5962 et seq. This act requires the Insurance Commissioner to compile the figures showing the results of the business of stock fire insurance companies during the five years preceding December 31st of each year, and provides that “if it appears that for such five-year period the stock fire insurance companies doing business in this State have made an aggregate underwriting profit in excess of five per cent., the Insurance Commissioner shall have the power to order such reduction in rates as will reduce the underwriting profit on business thereafter done to five per cent. ’ ’ Sec. 5960, C. & M. Digest. Each five-year period is a unit for the calculation of underwriting profits, and the Commissioner’s finding thereon fixes the insurance rates for the first year after that period; and the rate for each subsequent year thereafter depends on the Commissioner’s finding for the five-year period immediately preceding. This action of the Commissioner is made “subject to the summary court review as provided in section 7 hereof” (sec. 5969, C. & M. Digest), and pending this court review his orders are superseded. The present action is such a review, and it is al-. leged in 'the complaint filed for that purpose that the Insurance Commissioner, in the discharge of the duties therein imposed, has attempted to compile the business for the five-year period ending December 31, 1919, but that such tabulation has been made upon an erroneous basis, in this, that the Commissioner has; undertaken to arrive at the underwriting profit by calculating the aggregate premiums received and losses and expenses actually paid during said period and ascertaining the ratio of losses and expenses paid to premiums received, which, according to his • compilation, was 88.79 per cent., and the Commissioner has treated this result as showing an aggregate underwriting profit for that period of 11.21 per cent, or 6.21 per cent, in excess of the 5 per cent, allowed by said act, and on May 13, 1920, he made an order requiring all stock fire insurance companies to make such reduction, on all premiums collected, on all policies written after said date, and, on June 7, 1920, notified the Arkansas Fire Prevention Bureau to take necessary steps to put such reduction in force. The insurance companies applied for a rehearing, which was granted, but after hearing the representatives of the companies the Commissioner adhered to his original ruling. In filing this suit to have the order of the Commissioner reviewed and set aside, tlie companies alleged that the compilation was made upon an erroneous ¡basis, for the following reasons: Stock fire insurance policies are written for terms from less than a year aiid up to five years, and the full premium for the entire period is collected in advance. The policy used in the State of Arkansas is the standard form, and provides that, for a certain sum (the premium for the entire period), the company insures the insured for a given period. The policy may be canceled at any time at the request of the insured, or by the company by giving five days’ notice. Policies must be carried by the company for the entire period before the full premium is earned, or, if canceled, the unearned portion thereof must be returned to the policy-holder. At the end of the five-year period involved in the compilation a very considerable part of the premiums received by the company was still unearned. To arrive at a correct result for a given period to determine the actual underwriting profit requires the charge against the companies of premiums earned, instead of premiums received. The national organization of fire insurance commissioners, many years ago, adopted a standard “annual statement” for fire insurance comapnies, which form has been in use in Arkansas for more than ten years. It is insisted that the structure of this statement shows that the 'Commissioner proceeded upon the wrong basis in arriving at the underwriting profit. The finding of the Commissioner now under review is the second finding made by him under the requirements of the act of 1919 set out above. His first finding covered the five-year period ending December 31, 1919, and in making up this finding the Commissioner employed both methods, but ordered no reduction in the rate, because, from April 1, 1918, to September 1, 1919, the companies 'had imposed a surcharge of 10 per cent, to cover the extra hazard supposed to result from the state of war then existing, and as this surcharge has been annulled the Commissioner ordered no reduction in insurance rates. As the surcharge is now no longer imposed, nothing further will be said about it. The Commissioner discovered, in compiling his first report, that the basis adopted made quite a difference in the result obtained, lie designates the basis which he adopted as the “paid-for basis,” and under it he has charged the companies with the actual premiums received during the five-year period and has credited them with actual losses paid and actual expenses paid for the five-year period. The companies contend that they should be charged with the premiums earned and credited with losses incurred and expenses incurred, and this method is designated by the witnesses as the premium earned 'basis. The ■Commissioner testified that, upon discovering that there was a considerable difference in the results reached in the two methods, he submitted the question, as to the proper method to employ in ascertaining underwriting profits, to a meeting of rate experts representing the insurance departments of Kentucky, Oklahoma, Missouri, Minnesota, and Arkansas, held in St. Louis, Mis souri, on November 7 and 8, 1919, and that these