Opinion
March Term, 1860
Henry R. Mygatt, for the appellant.
Francis Kernan, for the respondent.
The defence which prevailed at the trial, and which is relied upon here, is, that the defendants having been organized as a mutual company, had no authority to issue policies for premiums to be paid in cash, and consequently that their act in issuing the policy in question was ultra vires, and the policy void.
I shall assume, for the purposes of this case, that the defendants can avail themselves of this defence, and that they are in no manner estopped from insisting upon their own want of power. The question then is, did the defendants exceed their corporate powers by issuing this policy and receiving the premium upon it?
The charter adopted by the defendants, which was introduced and proved upon the trial, contained the following clause: "Any person applying for insurance, so electing, may pay a definite sum in money, to be fixed by said corporation, in full for said insurance, and in lieu of a premium note." The policy in question here was issued in strict accordance with this provision. The defendants, therefore, to sustain their defence, must show that the company had no authority to insert such a clause in its charter; and this depends entirely upon the provisions of the act of 1849, under which the company was organized.
By section 3 of that act, it is enacted that persons intending to become incorporated under it, "shall file in the office of the Secretary of State a declaration, signed by all the corporators, expressing their intention to form a company for the purpose of transacting the business of insurance, as expressed in the several subdivisions of the first section of this act, which declaration shall also comprise a copy of the charter proposed to be adopted by them;" and section 10 provides that "it shall be the duty of the corporators of any and every company organized under this act, to declare in the charter, which is herein required to be filed, the mode and manner in which the corporate powers given under and by virtue of this act are to be exercised."
These provisions confer upon the companies organized under the act a broad and unrestricted power to prescribe for themselves the manner in which they will conduct the business of insurance. They virtually transfer to these companies full legislative control over the subject and, construed by themselves, would invest each company, whether joint stock or mutual, with power to provide for every kind of insurance authorized by the act. The only express limitation upon this power is contained in section 11, which requires that the charter "shall be examined by the Attorney-General," who, if he finds it "to be in accordance with the requirements" of the act, "and not inconsistent with the Constitution or laws of this State," is to "certify the same to the Comptroller," c. It cannot be pretended that the clause in the defendants' charter, under which this policy was issued, is in any manner repugnant either to the Constitution or the general laws of the State. The only question, therefore, is, whether it is in conflict with anything contained in the act of 1849 itself. Unless the defendants can find something in that act which prohibits companies organized as mutual companies from receiving their premiums in cash, they cannot maintain their defence.
There is clearly nothing in the terms of the act which contains such a prohibition. But the restriction is sought to be deduced by implication from those provisions of the act which discriminate between joint stock and mutual companies. It is based mainly upon sections 3, 4 and 5. The charter, which persons wishing to become incorporated are required by section 3 to file, is, as we have seen, to prescribe "the mode and manner" in which their "corporate powers" are to be exercised. Section 4 authorizes the company, after filing such charter, "to open books for subscription to the capital stock of the company," * * * "or in case the business of such company is proposed to be conducted on the plan of mutual insurance, then to open books to receive propositions," c. It is there provided (§ 5) that no "joint stock company" shall be organized in the city of New York, or the county of Kings, with a smaller capital than $150,000, or in any other county, with a smaller capital than $50,000; and that no company formed for the purpose of doing business "on the plan of mutual insurance," in either of the counties of New York or Kings, shall commence the business of fire or inland navigation insurance, until agreements have been entered into for insurance, with at least one hundred applicants, the premiums on which shall amount to $200,000, nor in any other county, until such premiums shall amount to $100,000, for which premium notes are to be taken "in advance" as a "part of the capital stock" of the company.
Now the argument on the part of the defendants is, that there having been in this State, previous to the act of 1849, two distinct and well known classes of insurance companies, viz., joint stock and mutual companies, organized upon different principles, and transacting their business in different modes, it was the evident design of the Legislature, as evinced by the provisions to which I have referred, to keep these two classes of companies entirely distinct, and to prevent any intermingling of the two modes of insurance in the same company: that insuring for a specific premium, payable in cash, is the appropriate business of a joint stock company organized with a view to profit upon its capital, the corporators in which consist, not of the persons holding policies, but of the owners of this capital: that a mutual insurance company is composed exclusively of the persons insured, and is organized by its members, not with a view to profit, but for the sole purpose of mutually insuring each other: that it is essential to such a company that every person insured should be a member of the company, and an insurer of all the other members, as well as insured by them: and that one who pays the premium upon his policy in cash, and is liable for nothing more, does not become a member of the company, and is in no sense an insurer of others holding its policies: that there is no mutuality, therefore, between such a person and those who have given premium notes liable to be assessed for future losses; and hence that issuing policies for cash premiums is a departure from the legitimate business of a mutual insurance company, and subversive of that distinction between joint stock and mutual companies which it was the design of the Legislature to preserve.
