Connecticut General Life Ins. Co. v. Eaton

• Decision Date: 27 October 1914
• Docket Number: 1709.
• Citation: 218 F. 188
• Parties: CONNECTICUT GENERAL LIFE INS. CO. v. EATON, Internal Revenue Collector.
• Court: U.S. District Court — District of Connecticut

218 F. 188

CONNECTICUT GENERAL LIFE INS. CO. v. EATON, Internal Revenue Collector.

No. 1709.

United States District Court, D. Connecticut.

October, 27, 1914

Lucius F. Robinson, of Hartford, Conn., for plaintiff.

Francis H. Parker and Frederick A. Scott, U.S. Dist. Atty., both of Hartford, Conn., for defendant.

THOMAS District Judge.

In this action the plaintiff seeks to recover from the defendant certain taxes which it claims were illegally assessed against it under and by virtue of the provisions of the act of Congress approved August 5, 1909 (36 Stat. 112, c. 6, Sec. 38 (Comp. St. 1913, Secs. 6300, 6301)), entitled 'An act to provide revenue, equalize duties and encourage the industries of the United States and for other purposes. ' The case was heard by the court without the intervention of a jury, in accordance with a stipulation entered into by the attorneys of record, wherein it was agreed that a jury be waived and the case determined by the court in accordance with sections 649 and 700 of the United States Revised Statutes. A finding of facts, in the nature of a special verdict, has been made by the court and filed with the clerk.

For a thorough understanding of this case it is essential to set forth, at the very beginning, a somewhat lengthy statement of the plan of operation adopted by the plaintiff in the conduct of its business, as well as a statement of the claims of the parties and the facts disclosed by the evidence.

The Connecticut General Life Insurance Company was chartered by the General Assembly of Connecticut, by an act approved June 22, 1865 (5 Private Laws of Connecticut, page 693), and is a stock company doing a life insurance business on both participating (mutual) and nonparticipating plans. The charter provision of the company relating to these plans is contained in the fourth section thereof and reads:

'Policies may be issued, stipulated to be with or without participation in profits, and all dividends which shall be allotted to such participating policies which are not claimed and called for within two years after the same shall have been declared shall be forfeited to said company.'

Plaintiff commenced business in October of the year it received its charter, and has since continued, with its main office at Hartford. For a number of years plaintiff has kept the accounts of the mutual and nonparticipating departments of its business entirely separate, so that the mutual policies do not now, nor have they for many years past, been contributing directly to any payments made to the stockholders of the company. The company has been operating on the so-called 'level premium plan,' which is the plan adopted by practically all of the large life insurance companies, 'mutual' as well as 'stock.'

The level premium plan contemplates a uniform maximum annual contribution by the policy holder during the life of the policy, the amount of payment during the earlier years being in excess of the current cost of his insurance, and the excess being applied to the creation of a reserve fund, which serves to maintain the insurance in the later years, when the stipulated level premium would otherwise be insufficient to meet the current cost of such insurance.

In the case of nonparticipating policy holders, the premium is definitely fixed by the contract, while in the case of a participating policy holder a maximum premium is stipulated with a contract provision for its annual reduction as determined by the company. The stipulated maximum premium in a mutual or participating policy is invariably greater than the fixed premium in a nonparticipating policy issued at the same age and upon the same terms, other than as concerns the insured's right of participation.

The plaintiff now conducts its participating or mutual department so as to secure to the participating policy holders their insurance at cost, and this result is accomplished by an annual reduction in the stipulated premium, the amount of such reduction being determined from year to year by the company.

