Schimpf v. Lehigh Valley Mutual Insurance

Mr. Justice Paxson delivered the opinion of the court, This action was brought in the court below by the Lehigh Yalley Mutual Fire Insurance Company against John G. Schimpf & Son, plaintiffs in error, to recover an assessment upon a premium note. The defendants resisted payment upon two grounds, viz.: 1. That the assessment was ultra vires; and 2d. That it was made by the company after it had executed a general assignment for the benefit of creditors. These two questions involve all that is important in the numerous assignments of error. In order to discuss them intelligently it is essential to have a clear understanding of the facts. The company was incorporated March 30th 1866, Pamph. L. of 1867, p. 1398, with a capital of $20,000, divided into shares of $50 each, with power to increase the capital stock to $500,000, “ and to [375] be organized and managed according to the provisions of an act to provide for the incorporation of insurance companies, approved the 2d day of April 1856, and shall be limited to risks designated in the first class in the 7th section of said act, with the right to transact its business on the mutual principle in connection with its capital stock as aforesaid.” On the 11th of March 1871, a supplement to its charter was passed by the legislature (Pamph. L. 325), which after reciting that the said company possessed the power to insure on the stock and on the mutual principle, that policies had been issued on the mutual principle only, and that $10,000 of the capital 'stock had been paid in, declared, by the 1st section, “ that it shall be lawful for the directors of the said company, with the approval of the holders of a majority of the said capital stock, to withdraw said stock and pay the amount thereof paid in to the parties entitled thereto; and by the second section, “ That if said stock be withdrawn, as above provided, thereafter the powers and liabilities of said corporation shall be those of a mutual insurance company only.” The company accepted this amendment, and the capital stock was withdrawn. After this it proceeded to issue two classes of policies, the one for premium notes and the other for cash. Members insuring upon the all-cash plan were not liable to any further assessment to pay losses, but were permitted to participate in the profits, and to enjoy equal rights with other members. Those insuring upon the note plan paid a cash assessment of ten per cent, upon their premium note, and were liable to further assessment to the full amount of the note, in case the losses and expenses of the company required it. Revenues thus derived were the common property of both classes of members, and were received into and paid out of a common treasury in the liquidation of losses and expenses. On May 16th 1874, the defendants made application to the company for insurance in the sum of $1500, and a policy was issued to them accordingly, for which they gave their note for $875, subject to such assessments as might be made by the company, in accordance with the provisions of its charter and by-laws. In February 1877, the company executed an assignment for the benefit of its creditors, after which the assessment, which is the subject of this contention, was made by resolution of the board of directors. It is admitted that its losses, to cover which the assessment was laid, were on cash policies $30,697.48, and on premium-note policies $7105.55. It was urged that the cash policies were issued by the company in violation of its charter; that by the withdrawal of its capital stock, under the Act of- 1871, it was limited to a strictly mutual business. We think it clear its acceptance of the provisions of that act, and the subsequent withdrawal of its capital, put an- end to its power to insure upon a stock basis. Nor is there any evidence that any stock policies were ever issued. We must not confound a stock policy with a cash policy. They are essen [376] tially different. The payment of a cash premium does not decide the character of the policy as to whether it is mutual or stock. A mutual company may insure for either note or cash; so may a stock company. The distinction between them rests upon different principles. A stock policy is issued solely upon the credit of the capital stock of the company to one who may be an entire stranger to the cqrporation, who acquires no right of membership by reason of his policy; no right to participate in its profits, and who subjects himself to no liability by reason of its losses. In such case it can make no difference whether the premium is paid in cash or by note: that is a private matter between the insurer and the insured, which concerns no one but the parties to the contract. Mutual companies, on the other hand, are somewhat of the nature of a partnership ; the insured becomes a member of the corporation by virtue of his policy; is entitled to a share of the profits and is responsible for the losses to the extent of his premium paid or agreed to be paid. In the language of the 11th section of the Act of April 2d 1856, “all persons insuring with (mutual companies), and continuing to be insured therein, shall thereby become members during the period they shall remain so insured and no longer, and shall pay such rates as shall be'determined by the board of directors, and be liable for all losses and expenses of said company to the amount of the premiums paid or agreed to be paid by the members respectively.” The true principle of mutual insurance is the payment by each of the insured of a certain sum of money towards a common fund, which fund is to be held for the protection of each person so contributing. Is there any substantial reason why the cash premium may not represent the insured in the common fund as well as a premium note? There are numerous and respectable authorities which hold that there is not; among which may be mentioned Angell on Fire and Life Insurance 422; Insurance Co. v. Hoge, 21 Howard 64; May on Insurance, sect. 548; Mygatt v. N. Y. Protection Ins. Co., 21 N. Y. 52; and White v. Havens, 20 How. Pr. 177. It was held in Susquehanna Ins. Co. v. Perrine, 7 W. & S. 351, that the insured shall ipso facto be a member of the company, and on no other plan could a mutual company be constituted. The 11th section of the Act of 1856, supra, evidently refers to two classes of premiums, viz.: those which shall be paid in cash, and those which shall be paid by note or other evidence of indebtedness. In either case the insured is liable for losses to the extent of his premium “paid or agreed to be paid.” Where his premium is paid in cash that fixes the extent of his liability. If paid by note such note is liable to future assessments. The one is the equivalent for the other. The practical effect is that the premium note policy holder gets his insurance at a comparatively trifling cost, provided there be no losses. In such event he is not called upon for assessments. But he takes that risk, and in case of losses must [377] respond. The insured for a cash .premium pays in a sum which is considered by the company as a fair equivalent for future assessments, and his proper proportion of the common fund. This is a matter of equitable arrangement between the members of a mutual company. It is not prohibited by any law, and is a matter with which the outside public have no concern. It comes with an exceeding bad grace for a member of the company insured on the note plan to object to the payment of a loss upon a cash policy. By a mutual arrangement, to which the assent of every member must be presumed, the holder of the cash policy has made his contribution to the common fund created for the benefit of all. He has contributed the precise sum which the rules of the company have designated as the quota which in justice he ought to pay. The insured by note have contributed nothing, or at most but little to the common fund, and cannot now be permitted to escape the payment of what they agreed to pay because other parties made their contributions in cash at the time they were insured. We are of opinion that the position of the plaintiffs in error is untenable. It is unjust to their fellow members. Equally untenable is the position that the directors had no power to make the assessment after the assignment. That instrument passed only the assets of' the corporation, not its franchises. The assignees can do no corporate act. The corporation exists for many purposes, and may make an assessment upon the premium notes where it is necessary to pay debts. Were this not so it is difficult to see how the rights of those members who have sustained losses upon their policies could be enforced; while those who have insured by premium notes would enjoy the protection afforded by the common fund, and at the same time escape the payment of their contribution thereto. Upon a careful consideration of the case we find no error in the record, and the Judgment is affirmed.