September, 1905, Volume XIII, No. 9, The American lawyer, edited by Frank Charles Smith, Lucien Brock Proctor, Heman Gerald Chapin, Richard Selden Harvey, page 372,
Life Insurance: Shall We Have State or Federal Supervision? by Samuel Bosworth Smith.
(An Address Delivered Before the Bar Association of Tennessee.)
Ordinarily the discussion of such a topic as Life Insurance might be considered hardly a fitting theme for a meeting of lawyers. Under existing circumstances, however, I hardly feel that any apology is due for the choice of my subject.
The airing of Equitable affairs has made life insurance a matter of almost universal interest and comment, while the fact that Senator Dryden, president of the great Prudential Insurance Company, has introduced a bill in the United States Senate in which it is sought to have interstate life insurance declared interstate commerce has been deemed of so much importance by some of the bar associations of our sister States that they have appointed special committees to look into the question and to report their conclusions to the bodies which appointed them.
It Is not my object to go into either an exhaustive nor a technical discussion of my topic, but only to briefly touch upon the proposition from three points of view:
1. The historical; discussing the attempts which have been made to bring about federal supervision;
2. The practical; is federal supervision greatly to be desired; and
3. The legal; is federal supervision one of the powers delegated to the national government?
State supervision of insurance originated in Massachusetts in 1855.
Following the erection of the Massachusetts department, the other States fell in line with their own theories as to the proper methods of inspection, regulation and taxation of these institutions, which were beginning to give some intimation of the growth to which they have in our day attained. Naturally, such inspection and regulation being a new idea, the rules and regulations of the different States differed widely, and the insurance companies, which had begun business in these States without supervision, began very soon to chafe under what they considered, and in many instances, rightfully considered, unjust and oppressive surveillance.
The first steps looking toward national supervision took the form of an address to Congress in 18G5 from some of the leading companies, asking for legislation looking to relief from oppressive supervision, legislation and taxation. In 1868 a bill was introduced in Congress, evidently suggested by the recently Invented National Banking Act, seeking to concede to insurance companies the privilege of incorporating as federal corporations, with privileges and immunities similar to those of the National banks. (1)
(1) The statement as to the nature of this bill of 1SGS was taken from an address of Senator Dryden, before the writer had been able to secure a copy of the bill, and is not strictly accurate. However, for the purposes of this paper, the discrepancy is not material.
Naturally, as the peculiar reason for the existence of National banks applied to National banks, and National banks alone, the bill to create National insurance companies found an early grave.
During the early seventies, and even down into the eighties, the life of the insurance company was hard. Th9 business was comparatively in Its infancy; each insurance financier that "was developed had his theories and ideas ror reducing the cost to the policyholder and the returns to the stockholder, and failures were many and severe. These failures were easily attributed to vicious State legislation, and every fellow who did not succeed, as well as every one who did succeed in maintaining his company, but failed to give to the policyholder as much as he had promised, cried loud and long against the crime of State supervision.
It was easy, and It is easy, to say that results -would be better if things over which we have no control were changed.
The Supreme Court, however, in 1868, soon after the introduction of this first bill, handed down its opinion in the case of Paul v. Virginia, holding that insurance was not commerce, and this seemed so decisive of the question Ihat no further attempt at federal legislation "was made until 1892. when Mr. John M. Pattison, president of the Union Central Life Insurance Company, and member of Congress from Ohio, introduced a bill having in view the object of the bill of 1868— the federal supervision of insurance. But he approached the subject in an entirely different way, and his bill is the real foundation for the bills which have been subsequently introduced. By the terms of the Pattison measure all interstate insurance was to be made interstate commerce. A national commissioner of insurance was to be appointed; a national bureau of insurance was quite elaborately planned. State supervision for business in the home State of the company was to be retained, but for all interstate business national supervision was to be exclusive. This bill also faUed, Congress having had up to the present time the grace to follow the opinion of the United States Supreme Court, and having, therefore, declined to pass a bill which, under repeated decisions of that court, would be unconstitutional.