This argument, it will be seen, consists of two branches, viz.: First, of that construction of the act of 1849 which holds that a strict line of demarcation was intended to be drawn between the two classes of companies, and that when a company had once made its election to organize, either as a joint stock or a mutual company, it was the object of the act that it should be ever thereafter rigidly confined to that mode of insurance which is appropriate to its class; and secondly, of the assumption that there is something in the taking of a specific cash premium in full for insurance, without further liability on the part of the insured, which is repugnant to the nature and principles of a mutual insurance company. The defendants are under the necessity of maintaining both these propositions. If they fail in respect to either, they fail in their defence. If evidence of that inflexible determination to keep the two kinds of companies entirely distinct, for which the defendants contend, is not to be found in the act; or if the taking of a cash premium in full for the insurance can be reconciled with the "mutual principle," as it is called, then, of course, there is no objection to this policy.
Let us examine these two points separately. On what does the assumption of such a determination on the part of the Legislature rest? There is clearly no good reason why the Legislature should have provided for so rigid a separation of the two species of insurance companies. That it was never supposed there was any ground of policy which required that mutual insurance companies should be prohibited from receiving cash premiums, is conclusively shown by the course of legislation on the subject. Acts have been repeatedly passed, conferring upon such companies this power, in the precise terms used by the defendants in their charter. It was conferred upon the Albany County Mutual Insurance Company in 1848; upon the Herkimer County Company in 1850, and upon various other companies in subsequent years. The Legislature seems to have been ever ready, upon request, to authorize these companies to receive their premiums in cash, instead of premium notes.
There is no public reason why such a company, when it has once acquired a substantial basis for its business, should be rigidly confined to the mutual system. That system was not devised by the Legislature for the protection of the public, but by individuals for their private benefit. It does not rest upon any foundation of public policy. Why, then, should the Legislature, when enacting a general law, providing for the organization of all insurance companies, so adjust its provisions as to inhibit mutual companies from transacting any portion of their business in a manner which has so often received the legislative sanction? The very object of the law being to prevent the necessity of repeated applications to the Legislature, by those desirous of engaging in the business of insurance, we should naturally expect its provisions to be so framed as to enable mutual companies, under proper guards and restrictions, to avail themselves of that privilege which the Legislature has shown itself in so many instances ready to confer. A contrary intent ought certainly to be made very clearly to appear before its existence is assumed.
The question, then, upon this point, is, whether those provisions of the act of 1849, already referred to, discriminating to some extent between joint stock and mutual companies, exhibit an implied intention to prohibit mutual companies from issuing cash policies. It is indispensable for the defendants to maintain the affirmative of this; because, as the power of the companies, under section 10, to frame their own charters, is conferred in unrestricted terms, they may, of course, provide for this class of business, unless the limitation of this power upon which the defendants insist, is elsewhere found; and there is no portion of the act, other than that referred to, from which such limitation can by possibility be deduced.
But the discrimination in sections 4 and 5, between the two classes of companies, had another obvious purpose, which was fully answered when the respective companies were once organized and ready to commence their operations. The main reliance of all insurance companies for the payment of losses, after becoming once fairly established, is upon the sums received for premiums. But losses may occur before their accumulations from this source are sufficient to meet them. For this reason it was deemed wise and prudent on the part of the Legislature to provide that every insurance company, whether joint stock or mutual, should have at the outset a fund sufficient to meet its early losses; and as mutual companies have not, like joint stock companies, a cash capital, it became necessary, in arranging the provisions on this subject, to discriminate between the two.
That this was the sole object of the discrimination in question, to me seems plain. Sections 4 and 5 relate to this preliminary fund, and to nothing else. They require a joint stock company in the country, before commencing business, to have a cash capital of $50,000, and a mutual company a capital of $100,000, composed of promissory notes given in advance for premiums. These notes would represent risks incurred or to be incurred, while the cash capital would not; and hence the difference in amount. The Legislature evidently considered the $100,000 in notes equivalent to $50,000 in cash. What reason can there be, after the companies are once formed with such a preliminary fund, pronounced adequate by the Legislature, why a mutual company should not, as well as a joint stock company, if it chooses to incur the risk, issue cash policies. The public and all those who deal with the company have the same security in the one case as in the other. They have the same preliminary fund, and the same accumulations from the premiums received. The question of receiving cash premiums in full for policies, after a company has once obtained a sufficient capital to justify it in commencing business, is a question for the consideration, not of the Legislature or the public, but of the corporators themselves. The public have no special interest in it. The premiums received, if graduated upon just and proper principles, will strengthen one of these companies to precisely the same extent as the other, and will afford the same additional guaranty to parties insured for the payment of losses.
