Industrial Indem. Co. v. Golden State Co.

• Decision Date: 30 April 1953
• Citation: Industrial Indem. Co. v. Golden State Co., 117 Cal.App.2d 519, 256 P.2d 677 (Cal. App. 1953)
• Court: California Court of Appeals
• Parties: INDUSTRIAL INDEMNITY CO. et al. v. GOLDEN STATE CO., Limited et al. Civ. 15023.

Page 677

256 P.2d 677

117 Cal.App.2d 519

INDUSTRIAL INDEMNITY CO. et al. v. GOLDEN STATE CO., Limited et al.

Civ. 15023.

District Court of Appeal, First District, Division 2, California.

April 30, 1953.

As Amended on Denial of Rehearing May 29, 1953.

Hearing Denied June 18, 1953.

Robert W. Kenny, Los Angeles, Victor E. Cappa, San Francisco, Maurice J. Hyman, San Francisco (Jerome Politzer and Hyman & Hyman, San Francisco, Kenny & Morris, Los Angeles, of counsel), for appellants G. W. Thomas Drayage & Rigging Co., W. R. Ballinger & Son, and Minna M. Ballinger.

Earl C. Berger and Park Chamberlain, San Francisco, for intervenor and appellant, Robert L. Johnson Corp.

Thelen, Marrin, Johnson & Bridges, San Francisco, for respondents.

NOURSE, Presiding Justice.

This appeal relates to an action for declaratory relief regarding the rights of subscribers of Industrial Indemnity Exchange, a reciprocal insurance exchange, having as its field workmen's compensation insurance, hereinafter called 'Exchange', under an agreement by which the business of said Exchange was transferred as a whole to Industrial Indemnity Company, an insurance corporation, hereinafter called 'Company,' for a price to be distributed to subscribers, and to cross-actions in behalf of said subscribers claiming mainly that all of the insurance business transacted by Company belonged in equity to Exchange, from whose business it was alleged to have been disloyally diverted by Industrial Underwriters, a partnership, the attorney-in-fact of said Exchange, hereinafter called the 'Attorney' whose partners substantially owned the stock of Company.

A reciprocal insurance exchange, regulated in sections 1280-1530 of the Insurance Code, is an unincorporated business organization of a special character in which the participants, called subscribers (or underwriters) are both insurers and insureds; for their mutual protection, they exchange insurance contracts through the medium of an attorney-in-fact, empowered in each underwriters' agreement not only to exchange insurance contracts for the subscribers, but also to exercise all other functions of an insurer, e. g., to set rates, to settle losses, to compromise claims, to cancel contracts. The subscribers furnish by their premium deposits, the means required for losses and costs, reserves and surpluses of the reciprocal insurance of them all, and therefore are entitled to the equity in the assets of the Exchange subject to the purpose for which they have furnished said means. If the amount of premiums deposited is not fully required for the purposes mentioned the excess, called savings, is returned in whole or in part as dividends. The attorney-in-fact receives a sizable percentage of the premiums deposited in consideration of which he does not only provide his own services, but also has to defray many of the costs of the business. In this case the Attorney, from the 17 1/2% of the premium deposits to which it was contractually entitled, had to provide and to pay for all offices equipment and personnel required for the business of Exchange. The affairs of a reciprocal insurance exchange are normally supervised to some extent, and they were in this case, by an advisory commission which represents the subscribers and whose powers and formation are regulated in the underwriters' agreements.