The proposition next appears in a bill introduced, by request,'in 1898, by Senator Piatt, of Connecticut. This bill followed the Pattison bill in its main lines; declared interstate insurance interstate commerce and erected an insurance division of the Treasury Department. This bill departed from those which had gone before it in one radical particular, in that it provided that the solvency of the company should be tested by the laws of the State of its organization. This act, like its predecessors, failed of passage, and the subject again lay dormant in the halls of Congress until the last session.
In December, 1904, Mr. Morrell Introduced into the House a bill providing, in a few words, that the Bureau of Corporations of the Department of Commerce and Labor should prescribe and enforce suitable regulations for the transaction of the business of insurance, in all cases where such business shall include a contract or agreement between citizens of different States, such regulations to be subject to modification, alteration or repeal by Congress at any time and to be enforced under such penalties only as Congress shall from time to time prescribe. The bill further provided for the appointment, by the Secretary of Commerce and Labor, of a Superintendent of Insurance, to be subordinate to the Commissioner of Corporations, at a salary of $3,000 a year. This bill does not seem to have been seriously pushed, and in February, 1905, a bill was introduced in the Senate, by Mr. Dryden, president of the Prudential Insurance Company, which undoubtedly embodies the ideas of the great insurance companies on the subject of supervision. This bill takes the toga of an amendment to the^act_to establish the Department of Commerce and Labor. It provides, in as few words as possible, that there shall be in the Bureau of Corporations an officer called the Superintendent of Insurance, in charge of the bureau to be called the division of insurance, who shall be appointed by the President for a terra of four years. Mr. Dryden then, by a sweep of the pen provides, "That policies of insurance are hereby deemed articles of commerce and instrumentalities thereof," that "The delivery by said corporations of said contracts of insurance from the State, Territory or country of the locality to citizens, corporations or other pesons located in other States, Territories or nations, the transmission by the insured from such other States, Territories or nations of the premiums or other valuable consideration for said policies to the home office of the company, in the State, Territory or nation of the locality if and when said locality is situated in another State, nation or Territory, and the transmission by said insurance company from the home office to the insured in other States, Territories or foreign nations than that of the locality, oT any sums of money which from time to time shall become due to the insured on said contracts of insurance, are hereby declared and deemed to be transactions in interstate or foreign commerce as the case may be."
In the broadest way the bill proceeds to give to the Superintendent of Insurance, subject only to the approval of the Secretary of the Department of Commerce, the power to fix fees, establish rules and regulations for and to pass upon the solvency of all companies engaged in interstate insurance.
These various bills very fairly express the general advance of the demands of the ereat insurance companies. If constitutional, there was no grave objection to the bill of 1808. Its object was simply to give the right to insurance companies to incorporate as federal institutions. Its passage would not have prevented State insurance companies any more than the National Banking Act prohibited State banks.
Passing over the twenty-four years from 1808 to the Pattison bill of 1892 we see a great change. In the Pattison bill the privilege of the State charter with the immunity from
State taxation and regulation is sought. This bill was the creation of the life insurance president of 1892, and while broad in its scope It was still quite specific in its detaUs, and under its terms it was at last possible to forecast what the regulations of the National Insurance Commissioner would be.
The Platt bill of 1898 was not framed by a president of an insurance company, but by a gentleman who had been for many years deeply interested in insurance as a science and in federal supervision as a hobby. This bill in many of its provisions was crude, but it had one fundamental point of fairness—it required the national department to take the law of the State of the corporation as the law by which it should be judged by the federal commissioner. Under this provision the insurance company which had organized and iaunched itself under conditions and laws with which it was familiar had the assurance of the protection of Ute sftuic laws and conditions and the change fromState to the federal control would have meant simply the change in an official, not in the law.
At the time the Piatt bill was framed this clause seemed altogether above criticism. Since that time the country has been flooded with interstate trust companies from New Jersey, and we can see now a danger in such a clause, which was not then appreciated, as under it a dishonest commonwealth might make itself the mother and foster mother of every bastard wild-cat insurance scheme which might enter the brain of frenzied financiers, and the federal department being bound by the State law and the States in general being bound to admit all interstate companies there would be no method provided for killing the financial fraud.
