Osborn v. Ozlin

• Decision Date: 22 April 1940
• Docket Number: No. 592,592
• Citation: 84 L.Ed. 1074,310 U.S. 53,60 S.Ct. 758
• Parties: OSBORN et al. v. OZLIN et al
• Court: U.S. Supreme Court

310 U.S. 53

60 S.Ct. 758

84 L.Ed. 1074

OSBORN et al.

v OZLIN et al.

No. 592.

Argued March 27, 1940.

Decided April 22, 1940.

Appeal from the District Court for the Eastern District of virginia.

Messrs. John Lord O'Brian, of Buffalo, N.Y., and Andrew D. Christian, of Richmond, Va., for appellants.

[Argument of Counsel from pages 54-56 intentionally omitted] Mr. Abram P. Staples, of Richmond, Va., for appellees.

[Argument of Counsel from Page 57 intentionally omitted] Mr. Justice FRANKFURTER delivered the opinion of the Court.

Appellants have challenged the validity of a Virginia statute regulating the insurance of Virginia risks and have brought this suit to enjoin state officers from enforcing it. Its relevant provisions, copied in the margin,¹ forbid contracts of insurance or surety by companies authorized to do business within that Commonwealth 'except through regularly constituted and registered resident agents or agencies of such companies.' § 4222, c. 218, Acts of 1938. Such resident agents 'shall be entitled to and shall receive the usual and customary commissions allowed on such contracts,' and may not share more than half of this commission with a non-resident broker. § 4226a, as amended by Acts 1938, c. 218. Disobedience of these provisions (from which life, title and marine companies are exempted) may entail a fine or revocation of the corporate license in Virginia, or both. A district court of three judges, convened under § 266 of the Judicial Code as amended, 28 U.S.C. § 380, 28 U.S.C.A. § 380, dismissed appellants' bill on the basis of elaborate findings of fact and conclusions of law, set forth in an opinion by Circuit Judge Soper. 29 F.Supp. 71. From this decree the case comes here on appeal under § 238 of the Judicial Code as amended, 28 U.S.C. § 345, 28 U.S.C.A. § 345.

The bill was brought by foreign corporations authorized to do casualty and surety business in Virginia, and by some of their salaried employees. It is their claim that the statute deprives them of rights protected by the Fourteenth Amendment of the Constitution. The exact nature of these claims will appear more clearly in the setting of the illuminating findings below which may here be abbreviated.

The 'production' of insurance—'production' being insurance jargon for obtaining business—is, in the main, carried on by two groups, agents and brokers. Though both are paid by commission, the different ways in which the two groups perform their functions have important practical consequences in the conduct of the insurance business, and hence in its regulation. The agent is tied to his company. But his liability to 'produce' business depends upon the confidence of the community in him. He must therefore cultivate the good will and sense of dependence of his clients. He may finance the payment of premiums; he frequently assists in the filing and prosecution of claims; he acts as mediator between insurer and assured in the diverse situations which arise. The broker, on the other hand, is an independent middleman, not tied to a particular company. He meets more specially the needs of large customers, using their concentrated bargaining power to obtain the most favorable terms from competing companies. His activities, being largely confined to the big commercial centers, take place mostly outside Virginia.

A policy, whether 'produced' by broker or agent, must be 'serviced'—an insurance term for assistance rendered a customer in minimizing his risks. To this end the companies exert themselves directly, but the 'producer' may render additional service. Only to a limited extent can risks be minimized at long range; local activity is essential. When the contract is 'produced' by a non-resident broker the 'servicing' function is normally performed by the company exclusively. When the 'producer' is a resident agent the case is ordinarily otherwise. For this, as well as for other reasons, it is obvious that non-resident brokers prefer to negotiate their contracts covering Virginia risks with companies authorized to do business in that Commonwealth.

These basic elements in the insurance business attain special significance in the case of enterprises operating not only in Virginia but in other states as well. For them the brokerage system offers the attractions of large-scale production. Through what is known as a master or 'hotchpotch' policy, the assured may obtain a cheaper rate by pooling all his risks, whether in or out of Virginia. This wholesale insurance may furnish not only a reduced rate but a reduced commission to the customer. These are advantages which naturally draw the Virginia business of interstate enterprises away from local agents in Virginia to the great insurance centers.

