Neighbors of Woodcraft v. Fishback

Tolman, J. Appellant, as plaintiff, brought this action seeking an injunction restraining the respondent, as insurance commissioner of this state, from cancel-ling its license, interfering in any way with its continuing its business as heretofore carried on, or enforcing, or attempting to enforce, an order theretofore made by the commissioner requiring that the contributions of new members be kept separate and apart from the other funds of the society, making such new members a separate class, and in effect, so far as the insurance features are concerned, a separate and independent society. In its amended complaint, appellant alleges, among other things, that it is duly incorporated under the laws of the state of Oregon, has been doing business in this state since April 1, 1897, under and by virtue of the licenses duly issued by the insurance department of the state, at all times being organized and conducted solely for the mutual benefit of its members and their beneficiaries, not for profit, having a lodge system with a ritualistic form of work and a representative form of government, and making provision for and paying benefits in accordance with the laws of the state of Washington; that it has a total membership of upwards of fifty thousand, with more than sixty-four millions of dollars of insurance in force, of which membership more than seven thousand, with insurance protection to the amount of upwards of nine million dollars, are residents of this state; that, during the year 1922, it collected in benefit receipts the sum of $773,512.22, and paid out during the same period in death claims $673,500, the receipts being in the ratio of 114.7 per cent of the death claims; that in May, 1922, it prepared and filed in the office of the insurance commissioner its annual report and valuation — 684 — of its condition, and valuation of its policies as of December 31, 1921, with exhibits and notes attached, showing its possession of a benefit fund surplus in the sum of $3,331,352.98, and demonstrating as it is alleged, its complete solvency; that its members are required to pay each month monthly benefit assessments to provide for the payment of losses at rates' fixed by its bylaws, in amounts according to the ages of the members at the date of their admission and the amount of benefits provided in their contracts, and in addition thereto, since January 1, 1918, its by-laws provide for special contributions to the benefit fund as follows: “Section 162. Ratio of Benefit Fund Income to Claims — Subd. 1. The Benefit Fund income for each calendar year shall be maintained at a ratio of at least 10 per cent above all claims against the Benefit Fund which shall have matured in such calendar year. “Subd. 2. — The Benefit Fund Income, in the meaning of this Section shall consist of all sums derived from regular monthly benefit assessments, and interest on deposits and investments of the Benefit Fund, including rental from the General Fund, for the property designated as Lots seven and eight, Block 220, situated in the city of Portland, Oregon. ‘ ‘ Section 163, — How Ratio of Benefit Fund Income Maintained — -If the total Benefit Fund Income, as defined in Section 162, shall, in any calendar year beginning January 1, be not sufficient to maintain the ratio of income over claims required in section 162, additional collections from members to meet such deficiency in the Benefit Fund income shall be made as prescribed in Sections 165, 166, and 167. “Section 164, — Special Benefit Assessments — Collections made to meet the provisions and requirements of sections 162 and 163 shall be known and designated as Special Benefit Assessments. “Section 165. — Levy of Special Benefit Assessments. Subdiv. 1. When special benefit assessments — 685 — are necessary for any calendar year, to meet the provisions and requirements of sections 162 and 163, the Grand Board of Managers shall at the annual meeting in March of the succeeding year, formally direct the Grand Guardian and Grand Clerk to levy a special benefit assessment or assessments in amount sufficient to bring the Benefit Fund income for the preceding year up to the requirements. “Subdiv. 2. Upon receiving the formal direction from the Grand Board of Managers, the Grand' Guardian and the Grand Clerk shall officially issue the levy for the required special benefit assessment or assessments. “Subdiv. 3. Liability for special benefit assessments, to cover any benefit income deficiency, under the requirements of Sections 162 and 163, shall apply only to Class A members whose certificates were in force and effect for the year in which such deficiency occurred. “Section 166, — Amount of Each Special Benefit Assessment — Each special benefit assessment shall be the same in amount for each member as the regular monthly benefit assessment paid by such member, or some definite fraction of the amount of such assessment, if less than a full assessment is necessary to attain the ratio as specified in Section 162. “Section 167, — When Special Benefit Assessments Are Payable — Whenever the Grand Board of Managers directs the levy of special benefit assessments or assessments, it shall at the same time designate what month or months payments of the same shall be made by members of the Association liable therefor. “Section 168. — Special Benefit Fund Surplus— Subdiv. 1. Should the Benefit Fund income, as defined in section 162, for any calendar year, exceed the claims against the Benefit Fund, which shall have matured in such calendar year, by more than 10 per cent, the Grand Board of Managers shall declare, under the provisions of section 137, paragraph 5, the excess of income above 110 per cent to be a free surplus, to be held and known as a special Benefit Fund Surplus. — 686 — “Subdiv. 