Coming to the Dryden bill—the bill of the Prudential Insurance Company—what have we? We have State supervision eliminated; we have a political official who is given carte blanche to fix rules and regulations to suit himself, or to suit his owners, as the case may be; we have the power given to this political individual to provide arbitrary tests of solvency for the benefit of a few companies; we have a man who can fix the basis on which interest on the reserve shall be compounded, and, therefore, who will have the practical power of fixing the rates; we have a politician who, to all intents and purposes, would be legislature and supremo court In all practical questions touching the conduct of the insurance company. And the rulings of this man would "be binding upon the States. His rulings might be absolutely adverse to the great Massachusetts Insurance Department and to the laws of Massachusetts, the recognized standard of strict insurance inspection in this country; yet Massachusetts would be helpless; they might override every Idea of the department of Tennessee, which ranks second in the United States, which has had long and varied experience under competent heads; they might force upon Tennessee companies which our legislation and our department had rigidly excluded; might shut from our doors that form of company which we would most desire, yet our will, our judgment, would be as naught before the dictum of one who might be but a political henchman.
And, looking at the whole scheme fairly and squarely, where would be the real advantage, to the public, of federal supervision; of creating insurance interstate commerce; of taking from the States the power of regulation, taxation and control? Has federal supervision proven so successful; State control such a failure, that there can be but one side to the question? Take our National banks. It is a matter of common remark that the bank examiner never finds anything the matter until the bank is insolvent.
Despite the boasted strength of the National banks, twenty-six failed in the fiscal year of 1903-1904; six resumed business; twenty were insolvent. In the past decade 142 National banks failed, nearly 3 per cent of the total now in being. I speak only of the failures, not of liquidations. In the past fifteen years 2C9 National banks have failed, or about 5 per cent of the total now in existence.
Looking to the old-time life insurance companies, with their State supervision, we fail to find one failure in the past ten years; we find but one since 1890.
As there are something over a hundred such companies now in business, we find less than 1 per cent of failures in fifteen years, as against 5 per cent of National bank failures during the same period.
Has the success of the Interstate Commerce Commission been such as to invite its extension over business in general?
If the ordinary citizen be asked his opinion as to the greatest problem of the country and of the hour, the chances are strong that his answer will be "the trusts." No one questions the will of the great insurance interests to create an insurance trust, should the opportunity present itself. L'p to date It has never been possible to complete the formation of such a trust, though rumor has had it for a long time that there exists a "community of interests" arrangement among certain of the great companies. So long as there is State supervision and State regulation, such trust is impossible. Make insurance interstate commerce and such a result is inevitable. This may sound like demagogy, but looking over the industrial field it will be found that every trust is engaged in interstate commerce and is able to sustain itself because of a necessary and beneficent clause in the National Constitution; that in those industries and pursuits; in the great financial enterprises which do not come under the commerce clause of the Federal Constitution, there is not a twist; there never was a trust and there never will be a trust unless and until State lines are obliterated.
Looking at the pressure now being brought for the centralizing of all regulation in one department, one is reminded of a little recent history. Most of us have read of and remember that master stroke of finance by which a small body of men was to control in perpetuum a great insurance company and a great trust company, with practically not a dollar in e'ther concern. The plan was to largely increase the stock tf the trust company, and to put it on the market at a very high figure. This stock, together with the stock of the trust company already outstanding, and which was owned by the controlling stockholders and directors of the insurance company, was to be bought by the insurance company. The Insurance company's d'rectors thus were to make a handsome trade in their stock and as directors of the insurance company they would control the trust company; to whicn tney were to elect themselves directors. The trust company now having a large surplus by reason of its sale to the insurance company, would be in pressing need of finding an investment What could be more advantageous than the controlling stock in the Insurance company, which could be bought from the directors of the trust company and of the insurance company if enough were paid for it? This purchase being made the trust company would own the control of the insurance company and would through its directors elect the directors o; the insurance company and vice versa. By this simple, though unique, plan, the directors in these two massive corporations would sell out their own holdings at enormous profits, and still retain for all time the absolute control of both corporations. This was, in rough and in brief, the scheme. This well laid plan was scorched by the Insurance Commissioner o: Massachusetts, although the insurance company in question was domiciled in New Jersey. At the next senatorial election after the Massachusetts department had been so rude as to interfere with so neat a plan of high finance, the president of this same insurance company is elected to the United States Senate, and has hardly well warmed his seat before introducing a bill which is intended to take from the Massachusetts Commissioner and from all other commissioners the power of interfering with the plans of any of the "Big Four" of life insurance.
