Johnson v. School Dist. No. 1 of Multnomah County

• Decision Date: 02 October 1928
• Citation: 270 P. 764,128 Or. 9
• Parties: JOHNSON v. SCHOOL DIST. NO. 1 OF MULTNOMAH COUNTY ET AL.
• Court: Oregon Supreme Court

270 P. 764

128 Or. 9

JOHNSON v. SCHOOL DIST. NO. 1 OF MULTNOMAH COUNTY ET AL.

Supreme Court of Oregon

October 2, 1928

In Bank.

Appeal from Circuit Court, Multnomah County; Walter H. Evans, Judge.

Suit by N. P. Johnson against School District No. 1 of Multnomah County and others. Decree for plaintiff, and defendants appeal. Reversed, and suit dismissed.

Sam H Pierce, of Portland, for appellant School District No. 1.

Hewitt & Sox, of Albany, amicus curiæ.

E. B Seabrook and Plowden Stott, both of Portland (Malarkey Seabrook & Dibble and Plowden Stott, all of Portland, on the brief), for respondent.

BELT J.

This is a suit to cancel certain policies of insurance issued by the Northwestern Mutual Fire Association to school district No. 1 of Multnomah county, Oregon, and to enjoin the school district from purchasing similar policies from such company. The precise question presented is whether a mutual fire insurance company may, under the Constitution and statutes of this state, issue a nonassessable policy to a school district. It is the contention of the plaintiff respondent that a cash premium policy violates the spirit and intent of article 11, section 9, of the Oregon Constitution, which, so far as material herein, provides:

"No county, city, town, or other municipal corporation, by vote of its citizens or otherwise, shall become a stockholder in any joint stock company, corporation, or association whatever, or raise money for, or loan its credit to, or in aid of, any such company, corporation, or association."

The defendant insurance company was organized under the laws of the state of Washington and is duly authorized to do business in this state. It is conceded that its assets are in excess of $200,000 and that it has a net cash surplus in excess of $100,000. The cash premium policy purports to be nonassessable, as upon the face thereof it is stated: "This policy participates in the profits and is absolutely nonassessable." The by-laws of the company provide in substance that, when a policy is issued on the cash premium plan, the premium paid "shall be considered a full premium and shall be the limit of the liability of the insured under such policy." However, the law of this state governs the contract of insurance. Equitable Life Assurance Society of the United States v. Pettus, 140 U.S. 226, 11 S.Ct. 822, 35 L.Ed. 497. The association is authorized to do business in this state only upon compliance with section 6420, Or. L.

We inquire whether such a policy holder, within the fair import of the above constitutional inhibition, becomes a "stockholder" in the association or loans its credit to it. Since the constitutional provision is a limitation, and not a grant, of power, it is the duty of the court, in interpreting it, to consider the evil intended to be avoided. This constitutional provision was added to the fundamental law of the state, through the initiative, to prevent the investment of public funds in private enterprises. It was designed to curb speculation, which in many instances resulted in pecuniary loss to the taxpayer. Municipal Security Co. v. Baker County, 39 Or. 396, 65 P. 369.

If the contract of insurance subjects the school district to a contingent liability, it is in violation of the Constitution and ultra vires. Mere membership in the association does not offend. It may well be argued, although there are decisions to the contrary, that one who, under the terms of a policy, agrees to be answerable for assessments in the event of loss, is, within the meaning of the Constitution, a "stockholder"; but it would be unduly extending the scope of this constitutional provision to apply it to a case wherein the policy holder is expressly exempted from liability. In cases involving a distribution of assets of a mutual insurance company, or where the member is undertaking to assert some right under the policy, it has been held, with good reason, that a policy holder is, in a sense, a stockholder. Huber v. Martin, 127 Wis. 412, 105 N.W. 1031, 1135, 3 L. R. A. (N. S.) 653, 115 Am. St. Rep. 1023, 7 Ann. Cas. 400; Sugg v. Farmers' Mutual Insurance Ass'n et al. (Tenn. Ch.) 63 S.W. 226; Carlton v. Southern Mutual Ins. Co., 72 Ga. 371. In the instant case a policy holder, by virtue of its contract, has determined its legal status, and in no manner is there the same character of interest which a stockholder has in a stock insurance company. As stated in Beaver State Ins. Ass'n v. Smith, 97 Or. 579, 192 P. 798, Mr. Justice Bean, speaking for the court: "The liability to pay an assessment is a matter of contract. A member of a mutual company may so stipulate to pay assessments as that upon failure to fulfill his obligation an action will lie against him to recover the same. 3 Joyce on Insurance (2d Ed.) § 1245c. Only members who have assumed a contract obligation to pay assessments are liable therefor. A member, in order to become liable for assessments, must contract to pay the same or assent to some plan or provision for levying assessments, required by the by-laws or constitution of the mutual association or by the statute authorizing the organization of the company. 3 Joyce on Insurance (2d Ed.) §§ 1251, 1253. Members insured exclusively on the cash premium plan, and who have paid their premium in cash, as defendant has done, are not liable to an assessment for the purpose of paying losses and expenses [citing authorities]."

If membership in the association created a liability, there would be better reason to assert that the term "stockholder" is synonymous with "member." We are not so much concerned with mere names as we are with the reason for the rule.

The decision of the case hinges primarily upon the construction of section 6408, Oregon Laws, which provides:

"Each person or partnership or corporation or society accepting a policy in any such mutual insurance company shall thereby become a member of such corporation or association and shall be liable for his proportionate share of losses and operating expenses as hereinafter provided. Any person or persons holding property in trust may insure the same in such company, and as such trustee assume the liabilities and be entitled to the rights of a member, but shall not be personally liable upon such contract of insurance. Any such company may fix the contingent and mutual liability of its members for payment of losses and expenses by a uniform rule set forth in its by-laws and policies and such mutual liability shall not be less than twice the amount of the usual advance assessment written in the policy: Provided, however, that companies which have accumulated in the regular course of the business, assets of not less than two hundred thousand dollars, of which not less than one hundred thousand dollars is net cash surplus over and above all the requirements of this act shall have power, subject to the approval of the insurance commissioner, while in that condition, to adopt by-laws

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