N.Y. Life Ins. Co. v. Chaves

• Citation: 153 P. 303,21 N.M. 264
• Decision Date: 14 December 1915
• Docket Number: No. 1798.,1798.
• Parties: NEW YORK LIFE INS. CO.v.CHAVES, SUPERINTENDENT OF INSURANCE.
• Court: Supreme Court of New Mexico

21 N.M. 264

153 P. 303

NEW YORK LIFE INS. CO.

v.CHAVES, SUPERINTENDENT OF INSURANCE.

No. 1798.

Supreme Court of New Mexico.

Dec. 14, 1915.

Syllabus by the Court.

All moneys returned or allowed in abatement of future premiums to policy holders in a mutual life insurance company, which arise by reason of an overcharge on the actual cost of insurance occasioned by the overestimation of the death rate and administration expenses and the underestimation of the earnings on premiums by way of interest and gains by reason of lapses and forfeitures by the insurance company when it fixes the arbitrary level premium in its policies, are “returned premiums,” within the meaning of section 2810, Code 1915, and, as such, are exempt from taxation under said section.

Appeal from District Court, Santa Fé County; E. C. Abbott, Judge.

Action by the New York Life Insurance Company against Jacobo Chaves, Superintendent of Insurance. From judgment for defendant, plaintiff appeals. Reversed and remanded, with directions to enter judgment for plaintiff.

All moneys returned or allowed in abatement of future premiums to policy holders in a mutual life insurance company, which arise by reason of an overcharge on the actual cost of insurance occasioned by the overestimation of the death rate and administration expenses and the underestimation of the earnings on premiums by way of interest and gains by reason of lapses and forfeitures by the insurance company when it fixes the arbitrary level premium in its policies, are “returned premiums,” within the meaning of section 2810, Code 1915, and, as such, are exempt from taxation under said section.

Francis C. Wilson, of Santa Fé, for appellant.

Frank W. Clancy, Atty. Gen., for appellee.

PARKER, J.

The appellant brought an action in the court below to recover the sum of $954.31 from the appellee, who is superintendent of insurance of the state. This sum represents the amount of the tax which the appellee required the appellant to pay, and which it paid under protest. The tax was exacted by the appellee under the provisions of section 2810, Code 1915, the pertinent provisions whereof are as follows:

“All insurance companies, partnerships or associations engaged in the transaction of the business of insurance in this state shall annually, on or before the 1st day of February in each year, pay to the superintendent of insurance two per centum on the gross amount of premiums received, less returned premiums within this state, during the year ending the previous 31st day of December; and insurance companies shall be subject to no other taxation than herein provided, except upon real estate.”

The cause was tried upon an agreed state of facts, and resulted in a judgment against the appellant. A somewhat lengthy agreed statement of facts was submitted to the court, the pertinent provisions whereof may be summarized as follows: The appellant received during the year ending December 31, 1912, as premiums from its policy holders in the state, the sum of $147,846.83, and divided amongst its said policy holders in the state the sum of $47,715.50. That it is upon this sum of $47,715.50 that the tax complained of was exacted by the appellee, which said sum the appellant claims is exempt from taxation under the provisions of the statute. This $47,715.50 is made up of two items, as follows: $44,958.29 paid policy holders in cash; and $2,757.21 allowed on reduction of renewal premiums. That appellant is a mutual company, and conducts its business of life insurance on the mutual plan, having no capital stock and no stockholders, its board of directors being selected by the policy holders. That the insured receives his insurance at cost, which result is obtained by the company collecting its estimated premium in advance, and thereafter adjusting the actual cost and returning the excess to the policy holder, which is called his share of the divisible surplus of the company. That this estimated premium is generally found to be in excess of the requirements, and the amount of this excess is ascertained at the end of each calendar year and is called divisible surplus, and is paid back to the policy holders, in one of the ways stated in his policy, which are said to be as follows: (a) Paid in cash; or (b) applied towards the payment of any premium or premiums; or (c) applied to the purchase of a participating paid-up addition to the sum insured; or (d) left to accumulate to the credit of the policy at interest, and payable on the maturity of the policy or withdrawable in cash on any anniversary date of the insurance. That these excess premiums are exacted from the policy holders as margins of safety, and that there is therefrom created what is called a divisible surplus or dividend fund, which said sum is accumulated by reason of the following conditions and results: (1) Money saved and not expended on account of lower mortality rate than the insurance company calculated and fixed; (2) money gained because of the receipt of a greater rate of interest on the moneys and assets of the company than that calculated; (3) money gained by reason of less expense of operation and management of the insurance business than that calculated; and (4) reduction in necessary reserve because of diminished liability on account of lapsed and forfeited policies.

In support of the judgment the Attorney General, in behalf of the appellee, argues that the words “returned premiums” have no proper application to life insurance companies, and have proper application to fire insurance companies only, who return portions of unearned premiums in cases of the cancellation of fire insurance policies prior to the end of the term for which the premium was paid. He argues, further, that the insurance company is distinct from its policy holders, and that that portion of the divisible surplus made up of earnings from investments and reduced liability by reason of lapsed or forfeited policies, at least, becomes payable from the insurance company to its policy holders in the same way that dividends become payable to partners and members of joint-stock companies out of the common fund accumulated by way of profits of business ventures in which they may be engaged, and can in no sense be held to be “returned premiums” within the meaning of the statute.

The error in the argument may be made apparent. In the first place, partnerships and joint-stock companies organized for business purposes are organized for the purpose of making profits out of the investment. Each member contributes a certain share to the joint capital of the enterprise, which is in the nature of a permanent investment so long as the business continues. The inducement for the investment is the expected dividends or profits to be derived from the conduct of the business.

But a mutual life insurance company is organized upon an entirely different basis. It is organized for the purpose of furnishing life insurance at cost. There is no such thing as dividends or profits, properly speaking, in connection with its business. In fixing its arbitrary level premium the company overestimates the death rate and administration expenses, and underestimates the earning capacity of its investments, made up of premiums and the lapses and cancellations. At the end of the year, upon examination, it finds it has overcharged the insured a certain amount, and it simply refunds the same. We cannot see how the fact that a portion of the amount returned to the insured is made up of interest earnings on the premiums paid has anything to do with the matter. If it is allowed to him in reduction of his next annual premium, it is returning to him a portion of the premium which he has paid. The increment by way of interest is substantially, if not in a strict legal sense, the property of the insured, and becomes attached to and a part of the premium paid. Keeping in mind the fundamental proposition that the scheme is to furnish insurance at cost, we feel justified and required to interpret the word “premium” as including, not only the actual money paid, but also any additions thereto by way of earnings of the premium in the way of interest. To hold with the Attorney General would be to say that the word “premium” means simply the actual money paid by the insured, and no matter how...