The States are learning that it does not pay to be toj severe upon the foreign insurance companies. If they are too severe, the companies can withdraw from the States, and this remedy has more than once been resorted to.
It is true that taxation is too high—entirely too high. It is also true that, as a rule, the consumer pays the tax. Yet, even from this standpoint, the burden upon the individual policyholders is not great. If we assume—and the assumption is a radical one in most instances—that the policyholder would get the benefit of every cent of tax saved by eliminating State taxation, the saving upon his premium could In no case be over 2 per cent, i which is as nothing if the "State supervision can possibly avoid evils which might arise under a one-man administration.
If the Equitable tangle be pointed as an example of weakness in State supervision, a moment's thought 'will demonstrate that this argument is really for, not against, the State idea. It is true that monumental graft has apparently gone on under the closed eyes of the New York Insurance Department. It is equally true that Superintendent Hendricks Is a man of quite the calibre one might expect to find In the national superintendent's office. It has been rumored for a long time that the New York Insurance Department was owned by the great corporations of that State. It is believed to be true that Hendricks' last report on the Equitable wa.^ not given to the world until it had been edited by the Republican machine, and particularly by Odell. To-day Higgins is claiming that Odell has used this method of weakening the Governor's position. At this writing it seems that District Attorney Jerome has at last succeeded in procuring a copy of the testimony taken in the Equitable investigation, thougti he succeeded only after pressure of public opinion was brought to bear on the Insurance Department. All this and much more is doubtless true. But the Insurance Departments of the other States are vigilantly watching developments; the chosen men at the head of some fifty departments are seeking distinction in protecting the interests of the policyholders of their States. What has hapepned in this instance in Albany has happened and will happen again In Washington. If Albany flickers, half a hundred independent departments are entitled to a "look in" and an investigation; shouKl Washington fail this is the end of it. If Chairman Paul Morton, of the Equitable, is being protected by the Republican machine in New York, Vice-President Paul Morton, of the rebating Santa Fe, was none the less well protected by the administration at Washington. The corporation or the individual who has nothing to hide invites publicity; the eyes of the State departments are dreaded only by those who have something to hide. Foreign inspection is dreaded by many concerns because they have no pull from the foreign inspector. Let bim remain. The dread of him must do more good than his cost can do harm.
This bringi us to the legal question: Would federal supervision of insurance be a constitutional exercise of the rational power?
The negative would seem to be, in the light or the decisions, the only possible answer to thifl question. The clause of the Constitution, and the only clause, under which it is claimed that federal jurisdiction might be invoked, is the commerce clause. "The Congress shall have power to regulate commerce with foreign nations, and among the several States, and with the Indian tribes." It is not necessary to go into a dissertation as to what is Interstate commerce, as our courts have definitely -decided that insurance cannot be such commerce. The leading case upon this point seems to leave nothing unsaid. Decided in 1868 in an able opinion by Mr. Just'ce Field, Paul v. Virginia (a), has been many times followed; never departed from. A well-known writer upon the "Federal Power Over Commerce," has thus d'gested and commented upon this famous case:
"The next attempt to extent the meaning of the term commerce, is found in the case of Paul v. Virginia. The State of Virginia passed a law requiring all insurance companies not incorporated in the State to take out a license before doing business. To obta'n this license, certain taxes and other conditions were imposed. The act was a discrimination in favor of home insurance companies. One Paul, an agent of several New York companies, neglected to conform Io the conditions necessary to obtain a license from the State, but nevertheless persisted in acting as the companies' agent. He was indicted and fined in the State courts, and appealed to the Supreme Court of the United States. One of the grounds for the appeal was that the law of Virginia intrenched on the power of Congress to regulate commerce. This brought the following question before the court: Is one engaged in interstate business who is within the State an agent of a corporation organized under the laws of another State, soliciting insurance on the buildings within the State? Paul was an agent for a corporation. It is a well-settled rule of international law, that a corporation can have no existt nee in a foreign country, except by the express or implied permission of the laws of that country. In this respect tht different