Opinion
March Term, 1860
Henry R. Selden, for the appellant.
H.F. Hatch, for the respondent.
By section 3, of the act of 1836 (ch. 241) incorporating the Genesee Mutual Insurance Company, it was declared that the corporation thereby created should possess all the powers and privileges, and be subject to all the restrictions and limitations which were granted to and imposed upon "The Jefferson County Mutual Insurance Company," by the act incorporating that company, passed March 8th, 1836. (Id., ch. 41.) By the 2d section of the last mentioned act, all persons who should thereafter insure with the corporation should thereby become members thereof during the period they should remain so insured, and no longer.
The 8th section of the same act provides that every member of the company shall be bound to pay for losses, c., in proportion to the deposit note. The section then declares that the buildings insured, and the right, title and interest of the assured to the land on which they stand, shall be pledged to the company; which shall have a lien thereon in the nature of a mortgage to the amount of the deposit note, which shall continue during his policy; such lien to take effect whenever the company shall file, and shall have entered, c., a memorandum of the name of the individual insured, a description of the property, the amount of the deposit note, and the term for which the policy shall continue.
The position taken by the appellant, is, that upon the destruction of the insured property, and the payment by the company of the insurance, he no longer remained a member of the company, or liable to contribute to any losses, c., that might thereafter occur, although the time for which the policy issued had not expired.
The substance of the argument is, that when the property was destroyed the risk was at an end, and with it the relation of assurers and assured between the parties; and that upon the termination of such relation, the defendant, by force of the 2d section of the act, ceased to be a member of the corporation; and as by the 8th section, none but members of corporations are liable to pay for losses, the appellant is not liable for losses arising after he so ceased to be a member of the company.
Upon a careful examination and consideration, however, of the foregoing, with other sections of the act, I am satisfied that such was not the intention of the Legislature.
In the first place, it should be remembered that by the express terms of this contract of insurance, the liability of the parties was continuous, running through five years; that of the plaintiff was onerous upon them, in proportion to the time during which the policy by its terms was to continue. Upon the general principles of insurance, they could afford to take the risk for one year only at just one-fifth of the premium that they could afford to take it for five years, and in the same proportion for a longer or shorter period. There may be considerations which would justify taking risks for long periods at premiums less in proportion than for short periods; such, for example, as getting a larger amount of capital pledged in deposit notes, securing the patronage of the assured for a longer period, saving the expense of new policies, c.; but none which affect the principle stated. The actual risk, as a general rule, is increased upon a given piece of property exactly in proportion to the time it is to continue. In this respect there is no difference between mutual insurance and stock companies. It would, therefore, be manifestly unequal and inequitable to release the defendant from his engagement before the expiration of the time for which, by the terms of his undertaking, it was to continue, because the contingency has happened which was to render absolute the plaintiff's liability to the utmost extent which the contract contemplated. It would be, in effect, to release the defendant from a portion of his obligation, when the whole of it was the consideration of the plaintiff's engagement, because the latter have performed to the last extremity the whole obligation to which, by the terms in their contract, they could in any event be subjected. The injustice of such construction is illustrated by supposing a company to consist of one hundred members, each of whom has an insurance of $1,000 for five years, all taken at the same time, and each having given a deposit note for $1,000. A total loss happens to one of the members at the end of one week from the commencement of the five years. The members pay this loss by a contribution of $10 each. Immediately afterwards another member sustained a total loss, which, according to the defendant's argument, must be paid by the remaining ninety-nine members. Suppose like losses continue to occur at short intervals until they amount in the aggregate to a sum sufficient to exhaust the whole amount of deposit notes, which, on the principle contended for, remained in force. A computation will demonstrate that when sixty-four such losses should be paid, to say nothing of expenses, the whole capital of $100,000, being the total amount of the original deposit notes, would be used up, and the policies of the remaining thirty-six members be entirely worthless.
The case supposed is a strong and plain one, but it shows the working of the rule contended for more or less palpably in every case, and exhibits a scheme anything but mutual or equitable.
