Gorman Young v. Hartford Fire Ins Co Same v. Phcenix Assur Co

• Decision Date: 05 January 1931
• Docket Number: 13,Nos. 12,s. 12
• Citation: 75 L.Ed. 324,72 A.L.R. 1163,51 S.Ct. 130,282 U.S. 251
• Parties: O'GORMAN & YOUNG, Inc., v. HARTFORD FIRE INS. CO. SAME v. PHCENIX ASSUR. CO., Limited. Re
• Court: U.S. Supreme Court

282 U.S. 251

51 S.Ct. 130

75 L.Ed. 324

O'GORMAN & YOUNG, Inc.,

v HARTFORD FIRE INS. CO.

SAME

v. PHCENIX ASSUR. CO., Limited.

Nos. 12, 13.

Reargued Oct. 30, 1930.

Decided Jan. 5, 1931.

Mr. Walter Gordon Merritt, of New York City, for appellant.

[Argument of Counsel from pages 252-253 intentionally omitted] Mr. Ralph E. Lum, of Newark, N. J., for appellees.

Mr. Justice BRANDEIS delivered the opinion of the Court.

These cases, which are here on appeals from the highest court of New Jersey, were argued together. They present the question whether the following statutory provision effective March 29, 1928, is consistent with the due process clause of the Fourteenth Amendment:

'In order that rates for insurance against the hazards of fire shall be reasonable it shall be unlawful for any such insurer licensed in this State to * * * allow * * * any commission * * * in excess of a reasonable amount, to any person for acting as its agent in respect to any class of such insurance, nor * * * to allow, any commission * * * to any person for acting as its local agent in respect to any class of such insurance, in excess of that * * * allowed to any one of its local agents on such risks in this State.' (New Jersey Laws 1928, c. 128, p. 258.)

In each case, O'Gorman & Young, Inc., a domestic corporation licensed as an insurance broker, sues a licensed foreign fire insurance company to recover a balance alleged to be due for services performed as local agent at Newark after the effective date of the statute. In the Phoenix Assurance Company case, the complaint is on a contract terminable at will, made prior to the enactment of the statute. by which the company agreed to pay to the agent twenty-five per cent of the premiums. In the Hartford Fire Insurance Company case, the complaint is on a contract, made after the enactment of the statute, by which the defendant agreed to pay as compensation 'what such services were reasonably worth'; and the complaint alleges that the services were reasonably worth twenty-five per cent. of the premiums. Each complaint alleges that the defendant has paid the plaintiff only twenty per cent. of the premiums. Each answer admits the facts alleged in the complaint. As a defense, it sets up the statute and the fact that the defendant had at the date of its enactment, and ever since has had, several persons acting as its local agents within the State to whom the compensation allowed in respect to the same class of business has been only twenty per cent. of the premiums.

Each case was heard upon a motion to strike out the answer and for judgment on the ground that the statute is void under the due process clause of the Fourteenth Amendment. In each case the trial court denied the motion and entered judgment against the plaintiff, the facts alleged in the answer being admitted. In an opinion discussing the question presented, that court said:

'Our statute provides that the rates for fire insurance 'shall be reasonable.' Since the commissions paid to local agents naturally enter into the cost of such insurance to the public, and therefore influence the rates which must be charged to the public for such insurance, it is within the police power of the State to require that the commissions must be reasonable, otherwise such large commissions might be allowed as to impair the financial stability of the insurance companies, and thus imperil their ability to meet their financial obligations to their policyholders.

'Since twenty per cent. is the amount of commissions paid to some of its local agents, the effect of this legislation is to determine that a commission in excess of that is unreasonable. The presumption is in favor of the reasonableness of the law until the contrary is made to appear.

'In the facts or argument th ere is nothing to overcome that presumption. * * *' 105 N. J. Law 645, 146 A. 370, 371.¹

On that opinion the Court of Errors and Appeals affirmed the judgments of the trial court. 105 N. J. Law, 642, 146 A. 370. We think it was right in so doing.