States of the Union are like distinct nations. A corporation organized in one State can exercise Its corpw ate power in another only by the comity of the latter. There are, however, two exceptions to this statement: First, where. ( the corporation has been vested by the federal government. / w ith the execution of one of its express or implied powers. Second, where the corporation is engaged in interstate business. Thus, Mr. Justice Field, in his opinion in the case under discussion, said: "There is nothing in the fact that the insurance companies of New York were corporations to impa'r the force of the argument of counsel,, that being engaged in interstate commerce they had the right to do business in any State of the Union." But the learned judge goes on to say: "The defect of the argument lies in the character of their business. Issuing a policy of insurance is not a transaction of commerce. . . . They are like other personal contracts between the parties which are completed by their signature, and the transfer of the consideration. Such contracts are not interstate transaction, though the parties may be domiciled in different States. The policies do not take effect—are not executed contracts, until delivered by the agent in Virginia. . . . They do not constitute a part of the commerce between the States any more than the contract for the purchase and sale of goods in Virginia by a citizen of New York whilst in Virginia would constitute a portion of such commerce." In determining whether a particular contract forms a transaction of interstate commerce, -u e must not look at the domicile of the parties, or where the contract is made, but where it is to be performed. It is the jierformance which is the intercourse; the contract is simply the preparation of that performance. It cannot be "disputed, for instance, but that a contract by A., of Pennsylvania, to leave C, of San Francisco, one thousand dollars, in his, A.'s, will, would be determined by the laws of Pennsylvania. Only those contracts in whose performance interstate business fa transacted, are under the control of Congress. A contract of insurance, while made by a corporation of one State and a citizen of another, was to be performed by paying money in the State of Maryland if a house in that State was destroyed by fire. The loaning or payment of money in itself cannot be a transaction in interstate commerce, for it always must be paid at a particular place. The decision in Paul v. Virginia has received the repeated approval of the court which pronounced it. The soliciting of insurance on property in the State cannot ever be interstate business or commerce." (b).
As stated, the decision in Paul v. Virginia has Been several times affirmed and approved by the court which rendered it (c), and has been followed in numberless other decisions, both State and Federal.
A similar opinion was expressed by the House of Lords in the case of Citizens' Insurance Company v. Parsons. The question in this case concerned the validity of a regulation of insurance business by the Province of Quebec, whicu, by the provisions of the British North American Act, Is without jurisdiction over interprovincial regulation of trade and commerce. The court says that the business of insurance "when carried on for the sake of profit, may, no doubt, in some sense of the word, be called trade, but contracts of indemnity made by insurers can scarcely be considered trading contracts, nor were insurers who made them held to be 'traders' under the English bankruptcy laws." (d).
There is also a long line of decisions excluding from interstate commerce transactions involving, as does insurance, the matter of contracts.
"In Nathan v. Louisiana it was said that a broker dealing in foreign bills of exchange was not engaged in commerce, but, like the shipbuilder, was engaged in supplying an instrument of commerce." (e).
"The business of a commercial agency in procuring and furnishing information of the standing of merchants is not commerce, and a tax thereon is not in conflict with the commerce clause. Nor is the business of a building and loan association; nor of loaning money; nor in dealing in foreign lands; nor in conducting a manufacturing establ'shment in another State." (f).
It is conceded by those who are pushing the idea of federal supervision that Paul v. Virginia seems to dispose oi the question, and that adversely to the right of sucn supervision. But these advocates seek to make a distinction between the Supreme Court holding as an abstract proposition that insurance is not interstate commerce, and the probable action of the same court in passing upon a congressional bill declaring it to be such commerce.
Mr. Dryden, in an address delivered in 1904, adopts the language of that well-known advocate of national supervision,
(b) Lewis Federal Power Over Commerce Sec. 9.
(c) See Ducat v. Chicago, 10 Wall. 410; Home Insurance Company v. Morse, 20 Wall. 445; Doyle v. Insurance Company, 94 U. S. 535.
(d) Prentice and Egan Commerce Clause, p. 47; Insurance Co. v. Parsons, 7 L. R. App. Case III.; Parsons v. Insurance Co., 4 Ap. Case, App. 103.
(e) 8 How. 73. And see cases cited In Prentice & Egan, p. 46.
(f) Prentice and Egan, p. 55. And cases cited.