If it should be said that the 11th section of the act contains provisions for the payment of losses after the amount collected on the deposit notes is exhausted, the answer is, in the first place, that such provisions are liable to be entirely inadequate, and would always be found less prompt and advantageous to the sufferer than a direct resort to the capital secured by the deposit notes.
But in the second place, the conclusive answer is, that the assessment thereby authorized is to be on the members of the company, who, according to the defendant's argument, are only those who remain insured, and do not include such persons as have sustained total losses. But the act under which this company was incorporated, upon a fair interpretation and a comparison of its several sections, will not be found to lead to any such unreasonable result as, it seems to me, the defendant's position tends to establish.
By section 6, every person becoming a member of the corporation, by effecting insurance therein, shall, before he receives his policy, deposit his promissory note for such sum as the directors shall determine; a part, not exceeding five per cent thereof, to be immediately paid, and the remainder of the note shall be payable in part or in whole at any time when the directors shall deem the same requisite for the payment of losses by fire, and such incidental expenses as shall be necessary for transacting the business of the company; and at the expiration of the term of insurance, the said note, or such part of the same as shall remain unpaid after deducting all losses and expenses occurring during said term, shall be given up to the maker thereof.
The words "term of insurance" evidently refer to the term of time for which, by the policy, the insurance should continue. They will certainly bear such construction without violating their ordinary and popular sense, and it is what I have no doubt the Legislature intended.
The 7th and 11th sections contain provisions by which persons insured might terminate their liability to contribute to the payment of losses before the expiration of the time for which they were insured. By section 7 it may be done by alienating the property insured, and by section 11, by payment of the whole of the deposit note, and surrendering the policy before any subsequent loss or expense has occurred. There is nothing else to be found in the act providing for or contemplating the termination of the liability of a member or person who becomes insured, prior to the expiration of the time for which, by the terms of his policy, the insurance is to continue. This circumstance adds force to the argument in favor of the continued liability of a member during the whole time for which he became insured.
In this and most, if not all, mutual insurance companies, every person insured becomes a corporator, with stock in the corporation to the amount of his deposit notes. These notes constitute the capital stock of the company, upon which it relies for the payment of losses and expenses; and the members have no right to withdraw themselves or the stock thus held by them from the company, before the time for that purpose provided in the contract of insurance, except in the two cases provided in sections 7 and 11 before referred to.
By the 10th section of the act under consideration, if a member neglects the payment of one assessment for thirty days after notice, the directors may sue for and recover the whole amount of his deposit note or notes with costs; and the amount thus collected shall remain in the treasury of the company, subject to the payment of such losses and expenses as have or may thereafter accrue; and the balance, if any remain, shall be returned to the party from whom it was collected, on demand, after thirty days from the expiration of the time for which the insurance was made. These provisions are inconsistent with the idea of a termination of the liability of the maker of a deposit note, upon a total loss being sustained by him.
By the defendant's theory, the individual the whole amount of whose deposit note had been collected under the above 10th section, should be entitled to have his money thus collected, or such part of it as was not applicable to the payment of losses and expenses then accrued, refunded, whenever the property embraced in his policy should be totally destroyed. But that would be a plain violation of the section last referred to.
The case of Wilson v. The Trumbull Mutual Fire Insurance Company (7 Harris Pa. R., 372), is cited and relied upon by the appellant's counsel, as an authority in support of his position. That case may have been well decided, if the defendants' charter contained a provision similar to that embraced in the 7th section of the act under which the company represented by the plaintiff was incorporated, in relation to alienating the insured property. In the case referred to, the assured had sold the property insured before the loss happened for which he was assessed, which, the court held, dissolved his relation with the company as a member, and consequently terminated his responsibility on his deposit note. It will be perceived, therefore, that it is not applicable to the present case.
The foregoing are among the considerations which have led me to the conclusion, that by a fair and correct interpretation of the 2d section of the act, persons insured in the company respectively remain members of the corporation during the time their policies, by their terms, are to continue, and that such membership is not terminated by a total loss of the property insured. Such construction is no violation of the terms of the section; is necessary to avoid inconsistency with other sections, and is in harmony with the scope and spirit of the whole act.
I am, therefore, of the opinion that the judgment appealed from should be affirmed.