gentlemen made the following report: “That premiums received and losses and expenses actually paid should be the basis on which to predicate for determining’ the factors on which to base underwriting profit. In this way calculations will be based on actual facts, whereas, on earned premiums and incurred losses results will flow which will effect a continuance of the very thing it is desired to avoid, namely, obtaining figures 'based upon estimates and assumed amounts. That income ami excess profits taxes are not proper items of expense.” He further testified that he adopted the paid-for basis because it was the easiest to calculate and apparently obtained the best results for the policy-holder, and that he could not make up his report on the premium-earned basis from the records in his office. Another reason assigned by him for the conclusion reached was that, if the companies were allowed credit for losses incurred, they might carry forward, from year to year, these incurred losses until they were, in fact, paid, and might, as the result of that action, obtain credit more than once for the same items. His chief clerk was of the same opinion and concurred in the opinion and-finding of the Commissioner. It appears, however, that, while both these gentlemen were experts in matters of accounting, neither qualified as an insurance expert, and it is apparent from their testimony that they have proceeded upon the assumption that they were vested with a discretion to determine what were underwriting profits, and that in reaching this conclusion it was their 'duty to adopt that method which operated to give the largest reduction in insurance rates. The act under review has nothing to do with the investment end of the fire insurance business. It deals only with the underwriting end, and all parties agree that it was the legislative purpose to limit fire insurance companies doing business in this State to an underwriting profit of five per cent, and, as a means to that end, clothed the Commissioner with the duty and authority to raise or lower rates to produce that result, based upon the experience -of the companies for the preceding five-year period. It therefore becomes of controlling importance to determine what is meant by the phrase, “underwriting profit”. In passing upon this question we conceive it to be our duty only to ascertain the legislative intent, and this must be done by interpreting the words which the Legislature itself has employed in expressing that intent. It is an accepted canon of construction that “where a word which has a known legal meaning is used in a statute, it must be assumed that the term is used in its legal sense, in the-absence of an indication of a contrary intent.” 26 A. & E. Enc. of Law (2nd Ed.) 607. In the case of St. L. I. M. & S. R. Co. v. State, 102 Ark, 205, this court had occasion to define the term, “division point,” and, in doing so, said: “In determining ' what the meaning of these words is, we must look to see what is the usual and ordinary interpretation given to them by those using them, and also to consider them in reference to the subject-matter in the mind of the Legislature, as shown ¡by this statute.” Many oases to the same effect are cited in the ¡briefs of counsel for the insurance companies. We think the undisputed evidence shows that the term “underwriting profit” has long had a definite, certain and well-known meaning in insurance circles. A number of witnesses of highest authority in the insurance business testified that the term was understood alike by all insurance men, and that the word “underwriting” refers to operations of the companies in accepting and carrying risks on the writing of insurance, and refers to that branch of the insurance business in contradistinction to the investment or banking end of the business, and that underwriting profit or loss is arrived at by 'deducting from earned premiums all incurred losses and incurred expenses. These experts testified that this definition and use of the phrase “underwriting profits” was of universal application in all insurance business, and that a different meaning was first given to it by the Insurance Commissioner of this State in his attempt to give effect to the act now under consideration. Prior to the passage of this act in 1919, the Insurance Commissioner of this State was required to calculate the reinsurance reserved for unexpired fire risks of insurance companies by taking fifty per centum of the premiums received on all unexpired risks that have less than one year to run and a pro rata of all premiums received on risks that have more than one year to run and, “having charged against a company the reinsurance reserved as above determined, * * * * and adding thereto all ■other debts and claims against the Company, he shall, in case he finds the capital stock of the company impaired to the extent of twenty per cent., give notice to the company to make good its whole capital stock -within sixty days, and, if this is not done, he shall require the company to cease to do new business within this State. * * * * ’ ’ Subdivision 6, section 5951, C. & M. Digest. The Insurance Commissioner testified that the term, “reinsurance reserve,” in the statute quoted, meant “unearned premium reserve,” and that the latter is the commonly used term. It is quite obvious that this legislation treated the unearned portion of an insurance premium as a liability against the company, and not as an asset of the company. It cannot, therefore, be regarded as a profit, for the reason that the law requires the insurance companies to maintain a reserve against it. This section, 5951 C. & M. Digest, was enacted