Rhode Island Ins. Co. v. Downey, 14210

CourtCalifornia Court of Appeals
Citation95 Cal.App.2d 220,212 P.2d 965
Decision Date21 December 1949
Docket NumberNo. 14210,14210

Peart, Baraty & Hassard, San Francisco, California, Bronson, Bronson & McKinnon, San Francisco, California, for petitioner.

Fred N. Howser, Attorney General of the State of California, T. A. Westphal, Jr., Deputy Attorney General of the State of California, Harold B. Haas, Deputy Attorney General of the State of California, for respondents.

William E. Powers, Attorney General of the State of Rhode Island, amicus curiae.

BRAY, Justice.

Petition for a writ of mandate directing the superior court to vacate its 'Order Appointing Conservator and Restraining Order' in a proceeding brought against petitioner by respondent Insurance Commissioner of the State of California. The questions involved concern the validity of the acts of respondent in seizing, by virtue of said court order, the California business and assets of the petitioner.


On May 17, 1949, said commissioner filed an application in the superior court under section 1011 of the Insurance Code, for an order making him conservator of the petitioner, directing him to take possession of all of its assets, records, and property, vesting title thereto in him, and enjoining it from transacting further business in California, etc. The application as permitted by section 1011 of the Insurance Code, was made ex parte and without notice. The order was granted forthwith. The application and order were served upon petitioner simultaneously with the seizure by the commissioner under the order, of all of its California assets. On June 1, petitioner filed its petition in this court for a writ directing the superior court to vacate its order. Respondents demurred to the petition on the ground that it does not state a cause of action against them and also filed returns. Later petitioner filed a supplement to the petition and then an amendment thereto. Respondents filed demurrers and answers to the petition and to the supplement and amendment. The case was submitted on the pleadings and the briefs, it being the petitioner's theory that the pleadings, together with certain admissions claimed to be made in the briefs and on the argument, show as matter of law that the commissioner had no legal right to seize the company as he did.


The material allegations of the complaint as supplemented and amended may be summarized as follows:

Petitioner was organized under the law of Rhode Island, is lawfully doing business in 34 states, a number of foreign countries and territories, and has been duly licensed to do business in California since 1912. Wallace Downey is the duly appointed Insurance Commissioner of California.

As of December 31, 1948, petitioner's total assets exceeded the total liabilities (excluding capital and surplus) by about $2,500,000.00. After deducting certain nonadmitted assets, there was still a capital stock of $1,000,000.00 and a surplus of over $1,000,000.00. During 1948, petitioner wrote insurance in gross premium value of about $13,000.000.00, and about $1,500,000.00 in California alone. Business in California has shown a healthy increase. Petitioner has 142,000 policies in force in the state, and is represented by over 2,500 duly qualified and licensed agents.

The superior court order appointed the commissioner conservator of petitioner's business, gave him title to its assets 'wheresoever situated,' and restrained petitioner from carrying on its business. The commissioner, on taking over, has prohibited the issuance of any further policies in California, and, in effect, has stopped petitioner from doing business here.

The grounds given by the commissioner in his application are all disputed by petitioner, and it is contended that for more than a year most of them were known to him. They rest on the determination of legal questions, accounting problems, questions of valuation of assets, and similar questions, all of which are debatable. On many of these issues the commissioner has a difference of opinion with 33 other state insurance commissioners. The only recent development is in connection with an agreement between petitioner and Pioneer Equitable Insurance Company of Indiana, dated March 21, 1949. This agreement was approved in March by the Insurance Commissioner of the State of Rhode Island, petitioner's domiciliary state, and the Insurance Commissioner of the State of Indiana, Pioneer's domiciliary state.

The commissioner's interpretation of that agreement is that (a) it amounted to a merger or consolidation without the commissioner's consent (the company denies that it does or that the commissioner's consent can be required); and (b) it would cause a properly adjusted financial statement to show the company's capital impaired approximately 73 per cent. This causes a technical statutory insolvency, and is based on determinations opposed to those of the insurance commissioners of the domiciliary and other states. The commissioner concedes that there is an excess of assets over true liabilities, so that no actual insolvency exists. The liability of petitioner to Pioneer as of January 1, 1949, for the retirement of preferred stock in the amount of $1,500,000 is by a resolution of the stockholders of Pioneer held March 29, 1949, made subordinate to the rights of the policyholders, creditors and claimants, and if petitioner shall be in arrears in providing for the redemption of the Class A preferred stock in an amount equivalent to two years cumulative redemptions, the stockholders of Class A preferred stock voting as a class shall be entitled to elect a majority of the directors of the corporation.

From August, 1948 on, the commissioner had conferences with officers and attorneys of petitioner regarding matters of internal management, making various complaints about the management and asking the company to withdraw from business in California. Further conferences were held. Although petitioner did not believe the commissioner had power to demand internal changes, it made several of the requested changes--put in directors who were not employees, cut down the volume of its business, adopted a policy of investing only in securities traded on a national exchange, etc. Petitioner did not remove Stewart Hopps, chairman of the board, from his position as officer and director, as suggested by the commissioner, but transferred power from the chairman of the board to the president. The commissioner, although not contending he had the right to insist on such change, still insisted Hopps should be eliminated entirely.

Early in November, 1948, the commissioner met in New York with the insurance commissioners of Rhode Island, Pennsylvania and Indiana, and some officers of petitioner. This was followed by a meeting of the insurance commissioners alone, who took no action nor did any of the commissioners in other states.

On November 8, petitioner received a letter from the commissioner purporting to require it to cease business in California. Under authority given in the Insurance Code, petitioner asked the Attorney General of California for an opinion as to the legality of the commissioner's order in the November 8, letter, and was later advised that the commissioner's order had been withdrawn. On November 18, petitioner filed in the superior court an application for declaratory relief against the commissioner, seeking an adjudication of status and legal relations under the Insurance Code, and an injunction restraining the commissioner from interfering with the company's business pending final adjudication. An order to show cause for a preliminary restraining order issued November 18, returnable November 26. It was continued from time to time by mutual consent, and was to be heard on June 13, 1949.

Immediately after the declaratory relief action had been filed by petitioner, the commissioner, under authority of the Insurance Code, began investigating petitioner. Hearings were held in New York and petitioner's books were examined in Philadelphia. Hearings were adjourned on December 23, for the Christmas holidays, on the understanding that they would be resumed again on notice from the commissioner. On February 23d, the Attorney General of California wrote petitioner about completing questioning of officers. The company replied that they would be available in about one week. The attorney general made no objection and was to notify petitioner of the date. No further word was received from the attorney general or the commissioner, and no further request for resumption of the investigation was ever received by petitioner.

The National Association of Insurance Commissioners is an organization of all state insurance commissioners, having as one purpose to secure uniformity of insurance regulation among the states. At the convention of the N. A. I. C. in New York in December, 1948, the commissioner made a motion that the executive committee, of which he was a member, act together in the matter of petitioner. The motion was not seconded. On January 17, 1949, the commissioner advised the N. A. I. C. that he did not desire to act alone and requested the N. A. I. C. to join in uniform action. The commissioner was thereafter advised that the N. A. I. C. suggested a 'convention examination,' conducted by examiners from state insurance departments, one examiner from each zone in which the company does business. For the purpose of these examinations, the United States is divided into six zones. Such examinations are made of all insurance companies as often as required by the law of the domiciliary state. Rhode Island requires such an audit every four years. The last examination of petitioner was in 1945. California is in zone 6, and the commissioner accepted the invitation to be the examiner representative of that zone.

The convention...

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