COMSTOCK, Ch. J., SELDEN, DAVIES, CLERKE, WRIGHT and BACON, Js., concurred.
I am of opinion that this judgment cannot be sustained, either upon general principles or according to the provisions of the act. The theory of mutual insurance is, that the individuals who associate, and those who from time to time join them, enter into an arrangement by which each member is insured to the amount specified in his policy, upon the property referred to in it, and becomes at the same time an insurer of each of the other associates, by binding himself to contribute towards making good any losses which they may sustain, in proportion to the amount of his own insurance. The relations which the members sustain towards each other is a reciprocal one, and it is that feature which creates the mutuality which distinguishes this arrangement from other contracts of insurance. It follows, that if for any cause one of the persons so associating ceases to be an insured party, he from that time ceases to be a party to the mutual arrangement. When he has no longer any property to be protected by the contributions of the other members, the consideration upon which he agreed to contribute for their protection is wanting; the relations upon which the parties associated have ceased to exist, and hence the obligations incurred become inapplicable and inoperative; the vital principle of the arrangement is gone, and can only be revived by a new insurance, by which he shall be again made a party to the association. It is not material whether he has ceased to be an insured party on account of having disposed of the property in respect to which he was insured, or because the property has been destroyed, so that the provisions of the contract of indemnity cannot attach to it. And in case of the destruction of the property, it is of no moment whether the loss was occasioned by the happening of the peril insured against, or by any other cause. If the property is in any way annihilated, so as not to be any longer the subject of an insurance, the contract which provided an indemnity to the owner against its destruction has ceased to have any element to support it, and can no longer exist. This precise point has been determined by the Supreme Court of Pennsylvania. In Wilson v. The Trumbull Mutual Insurance Company (7 Harris, 372), that court held that the interest in the property insured was an essential link in the relation of mutual insurance, and therefore, that when a member of a mutual insurance company, whose stock of goods was insured, sold them several months before a loss by fire happened, he was not liable for a portion of the loss, though it happened during the time for which he was insured. The court was of opinion that when the defendant sold his property he ceased to be a member of the company, and that the assessment could only be upon those who were members at the time the loss happened. "If," the court said, "a member perform all his duties, and pay a share of all losses occurring during his membership, no more can justly be required of him." His premium note, they added, cannot be used to enforce contributions for losses occurring after he ceased to be insurer or insured. A contrary view would lead to results entirely inconsistent with any notion of mutual insurance. Upon the plaintiff's argument, the defendant continued liable on his note for all losses which might happen before the expiration of the time for which he was originally insured. The period would extend more than four years from the time when, by the destruction of his buildings and the payment of his loss, he had ceased to have any interest in the company as an assured party. Thenceforward his only connection with it would be that of a guarantor of its contracts. He would be liable not only on its engagements made while he was an assured party, for which there would be a show of reason, but to all such as it might make after he had ceased to be insured. As to such cases, he would be a guarantor of parties with whom he was in no kind of privity, and against whom he could not in any possible event have any resort for any purpose. In the opinion of the Supreme Court, it is suggested that the premium notes are the capital stock of the companies, and that the makers have not in general any more right to withdraw them than the shareholders in a stock company have to withdraw the moneys they have invested in the stock. This argument, I think, proceeds upon an erroneous view of the nature of these associations. They have not, in fact or in theory, any capital stock. Although the engagements which the members enter into are in the form of notes, they are in substance and effect only guaranties that the makers will contribute to the losses of the other associates, and the expenses of the business, in certain proportions. If no losses happen, nothing can be collected on the notes except a portion of the expenses, and if the expenses are met by the amounts required to be paid down, nothing whatever can be collected. They are continuing guaranties, that is, they continue to operate against the makers as long as those makers continue to hold such relations to the other associates as will enable them to resort, in the event of a loss, to the reciprocal guaranties given by the others. It is further suggested, in the opinion of the Supreme Court, that the amount of the note of a person taking out a policy is proportioned to the time it has to run; the risk assumed being, it is said, proportional to the time it is to continue; and hence it is argued that it would be inequitable that the note should be retired before the whole time the insurance was to run has expired, whatever may become of the property. This argument, I think, supposes that the