New York Life Ins. Co. v. Burbank

• Decision Date: 17 December 1927
• Docket Number: 38082
• Citation: 216 N.W. 742,209 Iowa 199
• Parties: NEW YORK LIFE INSURANCE COMPANY, Appellant, v. W. J. BURBANK, Treasurer of State, Appellee
• Court: Iowa Supreme Court

216 N.W. 742

209 Iowa 199

NEW YORK LIFE INSURANCE COMPANY, Appellant, v. W. J. BURBANK, Treasurer of State, Appellee

No. 38082

Supreme Court of Iowa, Des Moines

December 17, 1927

REHEARING DENIED NOVEMBER 22, 1929.

Appeal from Polk District Court.--LESTER L. THOMPSON, Judge.

Action to recover excess tax paid under protest. Judgment for defendant.

Affirmed.

Carr Cox, Evans & Riley, for appellant.

John Fletcher, Attorney-general, Maxwell A. O'Brien, Assistant Attorney-general, and Ben J. Gibson, for appellee.

MORLING J. STEVENS, FAVILLE, ALBERT, KINDIG, and WAGNER, JJ., concur, DE GRAFF, J., concurs specially. EVANS, C. J., not participating.

OPINION

MORLING, J.

As a preliminary statement in general terms of the question submitted, it may be said to be: Should the term "gross amount of premiums received by it * * * for business done in this state," in Section 1333, Code Supplement, 1913, requiring insurance companies of plaintiff's class to pay a tax of 2 1/2 per cent thereon, be construed to mean the total amount of premiums computed at table or policy rates at their face, or should it be construed to mean that amount less such sums as the company has during the year abated from premiums or paid in cash to policyholders for dividends and surrender values? It was stipulated that plaintiff is a mutual life insurance company, organized under the laws of New York, having no corporate stock, and conducting its business on the mutual plan only; "that its business is conducted on a level premium plan,--that is to say, that the only premium required * * * is collected in advance, and is calculated on such basis it will not have to be increased during the life of the policy. The established or calculated premium is made up of two factors: First, the net mathematical premium which, invested at an assumed rate of interest, will provide sufficient funds to meet the obligations of the respective policies, not including any dividends. To this factor is added a factor known as 'loading,' which is to provide for unforeseen contingencies, excess mortality, taxes, and operating expenses. That neither the policy contract nor charter contain any direction that the board of directors shall declare dividends, and, so far as the individual policyholder is concerned, he has no control over the question whether or not dividends shall be declared, but when declared, has a right, under his contract, to have them distributed in accordance with the policy contract. Under the mutual plan, whenever, by reason of excess interest earnings, savings in expenses, or savings in mortality, or any other source of profit, a surplus is earned, it is held for the benefit of all the policyholders, and may be assigned by those vested with authority so to do, and distributed in whole or in part to the policyholders. This distribution, when and if made, is commonly called dividends to policyholders, and is paid or credited to the policyholder in accordance with the provisions in the policy contracts."

By plaintiff's charter, its officers are required, as soon as practicable after the 31st day of December of each year, to cause a statement of its affairs to be made up, and to "ascertain the surplus earned by it during said year, which said ascertainment of surplus shall be binding and conclusive upon every person entitled to share in its surplus." By the terms of plaintiff's policies, the proportion of divisible surplus accruing to them shall be ascertained annually, and, beginning at the end of the second year, such surplus as shall have been apportioned by the company to the policy shall, at the option of the insured, be either paid in cash or applied toward payment of premiums or left to accumulate at interest, credited annually, and either withdrawable in cash at any time or at a specified time, as provided in the contract.

At the table or contract rates, the amount of premiums collected by plaintiff on its Iowa business in 1920 was $ 1,611,198.64. Included in this sum were the following items which the plaintiff claims should have been deducted in ascertaining the sum upon which it was required to pay the 2 1/2 per cent tax: 1. Annual dividends actually paid in cash, $ 10,354.21. 2. Dividends used by way of deduction from the stipulated premiums, $ 104,628.59. 3. Deferred dividends paid in cash, $ 216,221.48. 4. Amounts paid to policyholders in cash on surrender of policies, $ 245,894.68. These sums were allowed or paid to Iowa policyholders, and plaintiff seeks to recover the amount of the tax paid upon them.