in 1875, and requires the Commissioner to charge all “debts and claims” against the. company, which necessarily includes all losses and expenses which have been incurred, whether they have been paid or not. We think this statute defines the status of the unearned premium reserve. If it is in fact a liability, and not an asset, then it cannot properly be the basis of computing profits. It is not a profit, for the simple reason that it is not earned. It may never be. earned. The company could not use it for paying dividends or for other purposes of its own. Cook on Corporations, (7th Ed.) § 546, p. 1609. On the contrary, it must maintain a legal reserve against it, and if, adding to this reinsurance reserve “all other debts and claims against the company”, there is an impairment to the extent of twenty per cent, the Commissioner must declare the company not sufficiently solvent to do new business in this State. The Commissioner says, however, that it is not the purpose of the reports made pursuant to this statute to enable or to require him to pass upon the amount of profits earned by the reporting companies, but only to determine their solvency. So it is. But if this is the proper method to determine solvency, it is necessarily the proper method to determine whether profits have been made. At least, this was the existing law when the act of 1919 was passed, and we must construe the two statutes together. It is shown without question that the premium-earned basis is the method employed by all insurance companies in determining what profits have been earned and whether a dividend can be paid the stockholders. Numerous very interesting cases are cited in the briefs of counsel for the insurance companies to the effect that unearned premiums cannot] be said to be profits. The objection of the Commissioner to the adoption of the premium-earned basis, that he could not make a finding upon that basis from the reports of the companies on file in his office, is equally applicable to the basis which he did adopt, for he admits that it became necessary for him to pi'epare and send out to the companies special blank forms,- which he designated- as Schedule No. 6, before he could prepare his report in accordance with the basis which he had decided to adopt. It is also shown that, in support of the companies’ motion for a rehearing before the Commissioner, the companies offered to, and did, supply all the information necessary to make a report on the premium-earned basis, but the Commissioner refused to change his ruling, for the sole reason that he thought he had adopted the proper method. At the .time Schedule No. 6 was prepared by the Commissioner -for the purpose of making the finding required by section 8 of the act of 1919, a schedule numbered 5 was also prepared, tlie responses to which would have furnished the necessary data for making a finding in accordance with the premium-earned basis, and that schedule was prepared to fit into page 8 of the Convention Annual Blank, of which blank we shall have more to say. This Convention Annual Blank takes its name from the fact that it was prepared and adopted by the Conven ti on of Insurance Commissioners of the different States, and is in universal use, and lias been for many years past. Page 8 of this convention blank calls for a tabulation made on the incurred or premium-earned basis of the business of companies all over tbe United States; while Schedule 5, prepared on a similar basis, restricts the report to the business done to this State alone, and the tabulation made on that basis by the Commissioner shows that there was no underwriting profit for the five-year period under review. This difference is said to result from the fact that during the latter part of the five-year period the volume of insurance business in this State increased very largely and very rapidly. Much of this business then written,.and already paid for, will have to be ¡carried as outstanding risks by the various ¡companies beyond the five-year period under review. Under these circumstances there has been no underwriting profit if the same is computed according to the premium-earned basis. Any question as to the manner of securing the necessary data to report on either basis may be disposed of by saying that the law gives the Commissioner the right to call for such data as he sees proper to have, and imposes upon the companies the duty to furnish it. Secs. 5960 and 5965, C. & M. Digest. So far as the St. Louis meeting is concerned, it may be said that of the gentlemen who adopted this resolution only two testified in this case, besides Mr. Bullion, the Insurance Commissioner for this State, and those witnesses testified that they were proposing a method for the consideration of the National Convention of Insur- - anee Commissioners, and that the- method then proposed was looked on as being the most favorable one to the State and to the policy-holders, and as one easiest obtainable. and easiest figured. The resolution adopted át this St. Louis meeting, set out above, was embodied in a letter addressed to Mr. Joseph Button, Insurance Commissioner of Virginia, who was the chairman of the fire insurance committee of the National Convention of Insurance Commissioners. The Insurance Commissioners of Missouri and Kentucky were members of this committee, and at its meeting on April 18, 1921, both voted, with all the other members present, that the earned-premium and incurred method was the proper method to employ in requiring reports from the companies. This finding was embodied in a resolution then adopted. At a prior meeting of this committee in December, 1920, at which time the