Attorney General v. Prudential Ins. Co. of America

• Citation: 39 N.E.2d 664,310 Mass. 762
• Parties: ATTORNEY GENERAL v. PRUDENTIAL INSURANCE COMPANY OF AMERICA.
• Decision Date: 30 January 1942
• Court: United States State Supreme Judicial Court of Massachusetts

310 Mass. 762

39 N.E.2d 664

ATTORNEY GENERAL v. PRUDENTIAL INSURANCE COMPANY OF AMERICA.

Supreme Judicial Court of Massachusetts, Suffolk.

January 30, 1942

May 13, 1941.

Present: FIELD, C.

J., DONAHUE, QUA DOLAN, & RONAN, JJ.

Insurance, Agent Commission. Contract, Validity. Constitutional Law, Freedom of contract, Due process of law, Equal protection of laws Police power.

A provision in a contract of an insurance company with its "industrial" agents that in the calculation of their "net first-year premiums" they should not receive credit for any first-year premiums "on any policy written by" them "on the life of" one "who has terminated a policy of any . . . description . . not more than three months before or within three months after such policy is written," was a violation of Section

164A, inserted in G. L. (Ter. Ed.) c. 175 by St. 1938, c. 225, so far as the provision deprived the agents of credit in computing their commissions or salaries because of the surrender or lapse, after the effective date of the statute, of "industrial" life insurance policies upon which premiums had been paid for three years or more, and the company was enjoined from enforcing the provision to that extent.

Section 164A, inserted in G. L. (Ter. Ed.) c. 175 by St. 1938, c. 225, is not unconstitutional as interfering with the insurer's freedom of contract, or as depriving him of property without due process of law or of equal protection of the laws; and is a proper exercise of the police power.

INFORMATION, filed in the Superior Court on June 13, 1940, by the Attorney General at the relation of the commissioner of insurance.

The case was reserved by Greenhalge, J., upon the pleadings and an agreement as to material facts.

R. Clapp, Assistant Attorney General, for the Attorney General. T. Allen, for the respondent.

S. E. Angoff, S.

S. Grant, & F.

F. Cohen, by leave of court, submitted a brief as amici curiae.

QUA, J. The Attorney General, through this information filed at the relation of the commissioner of insurance under

G. L. (Ter.

Ed.) c. 175, Section 193A, seeks to restrain the alleged violation by the respondent of the provisions of G. L. (Ter. Ed.) c. 175, Section 164A, inserted by St. 1938, c. 225.

Section 164A reads as follows: "If a policy of industrial life insurance upon which premiums have been paid for three years or more is surrendered to the company for a cash surrender value or paid up insurance or extended term insurance or lapses for non-payment of premiums, the agent shall not be charged with a decrease for said premium and no deduction shall be made from his commission or salary.

"

This section was approved April 21, 1938, and went into effect July 21, 1938. The alleged violation is found in the terms of a new form of agreement between the company and its "industrial" agents which was put into operation on July 4, 1938, after the enactment of Section 164A, but before that section took effect. The portion of the new form of agreement which it is contended violates the statute is in these words, "See. 9. (c). That, in the calculation of my `Net First-Year Premiums', I [the agent] shall not receive credit for any `first-year premiums' on any policy written by me on the life of any person, or any relative sharing the home with the person, who has terminated a policy of any kind or description, either by non-payment of premiums payable under the terms thereof or by surrender, not more than three months before or within three months after such policy is written. A policy lapsed for non-payment of premiums, and having continuing benefits under paid-up or extended insurance, shall be deemed to have terminated for the purposes of this Section."

In Cronin v. Metropolitan Life Ins. Co. 304 Mass. 53 , we were called upon to construe Section 164A. We there held this section to mean "that in computing the agent's commission or salary no deduction shall be made on account of the surrenders or lapses to which the statute refers from the commission or salary which under his contract the agent would receive if there had been no such surrenders or lapses" (page 54), and that "The purpose was to exclude these surrenders and lapses as elements operating adversely to the agent in computing his commission or salary" (pages

54, 55). In the case now before us the respondent argues, in substance, that it makes no "deduction" from the agent's commission or salary, but that the substitution of a new policy for an old one involves loss to the insured, and that therefore the company, desiring to make it an object to its agents to discourage such substitution rather than to encourage it for their own personal advantage, merely provides that it will not obligate itself to pay any commissions on "first-year premiums" on policies taken out on the life of any person "or any relative sharing the home with the person" who terminates a policy by surrender or lapse in the manner described within three months before or after the new policy is written.

We cannot agree with this argument. In general, the company pays first year commissions on policies written by its agents. It does not refuse to accept the "re-written" or "replacement" policies, as they are called. It permits its agents to write such policies. In general, it does not even deny to its agents first year premium commissions on policies which replace former surrendered or lapsed policies. It simply reduces the amount which it would otherwise pay its agents for first year premiums upon new policies written by them by a sum which is dependent upon surrenders and lapses of "industrial" policies within three months. And in instances where the former policy is not surrendered or lapsed until after the new policy is written it cannot even be determined that any reduction will be made in the agent's compensation until some time after the event (writing of the new policy) out of which the right to a commission commonly arises. Whether the statute has been violated is to be determined with reference to the substance of the relation between the company and its agents and not with reference to the form of bookkeeping entries adopted. In view of the object to attain which the statute must have been enacted we cannot avoid the conclusion that the respondent's form of contract does make a "deduction" within the meaning of that word in the statute "on account of the surrenders or lapses to which the statute refers from the commission or salary which under his contract the agent would receive if there had been no such surrenders or lapses." Cronin v. Metropolitan Life Ins. Co. 304 Mass. 53 , 54. In so far as the respondent's form of contract deprives its agents of first year premium commissions because of the surrender or lapse in the manner described in the statute of "industrial" policies upon which premiums have been paid for three years or more, it is in conflict with the statute.

But the respondent further contends that the statute is unconstitutional in that it unwarrantably interferes with the respondent's freedom to contract, deprives the respondent of property without due process of law and of equal protection of the laws, and is not a valid exercise of the police power of the Commonwealth. The question of constitutionality was not argued and was not decided in Cronin v. Metropolitan Life Ins. Co. 304 Mass. 53. We are of the opinion, however, that the statute is not unconstitutional upon any of the grounds urged. All of the contracts here involved between the respondent and its agents were entered into after the statute was enacted, although many of them must have been entered into before it took effect. We are therefore not here concerned with the impact of a statute upon a contract made before the statute was enacted.

It is well settled that the business of insurance is subject to a large degree of legislative regulation. New York Life Ins. Co. v Hardison, 199 Mass. 190, 198. Delaney v. Ancient Order of United Workmen of Massachusetts, 244 Mass. 556 , 567. Opinion of the Justices, 251 Mass. 569 , 607. Goldman v. Commercial Travellers Eastern Accident Association, 302 Mass. 74, 77. German Alliance Ins. Co. v. Superintendent of Insurance of Kansas, 233 U.S. 389. National Union Fire Ins. Co. v. Wanberg, 260 U.S. 71. This power extends to the reasonable regulation in the public interest of insurance brokers, La Tourette v. McMaster, 248 U.S. 465, and agents, Stipcich v. Metropolitan Life Ins. Co. 277 U.S. 311, 320, and of the compensation paid to agents. O'Gorman & Young, Inc. v. Hartford...