New England Mut. Life Ins. Co. v. Reece

• Decision Date: 10 June 1935
• Parties: NEW ENGLAND MUT. LIFE INS. CO. v. REECE, Commissioner of Insurance, et al.
• Court: Tennessee Supreme Court

83 S.W.2d 238

169 Tenn. 84

NEW ENGLAND MUT. LIFE INS. CO. v. REECE, Commissioner of Insurance, et al.

Supreme Court of Tennessee.

June 10, 1935

Appeal from Chancery Court, Davidson County; James B. Newman Chancellor.

Suits by the New England Mutual Life Insurance Company against Joseph I. Reece, Commissioner of Insurance, and others. Decree for complainant, and defendants appeal.

Affirmed.

Roy H Beeler, Atty. Gen., Charles M. Bryan, of Memphis, and Edwin F. Hunt, Asst. Atty. Gen., for J. I. Reece et al.

Tyne Peebles, Henry & Tyne, of Nashville, for New England Mut Life Ins. Co.

GREEN Chief Justice.

These suits were brought against the commissioner of insurance and fiscal officers of the state to recover certain taxes paid by complainant under protest. From a decree for the complainant, the defendants have appealed.

Chapter 13 of the Public Acts of the Second Extra Session of 1931 (article 3,§ 2, item 100 (a) and Revenue Acts of other years since 1895 have contained substantially the same provision as follows:

"*** Life insurance corporations or companies of other States and foreign countries shall pay two and one-half per cent on gross premium receipts from citizens of and residents of this State, payable semiannually in January and July, on sworn returns. ***"

The controversy is over the meaning of the words "gross premium receipts." The complainant is a life insurance company operating on the mutual plan, organized under the laws of the state of Massachusetts, and licensed to do business in Tennessee in 1915. Since it entered the state, complainant has paid the aforesaid tax upon the aggregate amount of money actually received by way of premiums from Tennessee policyholders, deducting from the total of the fixed or contract premiums the aggregate of the credits allowed policyholders by way of dividends. The contention of the defendants is that the tax should have been calculated upon the total of the premiums stipulated in the Tennessee policies without deduction for dividends credited.

In computing its tax due the state of Tennessee, the complainant followed a ruling of the insurance commissioner made in 1897 under advice of the Attorney General. In 1932 the commissioner at that time reversed the ruling of his predecessor, which had been followed by all commissioners of insurance since 1897, and demanded that complainant pay 2 1/2 per cent. on the aggregate of the contract premiums stipulated in its Tennessee policies without deductions. Under threat of penalties, the commissioner in 1932 exacted of complainant the increased tax for the current year and certain previous years.

The points of controversy with respect to the meaning of "gross premium receipts" will be more obvious if we consider the nature of the plan upon which complainant and mutual life insurance companies generally do business.

A table of mortality is adopted showing a higher death rate than will probably be realized, and it results at the end of the year that the amount necessary to take care of death losses is less than that contemplated in fixing the amount of the premium.

A rate of interest is assumed likely to be realized upon the invested assets of the company during the life of the policy, and this rate of interest is in fact lower than that which the company actually realizes.

The expenses of conducting the business of the company as well as unforeseen contingencies, such as excessive death losses and investment losses, are taken into account in fixing premiums. The provision for such expenses and contingencies is also greater than is actually required.

Upon the assumed factors just stated, the level or contract premium rates are computed; this being done as a measure of precaution, with knowledge that the premiums so stipulated will be in excess of the company's requirements.

Premiums being so calculated, it results at the end of the year that the company has a surplus arising out of level premiums collected not necessary for its financial needs. Policies issued by the complainant contain the following provision with reference to distribution of this surplus:

"Upon payment of the second annual premium, and each year thereafter while in force, this Policy will be credited with such share of surplus as may be apportioned hereto by the Company, and each share of surplus, at the option of the Holder of the Policy, shall be (A) payable in cash; or (B) applied in reduction of premium; or (C) used to purchase a non-forfeitable, participating paid-up addition; or (D) left with the Company to accumulate with interest at not less than three per cent per annum, payable at the maturity hereof, or withdrawable in cash on demand. If no election is made on or before the premium date, the share for that year will be held by the Company, as provided in Option D. If any premium remains unpaid at the expiration of the period of grace, the Company will apply to the payment then due the accumulated surplus under Option D, if sufficient to make said payment in full. If this Policy, become a claim by death after the first policy year, a post-mortem share of surplus will be paid."