2. The special Benefit Fund Surplus arising under the provisions of this section shall be used only; (a) to meet or help meet any future required special benefit assessments; (b) or, in the discretion of the Grand Board of Managers, to reduce the amount of one or more regular monthly benefit assessments, payable, by all Class A. benefit members of the Association. ’ ’ It is further alleged that these by-laws constitute a part of the insurance contract between the society and its members; that all of its losses are promptly met, and all benefits from it to its members are paid in full and a surplus is accumulated yearly in addition to the amount necessary to meet the demands mentioned; that, since the adoption of the by-laws quoted, special assessments have been collected from members to supplement the regular monthly assessments as required, by which means benefit funds have been collected at the ratio of 110 per cent or more of all losses payable, and that the special assessments are a part of the regular contributions made by members under their contracts, and that members are subject to the same penalty for failure to pay the special assessments as in the case of failure to pay the regular monthly benefit assessments; i. e., either may be enforced by an action at law, or the benefit contract of the member may be cancelled for non-payment of either. It is charged that the insurance commissioner refuses to recognize the by-laws which we have quoted, or that the special assessments therein provided for are an asset to be considered; refuses to give any credit on account thereof, and has served notice, as hereinbefore indicated, requiring new members to be placed in a separate class and the funds contributed by thém kept separate and apart. It is further alleged that to comply with this demand would require appellant to aban — 687 — don its present method of doing business; to make contracts with new members different from the contracts held by its present membership, and different from those which it and its members desire to enter into with new members, and “that such a change would discredit the present method of plaintiff in conducting its business, and would lead to a loss of many of its existing membership, and that the damage to plaintiff and its members thereby would be impossible of exact determination, but would be very great in character, and would be irreparable. ’ ’ To this complaint a general demurrer was interposed which was sustained by the trial court, and judgment entered dismissing the action. The plaintiff has appealed from that judgment. Our statutes, Bern. Comp. Stat., § 7259 et seq. [P. C. § 3088], cover the subject of the organization and conduct of fraternal benefit societies, and the question here presented is one of construction. Section 7281, Bern. Comp. Stat. [P. 0. § 3110], among other things, provides: “Every society transacting business in this state, shall annually, on or before the fifteenth day of February, file with the commissioner, in such form as he may require, a statement under oath of its president and secretary or corresponding officers, of its condition and standing on the thirty-first day of December next preceding, and of its transactions for one year ending on that date, and. also shall furnish such other information as the commissioner may deem necessary to a proper exhibit of its business and plan of working.” Under this provision of the statute, appellant filed its report with its plan of working as an exhibit, attached, on which the respondent’s threatened adverse action is based. Bespondent evidently construed this — 688 — “plan of working” to be a whole life level rate plan, and demanded that appellant’s financial condition and standing be determined by the method of valuation prescribed for societies which operate on that plan. We need not here define the level rate plan, as it is well understood by those familiar with the subject, and it is sufficient to say that, in a general way, that plan is designed to provide for normal losses and to create a reserve which will care for unexpected emergencies and contingencies. Appellant’s plan does not purport to be a level rate plan, first, because the stated monthly assessments are not claimed to be either actuarily conceived or mathematically computed; second, the provisions for special assessments are a material part of the working plan, and not a mere safety clause for emergencies and contingencies. As we understand it, with the addition to its bylaws of the by-laws quoted, the plan upon which the appellant is now working covers the levying of assessments to meet all maturing claims, and in addition the levying of additional or special assessments to assure an increase in accumulations equal to ten per cent of the current mortality losses. This provision for increased accumulations saves the plan from the fatal defects inherent originally in this class of insurance which are so clearly pointed out in Thomas v. Knights of Maccabees, 85 Wash. 665, 149 Pac. 7, Ann. Cas. 1917B 804, L. R. A. 1916A 750. In order to remain in good standing, members must pay the additional or special assessments just as surely as they must pay the regular monthly assessments, and their failure to do so cancels their insurance and releases the appellant from the risk and all liability thereon. If they do not pay, they are suspended and the insurance risk is terminated. The exhibits to the complaint show that, since the adoption of the by-laws providing for these — 689 — special assessments, and during the years 1918 to 1921, inclusive, by tbe working of this plan appellant has met all maturing death losses and materially increased its reserve or surplus, and it must be apparent that, if it collects each year ten per cent in excess of all losses, it must become increasingly solvent. Tbe plan to be selected and tbe determination of when and bow “stated periodical contributions” shall be made by members are affairs of internal management with which tbe courts will not interfere. Tolbert v. Modern Woodmen of America, 83 Wash. 287, 145 Pac. 183; Wright v. Minnesota Mut. Life Ins. Co., 193 U. S. 657; Ross v. Modern Brotherhood of America, 120 Iowa 692, 95 N. W. 207. As we have seen, appellant’s plan enables it to carry out its contracts in good faith and according to the will of its self-governing members, and tbe commissioner erred in construing it otherwise. Of course, tbe commissioner may and should inquire into the working of tbe plan and tbe adequacy of tbe assessments, but a finding against “adequacy” must be based on sufficient cause. We bold tbis plan to be sufficient to fully meet tbe requirements of §§ 7267 and 7270, Rem. Comp. Stat. [P. C. §§3096, 3099], which