The business of insurance is so far affected with a public interest that the State may regulate the rates, German Alliance Insurance Co. v. Lewis, 233 U. S. 389, 34 S. Ct. 612, 58 L. Ed. 1011, L. R. A. 1915C, 1189; and likewise the relations of those engaged in the business, La Tourette v. McMaster, 248 U. S. 465, 39 S. Ct. 160, 63 L. Ed. 362; Stipcich v. Metropolitan Life Insurance Co., 277 U. S. 311, 320, 48 S. Ct. 512, 72 L. Ed. 895. Compare McCarter v. Firemen's Insurance Co., 74 N. J. Eq. 372, 382, 73 A. 80, 414, 29 L. R. A. (N. S.) 1194, 135 Am. St. Rep. 708, 18 Ann. Cas. 1048. The agent's compensation, being a percentage of the premium, bears a direct relation to the rate charged the insured. The percentage commonly allowed is so large that it is a vital element in the rate structure and may seriously affect the adequacy of the rate. Excessive commissions may result in an unreasonably high rate level or in impairment of the financial stability of the insurer. It was stated at the bar that the commission on some classes of insurance is as high as thirtyfive per cent. Moreover, lack of a uniform scale of commissions allowed local agents for the same service may encourage unfair discrimination among policyholders by facilitating the forbidden practice of rebating. In the field of life insurance, such evils led long ago to legislative limitation of agents' commissions.²

The statute here questioned deals with a subject clearly within the scope of the police power. We are asked to declare it void on the ground that the specific method of regulation prescribed is unreasonable and hence deprives the plaintiff of due process of law. As underlying questions of fact may condition the constitutionality of legislation of this character, the presumption of constitutional- ity must prevail in the absence of some factual foundation of record for overthrowing the statute.³ It does not appear upon the face of the statute, or from any facts of which the court must take judicial notice, that in New Jersey evils did not exist in the business of fire insurance for which this statutory provision was an appropriate remedy. The action of the legislature and of the highest court of the State indicates that such evils did exist.⁴ The record is barren of any allegation of fact tending to show unreasonableness.

Affirmed.

The separate opinion of Mr. Justice VAN DEVANTER, Mr. Justice McREYNOLDS, Mr. Justice SUTHERLAND, and Mr. Justice BUTLER.

We are of opinion that the judgments below should be reversed.

The appellees (defendants below) are separate fire insurance companies. The facts are not in dispute; both records present like circumstances and questions of law. It will suffice here to point out the essentials disclosed in No. 12.

O'Gorman & Young, a New Jersey corporation, under proper license transacts business as an insurance broker. For many years it has been the agent of appellee, a Connecticut corporation authorized to issue fire policies in New Jersey. Prior to March 29, 1928, the agreement of employment provided that for negotiating and selling such policies the agent should receive 25 per cent. of prescribed premiums. On that day the original contract was changed and now it provides that the agent shall be paid 'what such services were reasonably worth.'

Acting under this modified arrangement, O'Gorman & Young negotiated and sold policies upon which the premiums amounted to $2,454.61. As reasonable compensation, demand was made for $613.68-25 per cent. of the premiums. The insurance company paid $490.92, 20 per cent., and denied further liability.

Thereupon (October, 1928), asserting that its services were reasonably worth 25 per cent. of the premiums, O'Gorman & Young brought an action against the insurance company in the circuit court, Essex county, N. J., to recover $122.76. The complaint sets out the foregoing facts and asks for judgment; it says nothing concerning any New Jersey statute.

The answer admits the allegations of the complaint except 'defendant denies that it owes the plaintiff the sum of $122.76 as in said complaint alleged for the reasons hereinafter in this answer set forth.' They are set out in the three paragraphs immediately below.

Chapter 128,⁵ Act of the New Jersey Legislature approved March 29, 1928, provides (section 1): 'In order that rates for insurance against the hazards of fire shall be reasonable it shall be unlawful for any such insurer licensed in this State to directly or indirectly pay or allow, or offer or agree to allow, any commission or other com- pensation or anything of value, in excess of a reasonable amount, to any person foract ing as its agent in respect to any class of such insurance, nor to directly or indirectly pay or allow, or offer or agree to allow, any commission or other compensation or anything of value, to any person for acting as its local agent in respect to any class of such insurance, in excess of that offered, paid or allowed to any one of its local agents on such risks in this State.'

Also (section 2): 'Any insurer, agent, expert, person or corporation violating any of the provisions of this act shall be subject to a penalty of five hundred dollars for each and every violation to be sued for and recovered by the Commissioner of Banking and Insurance, or by any citizen of this State and paid to the State Treasurer. In case any insurer is convicted of a violation of this act, every local agent of the insurer in this State shall be entitled to the same commission or compensation, or other thing of value, for business done for the insurer during the calendar year in which the discrimination took place, on risks in this State, and any local agent may recover from the insurer in any court of competent jurisdiction, the amount of such excess commission or compensation, or other thing of value, if any, to which he may become entitled under the provisions of this Act.'

'On and...