artificial person, the corporation, represents interests other than those of the policy holders; but there is no such interest in a mutual company. The bargain which each member makes is with the other members, and not with any other party supposed to be represented by the corporate name. It cannot be correct to apportion the amount of the premium note according to the length of time covered by the insurance. Assessments for losses are always to be in proportion to the amount of the premium note. Now, suppose A is insured for $1,000 for five years, and B for an equal sum for one year. If B give a note for $100, A must give one for $500. If during the year a loss happen to another insured party, A must of course pay five times as much as B. If B take out a policy on his property eachn year, and give only the note for $100 on each occasion, which is all that could be required of him, through the five years covered by A's policy, the latter will have to contribute in the same proportion for all the losses during that time. This, of course, would be a very unequal arrangement, and would render it very hazardous to insure for a long period. Nor would it be quite equitable in certain contingencies to have the notes upon policies for long and short periods of the same amount; for if we again take the case of insurance from year to year for five years, and a single policy for the same length of time, and a note of equal amount given by each, if losses should occur in each year during the five years, the party holding the long policy might pay up his note before his policy expired, while the one giving a fresh note each year might still continue liable though the other would be wholly exempt. The only way in which equality in this respect can be worked out under this system, would be to have all the policies made to run for the same period, and to have the premium notes always proportional to the amount insured and to the nature of the risk.
If we take up the charter of this company, we shall see the principles, which have been stated, very plainly laid down. In the first place, it is declared that all persons who shall insure with the corporation, and their representatives and assigns continuing to be insured, "shall thereby become members thereof during the time they shall remain insured, and no longer." (Act, § 2.) Then all the other provisions prescribing the relations between the parties and the corporation and their respective rights and liabilities, refer to them as members, Thus: This company is to be managed by thirteen members, who are to constitute a board of directors (§ 3). The directors are to be chosen by the members (§ 4). The mode of becoming a member is by taking out a policy of insurance, and there is no other way of acquiring the position of a member (§ 6). Every member shall be bound to pay for losses and necessary expenses, in proportion to the amount of his deposit note (§ 8). Suits may be maintained by the corporation against the members for their notes, and by the members against the corporation for losses by fire (§ 9). Assessments for losses are to be made against the members (§ 10). And after the notes are exhausted, the members may be further assessed to the amount of one per cent on their notes. It would seem that the Legislature were very careful to determine in the outset that none should be members who were not at the same time insured persons; and having in that manner given a precise idea of the nature of membership, they so arranged all the other provisions as to affect the members and no other parties. Unless it can be said that a person who has insured his property in this company, and, after its total destruction by fire, has received his insurance money, still remains insured by the company on the very same property, it is impossible to hold that the defendant was a member at the time the loss occurred with which he is sought to be charged; and if not a member at that time, it is equally impossible to hold him to be a contributor towards that loss.
The provisions of the 7th section, which allow members to receive back their deposit notes upon aliening the property insured, and surrendering the policy, is a further evidence that the nature of the system is such as I have supposed. If the notes were in the nature of capital, as the Supreme Court has suggested, every member would be interested in it, and it would be unjust that it should be withdrawn when the maker should choose to dispose of the property. But this privilege of withdrawing a note, under such circumstances, is quite consistent with the idea that it is a guaranty, to continue so long as the maker shall be in a situation which will enable him, in the event of a loss by fire, to be benefited by the other similar guaranties.
Again, by the provisions of section 8, a lien in the nature of a mortgage is created against any building insured and the interest of the assured in the land on which it stands, for the amount of the deposit note, to take effect when the company shall cause the policy to be entered in the book of mortgages. If the plaintiff is right in his position, a lien might be established against the lot on which the defendant's saw mill was erected, by making an entry of the policy in the clerk's office long after it had become functus officio, by the performance of every stipulation contained in it. It is said in the provision, it is true, that the lien shall continue during the policy. This does not, I think, mean during the time mentioned in the policy as the duration of the insurance, but during the existence of the policy as an operative instrument.
My opinion is, that the judgment of the Supreme Court was erroneous, and that it ought to be reversed.
Judgment affirmed.