Potomac Fire Ins. Co. v. State

• Decision Date: 20 March 1929
• Docket Number: (No. 7333.)
• Citation: 18 S.W.2d 929
• Parties: POTOMAC FIRE INS. CO. et al. v. STATE.
• Court: Texas Court of Appeals

18 S.W.2d 929

POTOMAC FIRE INS. CO. et al. v. STATE.

(No. 7333.)

Court of Civil Appeals of Texas. Austin.

March 20, 1929.

Rehearing Denied June 12, 1929.

Appeal from District Court, Travis County; George Calhoun, Judge.

Suit by the State of Texas against the Potomac Fire Insurance Company and another. Judgment for the State, and defendants appeal. Affirmed.

Geo. C. Gaines, Jr., of Houston, for appellants.

Claude Pollard, Atty. Gen., and Brann Fuller, Asst. Atty. Gen., for the State.

BLAIR, J.

By this suit appellee, the state of Texas, obtained an injunction against appellant insurance companies, perpetually restraining, as being violative of the anti-trust laws of Texas, the carrying out and performance of, or doing any act or failing to do any act under, appellants' following contract:

"In view of the ever mounting increase in insurance expenses, and in view of the fact that already approximately sixty per cent of the total expenses of insurance companies is the local agents' commissions, and in view of the fact that certain fire insurance companies, doing business in Texas, are endeavoring to crush and destroy competition by bribing insurance agents with excessive commissions to take the business away from competing companies and thus finally create a monopoly for themselves, and in view of the fact that said agents' commissions are paid by the public, thus laying a heavy tribute upon the premium payers by carrying out the policy of destroying competition, and in view of the fact that excessive commissions create a horde of solicitors who have no responsibility towards the companies and none toward the public, who undermine the soundness of underwriting and destroy the present local agency plan of doing business, and in view of the fact that the local agent is necessary for rendering service to the citizens and in view of the fact that a commission war is imminent and threatening, which must necessarily result in increased rates to the public and in the ultimate destruction to the local agent himself, by driving the business to the mutual companies and to the inter insurers, therefore, for the purpose of preserving reasonable rates to the public in Texas and the local agency occupation, and for our own protection, the Potomac Fire Insurance Company of Washington, D. C., and the Merchants' & Manufacturers' Fire Insurance Company of Newark, N. J., hereby agree that beginning on July 1st, 1928, they will limit the local agency commission to twenty per cent. on fire insurance business written by those companies in the state of Texas, and that they will not do business through an agent who accepts more than a commission of twenty per cent., from any company on fire insurance business written in the state of Texas."

The agreed stipulations are as follows:

"Capital stock fire insurance companies operating in Texas universally conduct their business upon what is known as the `agency plan,' which is to say: Each company appoints throughout the state persons to represent it in the acquisition and writing of business, each of which agents has the right to select the business for the company and to issue its policy of insurance, binding the company upon the risk. Every agent, without material exception, represents more than one company, usually several companies, for a number of good reasons. When an agent has solicited and secured an application for insurance from a property owner, the agent selects one of the companies which he represents, and `places' or `writes' the risk in the company so selected by him.

"All companies without exception compensate their agents by paying or allowing them a commission upon the business which the agents give them. Certain companies, of which the defendants herein are two, uniformly allow their agents certain commissions upon what is known as a `graded scale,' which by way of illustration provides for 15% of the premium collected upon certain specified classes of risks, 20% on other classes and 25% on others. Certain other companies pay their agents commissions for business given them in excess of the so-called graded scale.

"The experience of the defendants indicates that in those cases where agents are representing companies, some of which pay the graded scale and some of which pay the excess commissions, the agents place the more desirable risks in those companies which pay the excess commission and place the less desirable risks in those paying the graded scale. While the defendants carry with satisfaction a fair share of undesirable risks, good business and sound underwriting practice demands that they also have a fair share of the more desirable policies, since good insurance depends upon a wide and representative spread of hazards. The defendants have also found that there are so many of the agents in the business in the state who represent both classes of carriers, that they (defendants) are satisfied that they are not now getting this fair and necessary distribution of good and bad risks.