We see, therefore, very plainly, why every mutual company once established, which has asked of the Legislature the favor, has obtained the power to issue cash policies; and we can hardly fail also to see that when the Legislature, in the act of 1849, had provided that all mutual companies should have a sufficient fund upon which to begin their operations, they might safely be allowed, as by section 10 they are allowed, to prescribe for themselves the mode and manner in which they would conduct their business. This construction gives full force and effect to every provision of the act of 1849, and exempts the Legislature from the imputation of having so framed a statute, designed expressly to render such applications unnecessary, as to require in every instance a special application for a favor which reason and the practice of the State alike show it would be a matter of course to grant.
But this is not all. The statute bears upon its face unequivocal evidence that the Legislature did not intend to erect an impassable partition wall between the two kinds of companies. Section 21 provides as follows: "It shall be lawful for any mutual company, established in conformity with the provisions of the 4th section of this act, to unite a cash capital to any extent as an additional security to the members, over and above their premiums and stock notes, which additional cash capital shall be left open for accumulation, and shall be loaned and invested, as provided in the 8th section of this act, and the company may allow an interest on such cash capital, and a participation in its profits, and prescribe the liability of the owner or owners thereof to share in the losses of the company; and such cash capital shall be liable as the capital stock of the company in the payment of its debts."
It has been suggested that this is a mere authority to borrow money. But this idea can hardly be reconciled with the provisions of the section. If the contributors of the additional fund are "to participate in the profits" of the business, and if the fund itself is "liable as the capital stock of the company" to the payment of its debts, then such contributors are to all intents and purposes partners in the company, and not its creditors. The section authorizes the company "to prescribe the liability of the owner or owners" of the additional capital to share in the losses of the company. But if the money is borrowed, it would belong to the company itself and not to the contributors, as this provision plainly contemplates. Again, the fund is to be "kept open for accumulation." This cannot mean that the company shall continue to borrow. It can only mean that additions may be made from time to time to the subscribed capital, it being assumed that every such addition would strengthen the company. The whole section exhibits an intent that those who contribute the additional capital should be associates in and not creditors of the company; and any other supposition is inconsistent with its language and structure.
It is true, as has been said, that no such cash capital was added by the defendants to the funds of this corporation. But the section has, nevertheless, a most important bearing upon that which is made the turning point in the present case. The whole argument, on the part of the defendants, rests upon the assumption that an intent is to be gathered by implication from the general act of 1849, that there should be no intermingling of the two modes of insurance, in the same company. Now, section 21 conclusively proves the contrary. It shows even a solicitude on the part of the Legislature, by providing that the additional fund shall be left open for accumulation, to add the stock feature, and of course the system of cash premiums, to the mutual companies.
That the Legislature contemplated the issuing of cash policies to some extent by all mutual insurance companies, is evident from the very sections upon which the argument on the part of the defendants is mainly based. The notes provided for in section 5, which constitute the capital upon which a mutual company is to commence their business, are not premium notes, to be assessed when losses occur; but are payable absolutely, irrespective of all losses; and so it was held by this court in the case of White v. Haight ( 16 N.Y., 310). They are the same, therefore, as so much money advanced to the company for premiums upon policies thereafter to be issued. The idea of these notes was evidently borrowed from the charters of a class of mutual insurance companies, of which the Atlantic Mutual, chartered in 1842, was the type. Section 12 of the charter of that company provides that "the company, for the better security of its dealers, may receive notes for premiums in advance, of persons intending to receive its policies; and may negotiate such notes for the purpose of paying claims or otherwise, in the course of its business." This was the first appearance in our statutes of this mode of obtaining a preliminary fund upon which to commence its business by a mutual insurance company, and it was adopted by the Legislature in enacting the general law of 1849. The charter of the Atlantic Mutual clearly contemplated the re-payment of those advances by the issuing of cash policies, because no provision was made for the issuing by that company of any other; and it is very clear that the same mode of re-payment must have been contemplated, under the general law.
My conclusion, therefore, would be that if the policy in question is to be regarded as issued to a mere outside party, without any reference in itself to the principles of mutuality, it would nevertheless be valid and binding.
