Insurance Dept. v. City of Philadelphia
| Decision Date | 15 September 1961 |
| Citation | 173 A.2d 811,196 Pa.Super. 221 |
| Parties | INSURANCE DEPARTMENT of the Commonwealth of Pennsylvania and Francis R. Smith, Insurance Commissioner of the Commonwealth of Pennsylvania, v. CITY OF PHILADELPHIA, Appellant. |
| Court | Pennsylvania Superior Court |
Lewis Kates, Deputy City Sol., Levy Anderson First Deputy City Sol., David Berger, City Sol Philadelphia, for appellant.
Charles V. Walsh, Gen. Counsel Ins. Dept., Philadelphia, Michael J Stack, Jr., Deputy Atty. Gen., Anne X. Alpern, Atty. Gen., Donald A. Scott, Robert H. Young and Arthur Littleton, Sp. Counsel for Middle Dept. Assn. of Fire Underwriters, John A. Skelton, Gen. Counsel for Middle Dept. Assn. of Fire Underwriters, Philadelphia, for appellees.
Before ERVIN, Acting P. J., and WRIGHT, WOODSIDE, WATKINS, MONTGOMERY and FLOOD, JJ.
This is an appeal from an order of the Court of Common Pleas of Dauphin County sustaining an adjudication of the Insurance Commissioner approving a rate filing by the Middle Department Association of Fire Underwritters.
The finding and adjudication were made under The Fire Marine and Inland Marine Rate Regulatory Act of June 11, 1947, P.L. 551, 40 P.S. § 1221 et seq. We are concerned here with fire insurance rates only.
As this is the first insurance rate filing case to reach either of our appellate courts, a brief history of insurance regulation and rate making is in order. It has long been settled that the insurance business is charged with a public interest, and that its regulation is constitutional. Commonwealth v Vrooman, 1894, 164 Pa. 306, 30 A. 217, 25 L.R.A. 250; German Alliance Insurance Co. v. Lewis, 1914, 233 U.S. 389, 34 S.Ct. 612, 58 L.Ed. 1011. Historically, the regulation of insurance has been recognized as a function of the states rather than a function of the federal government. For many years no effort was made in any court proceedings to apply the Sherman Anti-Trust Act, 15 U.S.C.A. § 1 et seq., and other Acts of Congress to insurance, on the grounds that insurance was not interstate commerce, and that Congress did not intend its general acts to relate to insurance.
In 1944 the Supreme Court of the United States held that insurance companies which conduct their activities across state lines are within the regulatory power of Congress under the Commerce Clause of the Federal Constitution, art. 1, § 8, cl. 3, and that insurance was subject to the Sherman Anti-Trust Act. United States v. South-Eastern Underwriters Association, 1944, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440.
Congress, thereupon enacted the McCarron-Ferguson Act of March 9, 1945, 59 Stat. 33, 15 U.S.C.A. §§ 1011-1015, which as amended, provided, inter alia, that the business of insurance should be subject to the laws of the several States, and not to the Act of Congress, (unless such acts specifically relate to insurance) except that the Sherman Act, and certain other acts should be applicable to the business of insurance after June 30, 1948, to the extent that such business is not regulated by State Law.
Relatively few states had entered into the filed of insurance rate regulation prior to 1945, but by June 30, 1948, all of the states had passed rate regulating legislation. The opinion of the Supreme Court of the United States in 1944 and the action of Congress in 1945 caused the National Association of Insurance Commissioners to prepare model rate regulatory acts which, with variations, were promptly adopted by Pennsylvania and most other states.
Pennsylvania adopted The Casualty & Surety Rate Regulatory Act of June 11, 1947, P.L. 538, 40 P.S. §§ 1181-1199, with which we are not here concerned, and The Fire Marine and Inland Marine Rate Regulatory Act of June 11, 1947, P.L. 551, 40 P.S. §§ 1221-1238, supra, with which we are here concerned, and which we shall hereafter refer to as the Regulatory Act.
The purpose of the Regulatory Act as expressed in its first section (Emphasis supplied.) 40 P.S. § 1221.