require that tbe stated periodical contributions by members shall be sufficient to meet all “mortuary obligations contracted, when valued upon tbe basis of tbe National Fraternal Congress Table of Mortality,” unless there be something wrong with tbe method of valuation adopted by appellant as shown in its report to tbe commissioner and made a part of tbe complaint. As to tbe method of valuation, tbe statute provides in § 7281, Rem. Comp. Stat. [P. C. § 3110]: “In addition to tbe annual report herein required, each society shall annually report to tbe commissioner, — 690 — a valuation of its certificates in force on the thirty-first day of December, last preceding, excluding those issued within the year for which the report is filed, in cases where the contributions for the first year in whole or in part are used for the current mortality and expenses: Provided, that the first report of valuation shall be made as of December thirty-first, nineteen hundred and twelve. Such report of valuation shall show, as contingent liabilities, the present mid-year value of the promised benefits provided in the constitution and laws of such society under certificates then subject to valuation; and, as contingent assets, the present mid-yeár value of the future net contributions provided in the constitution and laws as the same are in practice actually collected. At the option of any society, in lieu of the above, the valuation may show the net value of the certificates subject to valuation hereinbefore provided, and said net value, when computed in case of monthly contributions, may be the mean of the terminal values for the end of the preceding and of the current insurance years. “Such valuation shall be certified by a competent accountant or actuary, or, at the request and expense of the society, verified by the actuary of the department of insurance of the home state of the society, and shall be filed with the commissioner within ninety days after the submission of the last preceding annual report. The legal minimum standard of valuation for all certificates, except for disability benefits, shall be the National Fraternal Congress Table of Mortality as adopted by the National Fraternal Congress, August twenty-third, eighteen hundred and ninety-nine, or, at the option of the society, any higher table, or at its option, it may use a table based upon the society’s own experience of at least twenty years and covering not less than one hundred thousand lives with interest assumption not more than four per cent per annum. Each valuation report shall set forth clearly and fully the mortality and interest basis and the method of valuation. “The valuation herein provided for shall not be considered or regarded as a test of the financial solvency — 691 — of the society, but each society shall be held to be legally solvent so long as the funds in its possession are equal to or in excess of its matured liabilities.” In construing this section of the statute, the respondent commissioner seems to have disregarded § 7267, supra, to which we have already referred, and to have given undue weight to that portion of § 7282, Rem. Comp. Stat. [P. C. § 3112], which provides for the reduction of deficiencies in certain cases. He also, in fixing the valuation, applies a whole life level rate plan, wholly disregarding the by-laws of 1918, and overlooks the wording of the statute permitting and requiring a society to have its valuation certified by a competent accountant or actuary, which the complaint shows was done here. A reading of the statute indicates clearly that the valuation by an actuary was not intended as an idle thing to be ignored at will. Actuaries are supposed to be experts and specialists, learned in the science of life contingencies, with expert and practical knowledge of life insurance principles, methods and management. It is to be presumed that the legislature acted with this thought in mind. The competency and accuracy of the actuarial work included in appellant’s report is in effect admitted by the demurrer, and by argument only it is sought to be established that it is based upon a wrong theory. Had we sufficient knowledge on the subject, we would not here enter into a technical discussion of the several points argued. We think, under the custom of life insurance companies generally, the valuation of appellant’s outstanding contracts on the basis of one year renewable term protection was right; but if not, then that is a question to be determined after the joining of issues and hearing of evidence on both sides. So far as here appears from the record, upon which our — 692 — decision must rest, the annual ten per cent increase in accumulations, which must accrue if the appellant’s plan is carried out, will he sufficient to offset the increased cost of protection to members accruing annually by reason of advance in age, and to assure this result, as mortality claims increase the surplus thus created will also increase so long as the protected members pay. When, if ever, the burden becomes too great, and the members cease to pay, that moment their insurance ends, the liability of the society ceases, and its only liability as insurer will be on pending claims based on contracts of members already deceased. We cannot say that the reserve, augmented each year up to that time by an amount at least equal to ten per cent of the death losses, will not be sufficient to care for the accrued costs. It is too plain for argument that to separate the membership into classes would be to destroy mutuality, uniformity, and perhaps fraternity, and that is a thing to be avoided. The scope of regulation by statute, as we see it, should be (and we think our statute so intended) to prevent abuses and fraud and to assure the exercise of good faith toward the beneficiaries. Beyond that the plan of working was adopted by the members of the society through their chosen representatives; is theirs; they may change it if and as they will, and if the final results are disappointing, theirs is the responsibility. We conclude that the demurrer to the amended complaint should have been overruled. Reversed, and remanded with instructions to overrule the demurrer. Main, C. J., Holcomb, Parker, Bridges, and Pemberton, JJ., concur.