In effecting the cost of these master policies, say the appellants, Virginia is intruding upon business transactions beyond its borders. Not only is a licensed company forbidden to write insurance except through a resident agent, but the agent cannot retain less than one-half of the customary commission allowed on such a contract for what may, so far as the requirements of the law are concerned, be no more than the perfunctory service of countersigning the policy.

But the question is not whether what Virginia has done will restrict appellants' freedom of action outside Virginia by subjecting the exercise of such freedom to financial burdens. The mere fact that state action may have repercussions beyond state lines is of no judicial significance so long as the action is not within that domain which the Constitution forbids. Alaska Packers Ass'n v. Industrial Accident Comm'n., 294 U.S. 532, 55 S.Ct. 518, 79 L.Ed. 1044; Great Atlantic & Pacific Tea Co. v. Grosjean, 301 U.S. 412, 57 S.Ct. 772, 81 L.Ed. 1193, 112 A.L.R. 293. Compare Equitable Life Assur. Society v. Pennsylvania, 238 U.S. 143, 35 S.Ct. 829, 59 L.Ed. 1239. It is equally immaterial that such state action may run counter to the economic wisdom either of Adam Smith or of J. Maynard Keynes, or may be ultimately mischievous even from the point of view of avowed state policy. Our inquiry must be much narrower. It is whether Virginia has taken hold of a matter within her power, or has reached beyond her borders to regulate a subject which was none of her concern because the Constitution has placed control elsewhere. Compare Wallace v. Hines, 253 U.S. 66, 69, 40 S.Ct. 435, 436, 64 L.Ed. 782.

Virginia has not sought to prohibit the making of contracts beyond her borders. She merely claims that her interest in the risks which these contracts are designed to prevent warrants the kind of control she has here imposed. This legislation is not to be judged by abstracting an isolated contract written in New York from the organic whole of the insurance business, the effect of that business on Virginia, and Virginia's regulation of it.

A network of legislation controls the surety and casualty business in Virginia. Insolvent companies may not engage in it. Virginia Code, § 4180. Neither companies nor agents may give rebates. § 4222(c). Rates for workmen's compensation, automobile liability and surety contracts are determined by its Corporation Commission. §§ 1887(75), 4326a1, 4350(3). The difficulty of enforcing these regulations, so the District Court found, may be increased if policies covering Virginia risks are 'produced' without participation by responsible local agents. Rebates evading local restriction may be granted under cover of business done outside the state. Contrariwise, if resident Virginia agents are made necessary conduits for insurance on Virginia risks now included in master policies, the state may have better means of acquiring accurate information for the effectuation of measures which it deems protective of its interests.²

It is claimed that the requirement that not less than one-half of the customary commission be retained by the resident agent is a bald exaction for what may be no more than the perfunctory service of countersigning policies. The short answer to this is that the state may rely on this exaction as a mode of assuring the active use of resident agents for procuring and 'servicing' policies covering Virginia risks. These functions, when adequately performed, benefit not only the company, the producer, and the assured. By minimizing the risks of casualty and loss, they redound in a pervasive way to the benefit of the community.³ At least Virginia may so have believed. And she may also have concluded that an agency system, such as this legislation was designed to promote, is better calculated to further these desirable ends than other modes of 'production.'⁴ When these beliefs are emphasized by legislation embodying similar notions of policy in a dozen states,⁵ it would savor of intolerance for us to suggest that a legislature could not constitutionally entertain the views which the legislation adopts. Compare Prudential Ins. Co. v. Cheek, 259 U.S. 530, 537, 42 S.Ct. 516, 520, 66 L.Ed. 1044, 27 A.L.R. 27.

The present case, therefore, is wholly unlike those instances in which a 'so-called right is used as part of a scheme to accomplish a forbidden result.' Fidelity & Deposit Co. v. Tafoya, 270 U.S. 426, 434, 46 S.Ct. 331, 332, 70 L.Ed. 664. For it is clear that Virginia has a definable interest in the contracts she seeks to regulate and that what she has done is very different from the imposition of conditions upon appellants' privilege of engaging in local business which would bring within the orbit of state power matters unrelated to any local interests. It is not our province to measure the social advantage to Virginia of regulating the conduct of insurance companies within her borders insofar as it affects Virginia risks. Government has always had a special relation to insurance. The ways of safeguarding against the untoward manifestations of nature and other vicissitudes of life have long been withdrawn from the benefits and caprices of free competition. ⁶...