If, however, we assume the contrary, and suppose it to be indispensable that the mutual principle, as it is called, should be observed in all the policies issued by a mutual company, the result, I think, would not be different.
It is somewhat difficult to ascertain with precision in what this mutual principle, so strenuously contended for, is claimed to consist; as mutual companies have assumed a great variety of forms. But I will suppose, for the purposes of this case, that it involves all the requirements suggested on the part of the defendants. The most prominent among the requisites insisted upon as constituting a mutual insurance is, that the party who is insured should thereby be brought into mutual relation with the insurers by becoming a member of the company issuing the policy. It seems to be supposed that this was not the case with the party to whom the policy in question here was issued. An examination, however, of the charter of the company will clearly show the contrary. Article 5, among other things, provides as follows: "The directors shall be elected by the persons holding policies of insurance in this company, or their proxies, and one vote shall be allowed on every $100 insured." Thus, every person holding a policy issued by the company is made a member of the corporation, and entitled to a vote therein, entirely irrespective of the question whether the premium upon such policy was paid in money or by a premium note; and his interest is measured upon a principle which is perfectly equal and just, viz.: by the aggregate amount insured.
If it be said that mutuality also requires that there should be some sort of ratable equality between those who pay their premiums in cash and those who give notes, this is easily attained. When the present value of a life annuity, or of a right of dower, is estimated upon principles which experience has established, the sum arrived at is, in the eye of the law, just equal to the contingent interest which it represents. So, when the chances of liability upon a premium note are calculated upon principles similar, if not as exact, a sum is found which may be regarded as equivalent to the contingent liability upon the note. Indeed, all premiums for insurance are calculated upon this principle. That equality may thus be produced, is conceded; but two answers are suggested. In the first place, it is said that it is not shown that the premium in this case was the result of any such calculation; and that the presumption is, that it was not. Now, I am unable to see upon what foundation such a presumption can rest. I have supposed that, where a transaction would be legal if done in one way, and illegal if done in another, and there was no evidence on the subject, it was to be presumed to have been done according to law. Here, however, a presumption is to be raised in favor of this company, that it was guilty of a violation of law, to enable it to escape from the obligation of a contract, the consideration for which it has received and still retains. In my opinion the presumption is directly opposite to that thus suggested. It was not necessary that anything should appear in the charter or by-laws on this subject. It was a matter of calculation to be adjusted upon fixing the premium.
The provision in the charter, however, as it seems to me, does imply that the premium was to be calculated upon the precise principle which has been here suggested. The cash premium was to be "in lieu of," that is, was to take the place of a premium note. This implies, that it was to be made equal to such note, which for all substantial purposes it would be if calculated in the mode here pointed out.
The other answer given to this view of the case is, that the principles of mutual insurance require that every person insured upon that plan should be also himself an insurer; that is, that each person insured must also be an insurer of all his associates, as well as insured by them; and it is said that an insured person who has paid a premium of a definite sum, in the language of the defendants' charter, " in full for said insurance," and who, therefore, is not responsible for anything more, cannot be a mutual insurer, because he is not in any sense an insurer at all. This argument is based upon what I regard as an erroneous view of the true distinction between a mutual and a joint stock company.
Indeed, much of the difficulty on the subject has been produced by attaching a meaning to the word mutual, in its connection with insurance, which does not belong to it. A mutual insurance company is simply a company whose fund for the payment of losses and expenses consists not of a capital subscribed or furnished by outside parties, but of premiums mutually contributed by the parties insured. ANGELL says: "A mutual insurance in its origin, was a body of persons, each of whom was desirous of effecting an insurance; and he agreed with the rest of the members to contribute the premiums to a common fund, on the terms that he should be entitled to receive out of that fund." (Angell on Fire and Life Insurance, § 413.) There is not a word about the parties being insurers of each other, further than as they were made so by the payment of a cash premium. They made up a common fund by means of their common or mutual contributions, upon which each had a claim for any loss in respect to the property insured. There was no responsibility beyond that, and this is all that is essential to a mutual company. The "mutual principle," as it is called, requires nothing more. Joint stock companies have a subscribed capital. Mutual companies do not, but depend upon their premiums. This is what distinguishes them; and whether the premiums are paid in cash or by notes has nothing to do with the distinction.
Granting it, however, to be necessary that all those who are insured in a mutual company should also be insurers; the person who took this policy was so. He became, as has been shown, a member of the company, and interested in its funds in proportion to the amount of his policy; and to the extent of that interest he was an insurer of all other members.