Commissioner from Arkansas was a member and was present, a sub-committee thereof recommended to the full committee that, in determining underwriting profit, earned premiums and incurred losses and expenses should be used, and that there should not be taken into account the banking end of the business. These recommendations were then adopted ¡by the whole committee, with the Commissioner from this State alone dissenting. At the National Convention of the Fire Insurance Commissioners of the different States held December 7, 1921, the fire insurance committee made the following report, which was adopted without dissent by that body: ‘ ‘ Through legislative enactment varying degrees of control over fire insurance rates within their borders have been assumed by several States. All such laws are based upon the principle that rates between risks of substantially the same hazard must not be discriminatory, but some go further and require that they shall be no higher than to provide a ‘reasonable’ underwriting profit. In one State the percentage of such ‘reasonable’ profit is named, and in another a specific requirement is laid down that the conflagration hazard both within and outside of the State shall be taken into consideration. “Further, as it is probable that in the future other States may enact legislation of similar effect, it is highly important that this body clearly express its convictions as to what constitutes a reasonable underwriting profit and a proper and uniform method of arriving at same. “Two years ago at the convention session in Hartford this subject was referred to in a resolution, after which the fire insurance committee of the convention met with a committee appointed 'by the National Board of Fire Underwriters, both bodies realizing the great importance of having an agreement embodying the factors necessarily involved. While it was recognized that the National board had no supervision over rates, it was selected as the only National organization of fire insurance companies. Frequent and lengthy conferences of the committees were held at which the various features were exhaustively studied. The final joint meeting took place in New York in April last when the following was agreed to: “1. Underwriting profit (or loss) is arrived at by deducting from earned premiums, all incurred losses and incurred expenses. “2. No part of the so-called bunking profit (or loss) should be considered in arriving at the underwriting profit (or loss). “3. Five years is the minimum period over which a dependable experience can be established. “4. A conflagration is any loss in excess of a million dollars. “5. The first million dollars of loss is chargeable to the State in which it originates, the balance being pro rated to all the States (including the one in which it originated) in proportion to the premium income of each State. “6. A reasonable underwriting profit is five per cent, plus three per cent, for conflagrations. The three' per cent, allowance for conflagrations is subject to revision if and when the records of conflagrations to be collected by the National board show that such three per cent, is excessive or inadequate.” This report is of course advisory in its nature, and binding upon no one, but it does show what these officers understood underwriting profit or loss meant. It does not appear that the Commissioner of Arkansas attended this convention, although Arkansas is the State referred to in the report as having a fixed percentage of insurance rates. This report appears to have been adopted by the unanimous vote of all the Commissioners present. ■ It thus appears that underwriting profit or loss has a known meaning as the sum arrived at by deducting from earned premiums all incurred losses and incurred expenses, and that the term, as thus interpreted, has long been employed in the insurance business, and we must therefore conclude that it was so used in the act of 1919, nothing to indicate a contrary intention appearing in the act. Having reached this conclusion, we should not be swerved from so interpreting it by any consideration of the results obtained. It may be said, however, in passing, that the fear expressed by the Commissioner that, if he adopted the premium-earned basis, losses would be pyramided, that is, credit would be given more than once for the same losses, appears to be without foundation. It is very clearly shown that this could not be done without deliberately falsifying reports, and a false report could, of course, be made on either basis. It is shown that the “Convention Form of Annual Statement” automatically takes care of this by requiring deductions to be made'of profits and credits taken, and in the same way any errors of estimation are taken care of by deductions in the next period. The court below made the following findings: “The words ‘underwriting profit’ have had for a long number of years, and now have, a well known, established and defined trade meaning, to-wit, net premiums earned less losses and expenses incurred in the business of writing fire insurance, and that those words were used in that sense in the act under consideration in this case.” Upon this finding the court ordered that, in making up his tabulations, the Insurance Commissioner should use, in said calculation, the aggregate net premiums earned during the five-year period, as distinguished from the, net premiums received, and that he should use losses incurred during said period, as distinguished from losses paid, and should use expenses incurred, as distinguished from expenses paid. It follows, from what we have'just said, that this finding and order of the court is correct, and it is