Insurance Co. of North America v. McCoach

McPHERSON, Circuit Judge. Under the act of August 5, 1909,' the government compelled the Insurance Company of, North America to pay an excise tax with respect to its net income for the years 1910 and 1911. This suit is brought to recover a part of the tax, the company claiming that too much had been exacted. In the court below two items were in dispute, and, as the company obtained judgment for only one' of them, this writ of error presents the question whether judgment should have been entered for the other item also, a sum of $2,503.47, with interest.. The opinion of the district judge is reported in 218 Fed. (C. C.) at page 905. • The trial was without a jury, and nearly all the facts were agreed upon, only three witnesses having been heard. The controversy arises in this way: The company, a Pennsylvania corporation chartered in 1794 by a special act (3 Smith’s Taws, p. 129), is now subject to the general insurance laws of the state. Its business is confined to-fire and marine risks. As the federal statute lays the tax with respect to net income, the question is immediately, presented, How is net income to be ascertained? The answer is found in section 38, subd. 2, and we quote so much of the. section as is now important: “ * * * Such net income shall be ascertained by deducting from the gross amount of the income of such * * * insurance company, * * * all losses actually sustained, &c. * * * and in the case of insurance companies the sums other -than dividends paid within the year on policy and annuity contracts and the net addition if any required Toy law to be made withim, the year to reserve funds.” We italicize the words on which the decision turns. [1] 1. The first matter to be noted is that the deduction in question is such addition as may be “required by law.” The parties agree that this, phrase means the law of the particular state, for the federal government does not attempt to regulate the internal affairs of insurance companies. In this case, we have to do with the requirements of the Pennsylvania law, and especially with such as concern the reserve funds of fire and marine insurance companies. (The reserves required from companies doing' other kinds of insurance are not involved in this controversy.) Whatever sum, therefore, the law of the state required the company to add to its reserve funds during each of the years in question is expressly declared by Congress to be a proper item of deduction from the company’s gross income. For the moment, we defer the examination of the Pennsylvania law on this subject, in order to consider the ground on which the district court decided against the company. Briefly, the position taken by the learned judge is this: That, because the company had an ample surplus, much more than adequate to-meet every addition to its reserve funds that was required by the state, it could not be allowed the deduction given by the federal statute. One of the additions required was the amount necessary to .meet unpaid losses and'claims, and the ground taken below seems, in effect, to be this: Since the company had accumulated a surplus more than enough to meet these unpaid claims, it had lost its right to the deduction. We.do not know whether the deduction would have been regarded as allowable, if the company had been barely able to' provide for these liabilities, but in any event we cannot agree with the conclu [659] sion. Surplus is what remains after making provision for all liabilities of every kind (leaving capital stock out of the present consideration); and, as we understand the situation before us, the surplus of the Insurance Company of North America ps what remained after it had' made provision for these losses by setting aside all that the Pennsylvania law required for that purpose. 0 We are unable to see how the fact can be relevant that (after thus providing once for these losses) the company still had in its treasury a large sum of money out of which it could pay them, again, and several times over. In other words, rve do not think the company’s surplus has anything to do with the present dispute. Congress has in terms allowed the company to deduct from its gross income “the net addition, if any, required by law to be made within the year to reserve funds”; and, as we see the question for decision, it is simply this: What net addition does the Pennsylvania law require to be made to the reserve funds of an insurance company doing a fire and marine business only ? [2] 2. In order to answer this question correctly, we must first ascertain what Congress meant by “reserve funds.” Was the phrase used in a special sense, or does it include generally such funds as must be reserved to meet liabilities, whether they be contingent or already adjusted? In our opinion it bears the general meaning. If Congress intended to allow no other deduction ou this account except what is technically known as “reinsurance reserve,” or unearned premium, it is not easy to understand why that well-known term of art was not used. The plural form, reserve funds, seems also to indicate that Congress intended to include, not only reinsurance reserve, but any other fund as well that a state might require the company to set aside for the purpose of meeting such a liability as unpaid losses and claims. This seems to be the natural and ordinary meaning of the words, and presumably therefore is the construction to be adopted. What then does the Pennsylvania law require to be added to the reserve funds of a fire and marine insurance company? For more than 40 years the state has had a department of insurance, and a system of regulating the affairs of companies doing that kind of business, and from time to time it has passed statutes on this subject. Ou June 1, 1911, an act was adopted codifying and superseding many of the previous enactments, and (although this statute is later than 1910, one of the years now in question) we need not go behind it, since for present purposes it does not differ materially from the earlier acts. The system is as follows: A department of insurance is established in charge of a commissioner, whose powers of control are varied and extensive. He is