It is no answer to this to say that mutual companies contemplate only indemnity against loss, and not the accumulation of a fund to be divided among the corporators. This depends upon the manner in which they conduct their business. There is nothing to prevent a mutual company from carrying on its operations with a view to profit and dividends. Indeed, the act of 1849 plainly contemplates that they will, or at least that they may do so when it provides, in section 21, that they may allow to parties contributing a cash capital a "participation in their (its) profits."
But were this question not as clear upon principle as I think it is, it may be regarded as settled by authority. What is claimed on the part of the defendants is, that issuing policies for premiums payable in money is not appropriate business for a mutual insurance company, or at all events for one which also takes premium notes subject to assessment; that it assimilates such company to a joint stock company, which the act of 1849 does not permit; and that there is a want of mutuality between those paying cash premiums and those who give notes.
These same questions received the deliberate examination of the Supreme Court of Ohio, in the case of The Ohio Mutual Insurance Company v. Marietta Woolen Factory (3 Ohio State R., N.S., 348.) The company in that case was incorporated in 1843. In 1844, an act was passed to amend the charter, which contained two sections. Section 1 provided, in almost the same terms with the provision in the defendants' charter, that any person applying for insurance might elect to pay "a certain definite sum of money in full for such insurance," which sum was to be "in lieu and place of a premium note." Section 2 devoted the funds arising from cash premiums and the premium notes, in general terms, to the payment of losses and expenses, saying nothing about assessments, but required the cash fund to be first exhausted. The directors there took ground precisely analogous to that taken here, viz.: that this change in the business of the company changed its character from "a purely mutual company" to what they called "a mutual stock company." Hence they disregarded the provisions in their charter, which subject the premium notes to contribution for such losses only as should accrue while the makers were members of the company; and treated the cash premiums and premium notes as joint capital, subject to be applied indiscriminately to all losses, except that the cash premiums were to be first exhausted. RANNEY, J., after stating this conclusion of the directors, said: "In this we think they were most clearly wrong. No such radical change is or was intended to be effected by this act. It was still a mutual insurance company, with no power in the directors to control its assets as an independent company, or to divert them from the purposes to which the law and the contract of the parties had appropriated them. Every person insuring, whether by the payment of a cash premium, or the deposit of a premium note, still became a member of the company, and this act simply gave the election to him whether he would become a member in the one way or the other." Again he says: The cash premium belongs precisely where the premium notes, whose place it takes, would belong; and is subject to the same appropriation, with this modification; it must be first applied, and no part of it can be withdrawn upon the expiration of the policy, although it should not have been all expended. * * * * There is no difficulty in the practical working of this construction."
This case decides every point raised by the defendants here; because, although there the taking of cash premiums was authorized directly by the Legislature, yet if this did not change the character of the company; if it was "still a mutual insurance company;" if those who paid cash premiums became "members of the company;" and the premium paid took the place of a premium note; and if there is no practical difficulty in the working of such a system, then there can be no objection to the adoption by the defendants of the clause in their charter which authorized it.
But the question under our own statute, and in precisely such a case as that now before us, has been passed upon by the Supreme Court of the United States in the case of the Union Insurance Company v. Hoge (21 How. U.S.R., 35). The company in that case was incorporated in this State under the law of 1849, and its charter was identical with that of the defendants here. The action was brought upon a policy, the premium upon which had been paid in money. The case appears to have been elaborately argued, and among the objections made by the counsel for the company to the issuing of cash policies, is the following: "That it destroys the principle of mutuality which is the leading characteristic of mutual companies, formed under the law of 1849, and confounds the operation of a company organized to do business on the mutual plan with that of those companies which are organized on the plan of stock companies, and which are in their nature and principles antagonistic to the mutual companies." On this point the court, by NELSON, J., say: "It is argued, however, that the company in question is a mutual insurance company, as declared by the act; that according to this system the insured must be a member of it, and that a person insured upon a cash premium, without any further liability, cannot be a member. This argument is not well founded either upon principle or authority. Admitting that the insured must be a member of the company, he is made so by the payment of the cash premium. The theory of a mutual insurance company is, that the premiums paid by each member for the insurance of his property constitute a common fund, devoted to the payment of any losses that may occur. Now the cash premium may as well represent the insured, in the common fund, as the premium note; and this class of companies has been so long engaged in the business of insurance it may well be that they can determine, with sufficient certainty for all practical purposes, the just difference in the rates of premium between cash and notes. These mutual companies, possessing the authority contained in the 8th section of this charter, viz., to take cash premiums or premium notes, are at the present day in operation in several of the States, and it has never been supposed that the mutual principle has been thereby abrogated."