approved. The court below also found “that the Insurance Commissioner should allow as expenses that part of the income and excess profits -taxes and all other taxes paid or incurred to the United States government during said period which is properly apportionable to the underwriting business done in Arkansas.” We do not concur in this finding. Underwriting profits must, of course, be taken into consideration by the directing officers of the insurance companies in casting up their accounts to determine what sum has been earned; but our statute does not undertake to regulate earnings of the capital stock of the companies. The act does not deal with capital stock, nor dividends 'to be paid thereon. It deals with underwriting profits, and, as we have shown, that term has a well-defined meaning, and is arrived at by deducting from earned premiums all incurred losses and incurred expenses. The income taxes are based upon profits. The thing the Commissioner determines is not the general business outcome of the reporting companies, but their underwriting profits in this State. He has no concern at all in making the tabulations with the investment end of the insurance business, either in or out of this State. Insurance companies pay income taxes on their business as a whole; both the underwriting and investment ends are considered for that purpose. Insurance companies might sustain such losses on their general business, through conflagrations elsewhere, or through other causes, as to have no income taxes to pay; but this would not affect their underwriting profits in this State. In other words, for the purposes of this act, the State of Arkansas is the sole unit to be considered, and the underwriting profit in this State is the sole subject of inquiry. The Commissioner does not take into account the balance sheet of any particular company. Some companies may have income tax to pay, while others may not. He considers the companies in the aggregate, and not separately, and it is unimportant to him whether the general business of any particular company will require the payment of income taxes or not. He determines in solido the underwriting profit of all the companies for a given period and, in doing so, he should exclude any allowance for income taxes. The court below also found “that the Insurance Commissioner should include in said tabulation the business of all stock fire insurance companies that did business in this State under license from the State during any part of said period.” We think the court was correct in this finding. The manifest purpose of the Legislature was to ascertain the result of the business done by all the insurance companies during the five-year period under consideration. It is unimportant what companies do the business. The thing to be ascertained is what was the result of the five years of business, and in arriving at that fact the Commissioner should take into account the reports of all companies covering any portion of the five-year period. If reports cannot be obtained from companies which have heretofore withdrawn from the State, their business, of course, cannot be included in the tabulation; but that fact affords no reason for excluding reports which are available from the companies which were not doing business at the end of the five-year period. Because the tabulation cannot be made absolutely accurate, by including all those companies which have done business in the State for any part of the five-year period, is no reason for not making the tabulation as nearly accurate as can be done by including reports which are available. Upon all questions thus far discussed and decided by us, the findings of the court below were in favor of the insurance companies. The court below made a finding adverse to them, and from that finding the companies have appealed. This finding was that “the Insurance Commissioner is not required by the act under consideration to make any allowance for conflagration hazard.” We think the court was correct in this finding. It is a fact, as stated above, that, at the last National convention of the Insurance Commissioners of the different States, the Commissioners adopted a resolution to the effect that conflagration hazard should be taken into account 'in fixing rates.- But that body was not undertaking to interpret our statute, nor, as we have said, would we be bound by their action if they had done so. Their resolution dealt with the manner of determining reasonableness of rates, and their report shows that only one State had fixed a definite per cent, of underwriting profit, which State, as we have said, is our- own, thereby determining what was reasonable. That part of the resolution in regard to conflagration hazard was advisory to those Commissioners acting for States whose statutes provided for reasonable profits. In determining what is a reasonable profit it is no doubt proper to consider conflagration hazard, but presumptively our Legislature did this. It has fixed five per cent, as reasonable, and we cannot presume that the Legislature omitted any item which should properly have been considered. This finding of the court below is affirmed. It follows, therefore, that the findings and decree of the court below, except in so far as it relates to the allowance for income taxes, is affirmed. Mr. Justice Wood concurs except as to Federal income and excess profit taxes, which he thinks should be allowed as an expense of the business, that this tax should be apportioned, and the companies should receive credit for the income and excess profit taxes on the income and excess profits derived from the underwriting end of the business in this State.