to see that all the laws of the state respecting insurance companies are faithfully executed. At his pleasure he may investigate, and examine the affairs of any company with the utmost thoroughness. If it has failed to comply with tlie law, or if he shall find its assets insufficient, he may suspend its entire business, reporting the delinquent, to the Attorney General for further action looking to its dissolution. He is to make an annual report to the Legislature of the condition of all the companies doing business in the state. Every such company must file an annual statement, using the blank forms furnished by the com [660] missioner, who may adopt any form he thinks “best adapted to elicit from them a true exhibit of their financial condition.” Failure to make such a statement, or the making of a false statement, is severely punished. The act provides in section 4 the method of ascertaining the “reserve liability” of life insurance companies (with which we have no present concern), and then in sections 7,*8, and 9 turns to the subject of ascertaining the financial condition of other companies. These sections first take up reinsurance reserve, and provide that, “in determining the liabilities upon its contracts of insurance of any insurance company •other than life insurance, and the amount such company shall hold as .a reserve for reinsurance,” the commissioner shall charge casualty insurance companies with a certain proportion of their premiums; and — • “For fire insurance companies fie sfiall charge 50% of tfie premiums written in tfieir policies upon all unexpired risks tfiat fiave one year, or less tfian •one year, to run, and a pro-rata of all premiums on risks having more tfian one year to run; on perpetual policies fie shall charge tfie deposit received, less .a surrender charge of not exceeding 10% thereof. From [For] marine and inland risks fie shall charge 50% of tfie premium written in the policy upon .yearly risks, and tfie full amount of tfie premium, written in tfie policy upon all other marine and inland risks not terminated.” Having thus dealt with reinsurance reserve, the statute goes on to, unpaid losses, and provides that the commissioner “shall, in calculating' the reserve against unpaid losses,” pursue a certain method with casualty companies (which does not need consideration now); and then, taking up other classes of companies, it declares in section 9 that .after the commissioner has “charged as a liability the reinsurance and loss reserves, as above defined for insurance companies of this commonwealth other than life, and adding thereto all other debts and claims against the company,” he shall thus ascertain whether the capital of the company has be.en so impaired that the company should be required to make the impairment good, as a condition to the doing •of further business. Acting under the authority of the sfatütes that have been in force since 1873, the commissioner has required the plaintiff and similar companies to return each .year, as an item among their liabilities, the net amount of unpaid losses and claims, whether such losses are actually adjusted, or are in process of adjustment, or are resistedand in so doing he has followed what the department has always understood to be the command of the Pennsylvania law. It is true that in this particular the statutes have never been interpreted by the Supreme Court of the state, but we think it must be conceded that (even if their meaning be considered doubtful) they are susceptible of the construction thus put upon them by the department that completely controls the subject. Moreover, as far as we know, the construction has never been contested, and it is clear that this form of report has been required by the department from the beginning. We have felt at liberty to examine the commissioner's official reports for 1876, 1884, 1894, and 1904 (although these were not in evidence), as well as the company’s reports for 1910 and 1911, and we find this item of unpaid losses always charged as a liability. Being a liability, and so charged [661] in the company’s accounts, funds are necessarily “reserved” to meet it, although of course they are not, and need not be, physically set aside for that purpose. One of the witnesses has been connected with the department for more than 30 years, either as clerk or deputy or as the commissioner himself, and he testified to this construction and gave excellent reasons therefor. Another witness, a man of 45 years’ experience, testified that this was the general construction in the insurance business, and no evidence was offered to the contrary. Indeed, it is difficult to see how any other opinion could be entertained. After a loss lias happened, the damage done thereby becomes an undoubted liability of the company, and (except now and then) will have to be met. In most cases all that remains to be done is to adjust the loss in order to ascertain the precise amount due, and usually this amount can be estimated in advance with sufficient accuracy to determine how much the company should set aside to make the damage good. Such unpaid losses are “claims against the company,” and in our opinion the Pennsylvania laxv (while it may be somewhat lacking in precision of statement) required them to be added to the company’s liabilities, and required funds to be reserved sufficient to meet them in full. It is hardly necessary to cite authorities on the point that the uniform construction of a statute adopted by the highest administrative authorities is entitled to great respect (U. S. v. Healey, 160 U. S. 141, 16 Sup. Ct. 247, 40 L. Ed. 369; U. S. v. Cerecedo Hermanos y Compania, 209 U. S. 339, 28 Sup. Ct. 532, 52 L. Ed. 821); and we should hesitate long before we differed from such a construction, even where we had more doubt concerning its correctness than we have in the present instance. The district judge entertained the same opinion concerning the meaning of “reserve funds” as we have just expressed, but was misled (as we think) by his views in reference to the surplus. We conclude that the company was entitled to the reduction in dispute, and the judgment must therefore be reversed, with instruction to allow the claim.