I have quoted thus largely from the opinion of Judge NELSON, because in my view the extract given answers so fully to every phase of the argument for the defendant here that there is but little necessity for saying more. When it is considered that the term "mutual," as applied to an insurance company does not import any peculiar and exact method of producing mutuality in the sense of equality among its members, but that it is simply significant of an association for the purposes of insurance, whose fund for the payment of losses consists, not of a capital furnished by uninsured parties, but of the premiums mutually contributed by the persons insured, all difficulty on the subject is at an end. That such is the import of the term appears not only from the opinion of Judge NELSON, but from all the other authorities on the subject.
The judgment in this case, should, I think, be reversed, and there should be a new trial, with costs to abide the result.
It is conceded that the defendants were incorporated under the general act of 1849, as a mutual insurance company; and that the contract of insurance, upon which a recovery is claimed, was executed for the cash consideration of $9.81 only, and without any engagement on the part of the assured to be further liable upon any event or contingency whatever; and that the amount insured was the sum of $872. The insured was not in any event to have any interest in the money thus paid by him, or in any premiums paid by any other parties effecting insurance with the company. The contract was an undertaking by the defendants, in consideration of the money thus paid, to indemnify him against loss by fire, and nothing more.
The defendants were authorized to make contracts of insurance "on the plan of mutual insurance." (Act of 1849, ch. 308, §§ 4, 5.) And in addition to the powers necessary to transact that business, including such as might be incidental to it, they did not possess and could not exercise any other powers. (2 R.S., 600, § 3.)
The general act carefully distinguishes between what it denominates the plan of mutual insurance, and the business of insurance generally. It authorizes the formation of two classes of insurance corporations, founded wholly upon that distinction, requiring from those which are not upon the plan of mutual insurance a capital actually paid, to the amount of at least $50,000, which is to be invested in public stocks and bonds and mortgages, while those which are organized upon the mutual plan are not obliged to furnish any actual capital, but may commence business when they have received applications for insurance to a certain amount and have taken notes for the unearned premiums in advance. (§§ 5, 8, 11.) The act denominates the corporations of the former class stock companies, and the others mutual companies. (§ 11.)
Upon these positions there can be no controversy whatever; and the single question in this case is, whether the contract upon which this action is brought was entered into between the defendants and the insured party in transacting a business of mutual insurance. If it was, the contract is lawful; otherwise it is illegal and void.
What then, is the meaning of mutual insurance, and how does it differ from the business of insurance when carried on by joint stock companies or individual underwriters? The words import the existence of reciprocal relations among the persons engaged in the business, and that each acts in return or in correspondence with the others. Where they are applied to the business of insurance they import that the parties concerned are each insured parties, and that at the same time each are insurers of the others. We should gather this idea from the language if there were no known examples of such a practice to which we might suppose that the Legislature had reference. But every business man, whether lawyer or layman, immediately associates with the words a method of conducting the business of insurance well known in this country and to a less extent among most of the civilized and commercial nations of the world. By looking into the books we find that a mutual insurance company is an association of persons each of whom is desirous of insuring his property, and who agree with each other to contribute their premiums to a common fund on the terms that each shall be entitled, in case of loss, to an indemnity out of that fund. (Angell on Life and Fire Insurance, § 413; Arnould on Insurance, 85; Strong v. Harvey, 3 Bing., 304.) It is of course the same thing if, in lieu of a fund, the parties to the mutual enterprise give written guarantees to be responsible for losses, in the proportion of their interest as insured parties, in the form of premium notes. All that is material to the idea of mutual insurance is, that each of the parties should sustain the relation of an insured party and of an insurer of each of the others. Now the business of insurance where the mutual principle does not obtain is quite a different thing. When conducted by a joint stock company or by a corporation, which is now the most usual method, it consists in the contribution of a capital, the proprietors of which guarantee the full payment of insurance to the policy holders, but retain the entire profits of the business. The assured has no interest in the premiums; they become the property of the insurers as the price of the insurance, and they are at liberty to apply them in what manner they think proper. Enough has been said to show that the two classes of institutions cannot be confounded without an