With or without regulation, it has always been in the public interest to have insurance premiums high enough to assure the payment of losses, and yet low enough to enable the public to secure protection upon the payment of a reasonable premium. To assure the availability of funds by insurers to pay losses, the state has long required insurance companies to be licensed, to maintain reserves and to submit to examination to determine solvency and compliance with the law. This has discouraged companies from charging 'inadequate' rates. Generally, insurers were prevented from charging 'excessive' rates by the keen competition which has long been prevalent in most segments of the insurance business.
Prior to the advent of state rate regulation, the fixing of rates having a proper relation to the risk involved, and thus not 'unfairly discriminatory' had been a problem of long standing to insurance companies. It is evident that the risks in fire insurance very substantially, and are influenced by many factors, including the type of construction of the building insured, its proximity to hazardous risks, the use to which it is being put, and the fire protection available in the area. It is evident, too, that with hundreds of insurance companies paying losses in the same area, the loss experience of any one company may not be sufficiently broad to form the basis for fair rates with any degree of refinement. On the other hand, the combined loss experience of all the companies paying losses makes possible the formulation of rates which more nearly reflect the actual risk. Rates based upon the experience of many insurers are likely to be more equitable to both the insurer and the insured than rates based upon a more limited experience.
The difficulty involved in each company establishing its own rates and the need for greater. Experience led to 'co-operative action among insurers' and the formation of associations to gather loss statistics and make fire rates which the member companies generally agreed to follow. The Middle Department Association of Fire Underwriters, known in the trade as the Middle Department, is such an association. It has 360 members and subscribing insurance companies doing a fire insurance business in Pennsylvania. Under a license from the Insurance Department, issued under § 6 of the Regulatory Act, 40 P.S. § 1226, it prepares and files the premium rates which are charged by all of its members and subscribers except those which file deviations from those rates with the Insurance Commissioner. The member and subscriber companies of the Middle Department write approximately 78% of the total fire insurance business in Pennsylvania.
For many years fire insurance rates in Pennsylvania were established by four separate territorial rating bureaus with numerous subdivisions. These bureaus began merging their experiences in 1932, and in 1948 they merged into one association known as the Meddle Department Association of Fire Underwriters. At that time, with the approval of the Insurance Commissioner, the state was divided into five major areas or zones for the purposes, inter alia, of gathering loss experience and of making rates. [1]
When the Regulatory Act became effective, the Middle Department was licensed as a rate making organization. It filed its constitution and by-laws with the Insurance Department and filed rates for its subscribing members. These rates were amended and changed from time to time and deviations were allowed various companies with the approval of the Insurance Commissioner.
The Middle Department annually reviews its rates to determine whether they are excessive, inadequate or unfairly discriminatory. Its records showed that for 1952-1956, the loss ratio for the principal classes for which rate differentials are established were 70.4% of premiums for risks written in the City of Philadelphia against 42.1% for the balance of the Commonwealth. The loss ratio by zones was as follows: Zone 1, 39.3%; Zone 2, 47.2%; Zone 3, 40.8%; Zone 4, 70.4%; Zone 5, 48.3%. (See footnote 1.) From these figures, filed by the Middle Department with the Insurance Commissioner in support of its are rate filing, it is evident that fire insurance rates in these categories were unfairly discriminatory in favor of the owners of Philadelphia property and against the owners of property in the rest of the Commonwealth. [2]
The Middle Department, thereupon, filed a rate adjustment with the Insurance Commissioner on September 17, 1958. The Supporting statistics which the Middle Department filed with the commissioner in support of the rate adjustments, were supplied to it by the National Board of Fire Underwriters, The Mutual Insurance Advisory Association, and the National Association of Independent Insurers, all of which are advisory organizations operating under § 10 of the Regulatory Act, 40 P.S. § 1230, and are examined by the Insurance Department.
The Middle Department, in determining whether the average statewide rate level required adjustment, compared the total annual earned premiums of stock and mutual companies averaged for a period of six...
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