The share of the surplus apportioned is commonly called a dividend, although such use of the word is said in some of the cases to be inapt. This use of the word, however, has been so persistent that dividend has obtained a distinct and peculiar meaning in insurance terminology. This meaning is recognized by standard lexicographers as well as in insurance circles. See Webster's New International Dictionary (2d Ed.). Such a dividend does not represent a bare share of corporate profit apportioned to a stockholder, but is a share of surplus allocated to a policyholder which represents a return of a portion of the premium not needed to meet losses and expenses and may include a distribution of earnings. As thus defined, the word "dividend" will be used in this opinion instead of more cumbersome phraseology sometimes employed.

The commissioner argues that the meaning of "gross premium receipts" is clear and unambiguous; that the gross premium is the entire premium, the premium stipulated in the contract; that gross premium is contradistinct from net premium and means the whole premium without deductions; that a dividend is the property of the policyholder, which he may draw in cash or for which he may take credit on his premium, or otherwise use as indicated in the policy; that being the property of the policyholder, a dividend becomes a premium receipt when appropriated by the policyholder and accepted by the company as a credit on a premium due; that in such a case the fixed premium is paid, partly in cash, and partly by an order on a trust fund, the whole constituting a gross premium receipt in the hands of the company. The commissioner explicitly denies the proposition that the dividends are merely returned premiums, and shows from the record that dividends, partly at least, are comprised of earnings from the company's investments to which the particular policyholder may have made no contribution at all.

The insurance company likewise insists that the meaning of "gross premium receipts" is clear and unambiguous, urging that defendants ignore the force of the word "receipts"; that a dividend represents nothing received from the policyholder during the current year, but represents a return to the policyholder of excess premium received from him during a previous year upon which excess the tax was paid when received. In other words, that a dividend does not represent profits but is a return to the policyholder of the excess of fixed premium over the actual cost of insuring him. An illustration is offered by the company, and in cases to which it refers, which runs something like this. Take a policy on which the fixed premium is $100 per annum and dividend, after the first year, $10 per annum. Dividends being credited on premiums each year, over a period of twenty years, the company would receive $100 the first year and $90 for each of the subsequent years, making a total of $1,810 gross premium receipts for the period. If the tax were computed as the commissioner insists it should be, the company would be taxed on $2,000 gross premium receipts when its gross premium receipts were actually $190 less.

While it seems to us a mistake, from the record before us, to say that profits do not enter into dividends at all, nevertheless dividends under consideration are not like dividends which a shareholder receives upon his stock in a corporation. In the latter case the shareholder takes the dividend without obligation. If a policyholder, however, takes the dividend, he must return it, if we may use the expression, to keep his margin good.

The assessment of gross premiums received is quite a common method of taxation of insurance companies. Statutes similar to ours have been enacted in many of the states, and the same question here presented has arisen in many jurisdictions.

As sustaining its contention as to the proper construction of the words "gross premium receipts," we are referred by the insurance company to the following cases: German Alliance Ins. Co. v. Van Cleave, 191 Ill. 410, 61 N.E 94; State v. Fleming, 70 Neb. 523, 97 N.W. 1063; People ex rel. Continental Ins. Co. v. Miller, 177 N.Y. 515, 70 N.E. 10; State v. Hibernia Ins. Co., 38 La. Ann. 465; Mutual Benefit Life Ins. Co. v. Commonwealth, 128 Ky. 174, 107 S.W. 802; State ex rel. Brewster v. Wilson, 102 Kan. 752, 172 P. 41, L. R. A. 1918D, 955; State ex rel. National Life Ins. Co. v. Hyde, 292 Mo. 342, 241 S.W. 396; Commonwealth v. Penn Mutual Life Ins. Co., 252 Pa. 512, 97 A. 677; Commonwealth v. Metropolitan Life Ins. Co., 254 Pa. 510, 98 A. 1072; New York Life Ins. Co. v. Chaves, 21 N.M. 264, ...