entire disregard of the plain directions of the statute. The distinction between them is palpable and it is fundamental. One who insures in a stock company pays a definite premium as a consideration for the risk which the company undertakes to indemnify him against, and he has no interest in the result of any other risk which the company may assume. He is simply an insured party, and not an insurer. It is indifferent to him whether the company accumulates profits, or loses a part of its capital, provided it does not become insolvent and thus unable to perform its engagements; whereas, one who insures in a mutual company is a shareholder in whatever the company may possess, and may be a loser to the amount of his interest in the common fund, or of his premium note if the provision for indemnity consists in such notes. He is personally, to that extent, the insurer of all other parties who hold policies; and such policy holders are to the same extent the insurers in his policy. Now, these defendants having organized under this law as a mutual company, besides their proper business as a mutual company, have deliberately entered upon the general business of insurance as though, in addition to their powers as a mutual company, they were organized as a stock company. The mutual branch of their business, as it appears from their by-laws, was organized upon the system of premium notes to be assessed for the payment of losses, and they have issued between three and four thousand policies, based upon such notes; and they have besides issued some five thousand policies like the one held by the plaintiff, to outside parties, who have no interest in or connection with the mutual enterprise, and who are not obliged to contribute anything towards the indemnity of each other, or of any of the parties holding policies issued upon the mutual branch of the business to parties who have given premium notes. The result will be, if this action can be sustained, that the premium notes may be enforced for the payment of losses to parties who are strangers to the mutual enterprise, and who can never be made to contribute anything to the indemnity of those who have given these notes if they should sustain losses from the risks which they are insured against. It is no answer to this view to say that the makers of the notes have had the benefit of the premiums paid by the outside parties. In the first place there is no such fact stated in the case; but if it were true, it could only operate as an equitable estoppel against the parties who had knowingly received the illegally acquired premiums, and would have no tendency to sustain an action on the policy, which must assume it to be a legal contract.
Nor is it any answer to the objections against this course of business that the charter contains a clause permitting it to be done. The associates, it seems, are empowered to frame their own charter, subject to the approval of the Attorney-General (§§ 10, 11); and that officer, in this case, overlooking the provisions referred to, certified that the charter conformed to the statutes of the State. The provision of the act requiring the approval of the Attorney-General did not enable him to license one of these companies to violate the law, and if an illegal provision is found lurking in a charter approved by him, it is not the less illegal because it escaped his scrutiny. The Legislature, by requiring his examination and certificate, sought to guard against the public inconvenience which would arise from the existence of a corporation apparently authorized to pursue a course forbidden or not authorized by law; but it did not authorize that officer to dispense with or modify any of the provisions of the statute.
There was submitted to us, in the course of the argument of the counsel for the plaintiff, a reference to the several special charters which have been granted by the Legislature from the earliest period down to the present time, and an abstract of the principal provisions of several of them. The argument deduced from them was, that the Legislature had in some of them recognized a course of business similar to that pursued by the defendants in this case, as falling within the description of mutual insurance. In some of them the method of working out the feature of mutuality is not prescribed, as in the case of the earliest one, the Washington Mutual Assurance Company, chartered in 1802 (Laws, 152). There was no joint stock to be contributed, but each assured party was to be a member of the company. There could be no policy, therefore, to outside parties. Each party holding a policy would be an insurer and an assured. In the Schoharie Mutual, chartered in 1831 (Laws, 280), the idea of mutuality was obtained by a provision in the ninth section, by which the parties insured were obliged to indemnify the directors in proportion to the amounts respectively insured by them in the company. It seems to have been assumed that the directors would have to pay the losses, and that the contribution of the adventurers would be enforced under that section. These two instances present the most imperfect of the schemes for effectuating the mutual feature; and without going through the list, it is sufficient to say that I find nothing in any of them giving any countenance to the suggestion that an insurance could be made by a mutual company, not also specially authorized by law to do a general insurance business, in favor of a person who was not at the same time responsible in some way as an insurer of the others.