The calculation of premium rates by a life insurance company involves, first, the adoption of a table of mortality showing the probable death rate for each age of life; second, the adoption of an assumed rate of interest, such as the company may reasonably expect to realize upon its invested assets during the lifetime of the policy. These two factors determine what is technically know as the 'net' or 'mathematical' premium, and are the sums considered sufficient and necessary to pay all outstanding policies as they become claims, provided deaths occur exactly in accordance with the table of mortality adopted, and the rate of interest earned on the investment of the reserve fund proves to be exactly equal to the rate assumed. To the 'net premium' there is then added a sum, technically known as 'loading,' for the purpose of meeting unforeseen contingencies, as also the necessary expenses of conducting the company's business.

Premium rates so computed have, in the experience of mutual life insurance companies, been generally found to be in excess of their requirements; but as such excess constitutes the margin of safety, and must be liberal, the stipulated rate must therefore be sufficiently large to insure, beyond peradventure, the company's ability to pay its claims as they accrue. Some of the policy contracts are likely to run for periods as long as 75 years, but the stipulated premium cannot be increased after once the policy is issued.

In the experience of the plaintiff, as with most other life companies, the actual death rate has been considerably lower than the expectancy shown in the table of mortality which was assumed in the computing of its stipulated premiums, and the interest rate which it has realized upon its investments has proved considerably higher than the assumed rate. The 'loading' is also somewhat greater than that ordinarily required to cover the expense of conducting the business and to meet contingencies, and with the margin of safety involved each year has resulted in an excess of income over disbursements and the amount required to be set aside for increase of the so-called reserve.

It has, therefore, been the practice of the plaintiff at the end of the year to take into consideration the results obtained by its participating or mutual department during that year, and with the information at hand to determine the amount of the premiums necessary to be collected from participating policy holders during the succeeding year. In making this estimate the ascertained cost of the insurance for a given year has been taken broadly as the basis upon which to estimate the probable cost for the succeeding year, and upon this estimate the amount of the reduction to be made, or to be credited to policy holders on their stipulated premiums when paying the succeeding year's renewals, is determined. For the purpose of technical solvency, however, a small surplus is always maintained.

The premium reductions allowed by the plaintiff to the several policy holders are apportioned as near as can be upon an equitable basis with respect to their ages and plans of insurance. The policy holder, however, is permitted to pay the full stipulated premium, instead of the difference between the stipulated premium and the amount of the reduction, and in such case the overpayment beyond the amount actually required to continue the policy in force is applied, at the election of the policy holder, either to the purchase of additional insurance or pure endowment, or to shorten the endowment or premium-paying period of the policy. A comparatively small number of the policy holders avail themselves of this privilege, as also of a further option to allow the amount of excess payment to draw interest.

In the case of paid-up policies, the policy holder may annually receive in cash such amount as the company determines to be properly apportionable to him out of the savings of the current year; his share thereof representing principally the excess in interest earnings upon the invested policy reserve over the interest earnings which were assumed in fixing the stipulated premium. The plaintiff also pays in cash, in connection with the settlement of a small class of policies issued years ago upon a semi-tontine plan, dividends which represent accumulated savings upon this class of policies.

The right of the participating policy holder to reductions in annual premiums is evidenced in the outstanding policies of the company. The policies issued prior to July, 1903, contained merely the clause 'with participation in the surplus,' in distinction from the policies issued by the company containing the clause 'without participation in the surplus.' The applicant for insurance indicated his preference for a participating policy by answering a question contained in the application: 'Kind of insurance applied for, . . . policy, on the mutual plan? ' From July, 1903, to January, 1907, the participating policies issued contained the following provision:

'(9) Dividends are declared annually after the second year and may at the option of the insured be applied in any one of the following plans: First. In reduction of premium. Second. To purchase additional full-paid insurance. Third. To accelerate the time of maturity of the policy. Fourth. To purchase pure endowment payable in 10, 15, or 20 years.'

The application during this period contained the words 'stock' and 'mutual,' one of which was crossed out to indicate the applicant's election that the policy to be issued should be participating or nonparticipating.

From January, 1907, to June, 1910, the participating policies issued contained the following:

'Dividends. Reduction of premiums as determined by the

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