The matters now before this court found their origin in objections made in 1947-1948 by the Insurance Commissioner of the State of California to certain interrelations allegedly existing and certain transactions allegedly having taken place between Exchange, Attorney and Company. After some time the objections were embodied in two unsigned and undated drafts entitled 'Accusations', which culminated in the conclusion that the stated acts constituted ground for suspension or revocation of the certificates of authority of the Exchange or of Exchange and Company but which were expressly stated to be meant only as a basis of discussion. The main points raised related to the following alleged facts: The stock interest of the members of the Attorney in Company, a corporation competing with Exchange in the field of workmen's compensation insurance and the existence of interlocking functions between them; the farming out since 1946 by the Attorney to Company of the performance of substantially all of the duties for which Exchange paid the Attorney, whereas the Attorney retained 20% of the compensation received from Exchange; the segregation under the underwriters' agreements in a special surplus fund of all investment income of the Exchange to serve in case of liquidation of Exchange as compensation for the activities and costs of the Attorney in that respect; the reinsurance by Exchange since 1945 of the larger participating insurance policies written by Company and the treatment of said reinsurance business as normal reciprocal business of Exchange; the reinsurance by Company from 1939 until 1941 of possible assessment liability of the subscribers of Exchange at a premium considered excessive by the Commissioner. Long negotiations followed. The Commissioner originally took the position that there should be a complete separation of the interrelation objected to. The Attorney and the Company thought this unacceptable and maintained that all they had done was proper under existing law, agreements and circumstances (their said position was later generally sustained in the findings herein). However, in principle an agreement with the Commissioner was reached on the basis of the following plan: Company would as of January 1, 1949, take over all assets, assume all liabilities, take over and reinsure all policies of Exchange, and pay in the course of time to subscribers of Exchange an amount in cash which would as closely as possible equal the entire net worth of Exchange. To eliminate the necessary of basing on estimates elements of the net worth, such as liability for claims, unbilled earned premiums, and accrued dividends on policies, the Company would run out the business of Exchange as it existed at the end of 1948 for a maximum of three years and adjust the estimated amounts of such items in accordance with the actual results. The cash amount so obtained would, subject to change in the manner of distribution if a final court decision required a different manner, be distributed to those who were subscribers of Exchange on December 31, 1948, in proportion to the total earned premium of such subscribers with Exchange during the period 1931-1948, each subscriber receiving a minimum of $50. The Company and the Attorney made the following concessions with respect to some matters stated above as objected to by the Commissioner: The Attorney waived its right to the special surplus fund as compensation for liquidation activities, Company, with certain stated exceptions, to bear the costs of running out the business of Exchange; Company and Exchange agreed to terminate and reverse the reinsurance by Exchange of participating policies of Company from the beginning so that Company would not participate in the distribution to subscribers under the plan; to correct the amount of premium paid for the 1939-1941 reinsurance of assessment liability of subscribers of Exchange, said insurance was made retroactively participating to the extent of 99 1/2% of the premium paid, which percentage would be refunded.

The Commissioner and the Attorney were both of the opinion that an agreement in accordance with the plan needed the consent of the subscribers of Exchange. After a summary of the plan with a letter of the Advisory Commission advising its adoption had been handed to all subscribers, approximately 98% of them both according to number and premium volume signed written consents. On December 21, 1948, a written Transfer and Assumption Agreement was executed to effectuate the plan stated above; the Commissioner approved it and on January 1, 1949, Company took over in accordance with said agreement.

Following a suggestion of the Commissioner those in favor of the agreement, the Exchange, the Attorney, the Advisory Committee, three consenting subscribers in representative capacity and Company, brought this action for declaratory relief against all non-consenting subscribers by name, praying for a declaration to the effect that past subscribers to the Exchange (no longer subscribers on December 31, 1948) have no interest in the net worth of Exchange, that the plan for distribution contained in the agreement is fair and that non-consenting subscribers have no further rights then those given to them in the agreement. It will not be necessary to detail the pleadings of the several non-consenting subscribers. They resulted in bringing before the court the defenses that the Attorney and the Advisory Committee had no authority to conclude the Transfer and Assumption Agreement, that the consents of the Commissioner and subscribers were invalid because obtained by misrepresentations, that the Transfer and Assumption Agreement was invalid as a fraudulent attempt by the Attorney to eliminate Exchange as a competitor of Company, that the Transfer and Assumption Agreement did not give subscribers all that they were entitled to because it gave them neither the value of the goodwill of Exchange nor of the business of Company which belonged to Exchange on the ground that the Attorney and the Company of which it owned the stock had built up the business of Company in competition with Exchange in violation of the duty of the Attorney, and finally that methods of dissolution and distribution contained in the Agreement were unfair. There was also before the court a cross-complaint of some non-consenting subscribers in representative capacity asking a declaration that the assets and business of Company as built up since May 3, 1939 belonged to the subscribers of Exchange and further a declaration of rights as to the different points in dispute.

Moreover ...