Scott v. Eagle Fire Co.

The Chancellor. The claim made by the appellants in this case is founded upon the erroneous supposition that it is the duty of the directors of an insurance company to divide all its surplus funds beyond its capital stock, periodically, among its stockholders; leaving such capital stock alone as the fund to which the creditors of the company, who become such by the loss of property insured, are to look for remuneration. But as I had occasion to say in another case, (De Peyster v. The American Ins. Co. and others, In Chan. 25th May, 1837,) the capital stock of an incorporated insurance company is not the primary or natural fund for the payment of losses which may happen by the destruction of the property insured. The charter of the company contemplates the interest upon the capital stock? and the premiums received for insurance, as the ordinary fund out of which losses are to be paid. And the surplus of that fund, after paying such losses, is surplus profits within the meaning of the'charter; which surplus profits alone are to be divided, from time to time, among (he stockholders. The unearned premiums received by the company upon which the risks are still running, and which may therefore all be wanted to pay losses which may happen upon those risks, are not surplus profits which the directors are authorized by the charter to distribute among the stockholders. 203 The capital stock of the company is a special fund, provided by the charter, to secure the assured against great and extraordinary losses which the primary fund may be found insufficient to meet. And if it becomes necessary at any time to break in upon this special fund, to pay such extraordinary losses, it must be made good from the future profits of the company before any further dividends of those profits can be made. (1 R. S. 590, § 4.) The directors of an insurance company have therefore no right to divide all the interest or premiums on hand at the time a dividend is declared; but they should always leave a surplus fund, in addition to the capital stock, sufficient to meet the probable losses on the risks then assumed by the company and which have not then expired. And if any losses accrue upon such risks, whether more or less than the whole capital of the company, that surplus or contingent fund must be applied to satisfy such losses. The fact therefore that the amount of the losses in this case was more than all the funds of the company, including its capital, furnishes no reason whatever for taking the natural and primary fund for the payment of losses, and giving it to the stockholders, to the injury of the creditors of the company. , As the directors are bound to exercise a proper discretion in making dividends of surplus profits, if they abuse that power by dividing the unearned premiums without leaving sufficient to satisfy the probable losses, they may, in case of any extraordinary loss which is sufficient to exhaust the whole capital and more, make themselves personally liable to the creditors of the company. On the other hand, should they without reasonable cause refuse to divide what is actually surplus profits, the stockholders are not without remedy, if they apply to the proper tribunal, before the corporation has become insolvent. But after such insolvency it would not only be improper but it would be highly inequitable to take such surplus fund and divide it among the stockholders; leaving the insured, whose premiums had contributed to the increase of that fund, to sustain a loss. In this case the fund remaining on hand, after the last dividend, in. July, 1835, was certainly not more than a prudent board of directors 204 ought to have retained to meet the probable losses which might occur upon the ten millions of property then insured by the company ; as it was less than three fourths of one per cent upon the amount at risk. And before the time i'or making the next semi-annual dividend arrived, this extraordinary calamity, which was equally destructive to the interests of the stockholders of the company and of the assured, gave to the latter a preferable claim upon all the funds and property of the company. For these reasons I am perfectly satisfied that the decision of the vice chancellor was right. The decree appealed from must therefore be affirmed with costs.