Plaintiff's contention is that it conducts its business on the principle of carrying insurance at cost; that it is the duty of its officers to ascertain yearly the company's condition, determine the excess of income, and assign for distribution to policyholders "such portion of its surplus as they may deem consistent with conservative business management;" that, "after the action by the board of directors in assigning the surplus for distribution to policyholders, the company is not entitled to retain any part of it as its own absolute property, and therefore comes within the application of the principle announced in" In re Continental Cas. Co., 189 Iowa 933, 179 N.W. 185, which will be later referred to.

Is it correct to say that the dividend is merely a return of a part of the premium which the company has no right to retain as its own absolute property? Attention to the facts of this case, as stipulated and proved, and to the statutes, will distinguish it from the cases relied upon by plaintiff.

While the plaintiff is a mutual company, and is owned by its policyholders, rather than by stockholders, it is nevertheless, a corporate entity, as distinct from its policyholders as is the stock company from its stockholders. The plaintiff's policyholders sustain a double relationship to it: (1) That of contractors with it, and (2), resulting therefrom, that of pro tempore owners of it. They are owners only in a qualified sense. They change from day to day, not by a mere transfer of interests which persist in others, but by utter cancellation of the interests of some and the acquirement by new contracts of newly created and temporary interests by others. The policyholder whose connection with the company expires by lapse, surrender, or death has no interest which he may transmit in the continued existence of the company. The policyholders have no interest in the permanent surplus, other than in the gains from the investment thereof and as an assurance of the safety of their contracts. In the case of the stock company, the stock is owned by the holders in a different capacity than as policyholders, though the same person may be interested in both capacities. The stock investment constitutes a source of financial strength and safety which the mutual company does not have, but which, manifestly, sound business principles would dictate that it offset by the collection of larger premiums, used in part in the accumulation of a larger reserve and surplus. (See Chapter 429, Acts of the Thirty-seventh General Assembly, and cases post.) The surplus of today results in large measure from the premiums collected from policyholders who have long ceased to be such. The earnings from their contributions figure largely in current dividends. Whether the business is conducted by a stock company or a mutual company, it is operated upon the same general principles. The so-called earnings, profits, or gains are of exactly the same nature, derived from the same sources. The factors entering into the fixing of the premium are: First, mortality, computed according to experience; second, interest earnings, computed at a rate estimated from experience; third, "loading," to provide for operating expenses and unforeseen contingencies. The premium is fixed, not for the individual, but for a class, and the experience upon which it is based is the experience of a series of years. There have been in the past, and it must be assumed that there will be in the future, fluctuations in each element entering into the premium basis. The duty of paying the premium in order to continue the insurance is necessarily that of the policyholder to the company, as an entity distinct from him, and is absolute. The premium is a resource of the company's. The right to the dividend depends on the discretion of the plaintiff's officers. As stipulated, "he has no control over the question whether or not dividends shall be declared." The annual or divisible surplus, as ascertained, arises, according to the evidence, "from various sources, such as excess interest earnings, savings in mortality, savings in expense charges, perhaps gains from lapsed and surrendered policies, and other profits which may arise in the conduct of the business." Manifestly, the interest earnings are those of the invested funds (capital) derived from premiums paid by former and by existing policyholders,--the capital (though not capital stock investment) of the corporation. The gains from lapsed and surrendered policies are gains of the company to which the persisting policyholders have not contributed, but in which they participate. It is a matter of general knowledge, shown by official reports, that some stock companies issue participating policies, and some mutual companies issue non-participating policies. The gains from non-participating policies would become a part of the gains of the corporation in which the participating policyholders of a mutual company would share. As has been seen, the officers may not be compelled to declare dividends. The policyholder has nothing to say as to whether or not they shall be declared, or as to the amount thereof. He merely has the right to have the dividend distributed...