"It is admitted by all parties to this cause that defendants entered into the contract and agreement above set out with the belief that the interest of defendants' business justified and demanded the making of said agreement looking toward a `segregated' agency where all companies represented by an agent would pay him the same scale of commissions; and with the idea that other companies would join in the agreement to such an extent that ultimately every agent will receive the same remuneration from every company that he represents. In this condition of affairs an agent would have no incentive to prefer one company over another with reference to the class of risks written."

In addition to these agreed facts, Hon. R. B. Cousins, chairman of the State Insurance Commission, testified that the commission fixed and promulgated maximum rates of premiums to be charged and collected for insurance based upon several items of expenses necessary to the insurance business, the item of agent's commissions being the largest single item going to make up the total expenses. Witness further testified:

"In calculating these rates it is the desire of the board to arrive at reasonable and equitable fire insurance rates in this state. * * * The formula at which we aim will provide a premium dollar, out of which 55 cents will be used for payment of losses, 40 cents for operating expenses, and 5 cents either for company reserve or profit. That, roughly speaking, is our formula that is in use. One of the items that go to make up this 40 cents expense account is the item of agents' commission. * * * We take the companies' figures for their expenditures as reasonable and any variation in the agents' commission item, unless it appears to be absolutely extravagant, would be accepted as reasonable and would be taken into account in fixing fire insurance rates. * * * Of course, if they did raise the rates which they pay their agents so it increased the amount of money that they paid out on the whole as expenses it might be necessary for us to raise the rates in order to give them the money with which to pay. In the final analysis, it would be necessary for them to show us that this was necessary."

Whether this contract of appellants is violative of the following provisions of article 7426, is the sole question on this appeal:

"A `trust' is a combination of * * * skill or acts by two or more * * * corporations, * * * for either, any or all of the following purposes:

"1. To create, or which may tend to create, or carry out restrictions * * * in the free pursuit of any business authorized or permitted by laws of this state.

"2. To fix, maintain, increase or reduce * * * the cost of insurance. * * *

"3. To prevent or lessen competition in the * * * business of insurance. * * *

"4. To fix or maintain any standard or figure whereby the * * * cost of * * * insurance, * * * shall be in any manner affected, controlled or established.

"5. To make * * * any contract of insurance at a price below a common standard or figure, or by which they shall agree in any manner to keep the price of * * * insurance, * * * at a fixed or graded figure, or by which they shall in any manner affect or maintain the * * * cost of * * * insurance, or * * * to preclude a free and unrestricted competition among themselves, or others in the * * * business of * * * insurance * * * or by which they shall agree * * * to combine or unite any interest they may have in connection with the * * * charge * * * insurance * * * whereby its price * * * might be in any manner affected."

Appellants first contend that when standing alone, section 1 of the article is broad enough to include the insurance business, but that that section is limited and controlled by other sections of the article which deal specifically with illegal combinations relating to the insurance business. We have reached the conclusion that the contract is in violation of sections 2, 3, 4, and 5 of the article, which relate specifically to the insurance business, and we therefore pass the question raised as not material.

The second proposition is that appellants' contract in regard to expenses of agents' commissions does not and cannot affect the rates of premiums to be charged and collected for insurance, because exclusive power and authority to fix such rates is vested by articles 4878, 4879, 4884, 4885, and 4893 in the State Insurance Commission. These statutes vest in the State Insurance Commission "the sole and exclusive power * * * to fix * * * the rates of premiums to be charged and collected," and provide the manner of obtaining information to effectuate that purpose. They forbid the collection of rates in excess of the "maximum" so fixed, and declare that the rates of the commission must be reasonable; that all items and elements considered in fixing the maximum rates of premiums must be shown in the published schedules; that after 30 days' notice the...