There is a class of cases where the company was originally incorporated as a mutual insurance company, and was afterwards authorized by a special statute to transact a general business like a stock company. The Mutual Insurance Company of the City and County of Albany is a sufficient type of that kind of legislation. It was incorporated in 1836 (Laws, 315), upon the pattern of the Madison County Company, the plan of mutuality being arranged by means of premium notes. It was amended by an act of the Legislature in 1848 (Laws, 66). A person applying for insurance was authorized to pay the company "a certain definite sum of money in full for such insurance, which said sum (it was declared) shall be in lieu and place of a premium note;" and it was further declared that such person should not be liable, during the continuance of his policy, for any sum beyond the amount thus originally paid. By another section, the money thus received was made liable for losses and expenses, and was to be first expended for these purposes, before any resort could be had to the premium notes. Several other mutual companies were amended in a similar manner. The power of the Legislature, by a prospective enactment, to enlarge the powers of a mutual insurance company so as to permit it to transact a business in which there should be no feature of mutuality cannot be doubted. This is precisely what was done in this case. It is perfectly plain that the parties taking policies under this amendment did not assume any mutual relations with each other, or with those who had taken out policies, upon giving premium notes. They assumed the position of insured parties, and did not become in any sense insurers. As they were authorized to take policies in a mutual company, and were not to assume mutual relations, it was carefully provided, as was fit and proper, that they should incur no liability as the insurers of the others, and in effect that they should have no interest in the mutual business of the company. This was done by the provision that the sum to be paid by such parties should be "in full for such insurance," and that they should not be liable in any event to pay any further sum. It is altogether probable that the companies obtaining these additional powers were able to show to the Legislature that they had accumulated a capital in the course of their mutual business which rendered it safe for them and for the public to engage in a general insurance business as though they had contributed a capital stock. So far from proving that the business thus authorized is, or was considered by the Legislature to be, a species of mutual insurance, the legislation referred to presents the contrary view in a very strong light. The discrimination between the original members, bound together and made responsible for each other's losses by means of the system of premium notes, and the new parties authorized to come in upon precisely the same kind of contract which exists between insurance companies, not mutual, and their customers — and whose cases are carefully placed without the influence of the mutual principle — marks the difference between the two species of transactions as sharply as any argument which could be presented. The similarity of language, amounting almost to identity, between the provisions in the defendants' charter and the act amending the Albany charter, shows that it was intended by the persons who framed the first named instrument to do by their own authority what it required the whole legislative power of the State to accomplish in the other case.
I have never entertained the opinion that the system of premium notes was an essential feature of mutual insurance. I refer to it as only one of several methods by which mutual relations may be created among parties embarking in that business. In White v. Haight ( 16 N.Y., 310), I expressed the opinion, founded upon an examination of most of the charters of mutual companies which had been granted by the Legislature, that the principle of mutuality had theretofore been worked out by two methods only — by means of premium notes operating as mutual guarantees by each of the adventurers in favor of all the others, and by a provision for an annual accounting by which each insured party was secured a share of the profits in proportion to the premiums paid by him. A further examination of the charters, aided by the list and abstracts which have been furnished, has confirmed me in this opinion; for, independently of the cases in which the power to transact a general insurance business has been engrafted upon mutual charters, as in the amendments to the Albany charter, which are quite aside from the subject, and in the few early charters where the method of establishing mutual relations was not pointed out, the two modes referred to seem to be the only ones which have received the sanction of the Legislature. But I am far from thinking that the companies organized under the general act are confined to any particular system. The act leaves the associates perfectly free to organize such method of establishing mutual relations as they may see fit; only they cannot, under the pretense of carrying on mutual insurance, make contracts for insurance into which the mutual principle does not enter at all. The premiums may be required to be paid in cash, as in the companies chartered in the city of New York, with a provision for dividing the profits in proportion to the premiums paid; or, only sufficient may be exacted from the insured to pay the expenses, leaving the losses to be made up by assessments upon the guarantee notes; and it may be that a combination of the two methods might be adopted which would secure the same general result. If applicants were permitted to execute a guarantee, or pay an amount of money, at their election, with a provision that the money should be invested by the company for their benefit, and be repaid to them with its accumulations, so far as it should not be required to pay the proportion of losses and expenses which those who have paid it ought to contribute, the arrangement would not seem to me objectionable. Under the provisions in the defendants' charter, the insured parties might give notes or pay money; but then those who paid money paid it "in full for the insurance," and assumed no responsibility as to the other risks, while those who gave notes were liable to be assessed to their full amount for the payment of all losses which should be sustained by the other insured parties. I am unable to discover any mutuality between these two classes of dealers, and am quite sure none can be pointed out.
It has been argued that a kind of mutuality may exist between two classes of insured parties where the individuals of one class undertake, by means of premium notes, to be responsible in certain proportions for the losses which any of the others may sustain, and those of the other class pay money in full for their respective insurance. The argument is that a sum of money to be paid down may be determined upon, which shall be equivalent to an undertaking to indemnify against a particular kind of casualty, and that it is to be intended, in favor of the policy of insurance in this case, that the insured were brought within the principle of mutuality by means of the adjustment of the premiums upon this theory. In the first place, there is nothing in the charter or by-laws of the company, both of which are before us, which indicates the existence of any such theory, or which tends to show that the persons who under this charter should pay money in full of their insurance would be required to pay any other or different amount than that usually exacted from insured parties upon the same risks in other companies. Prima facie, the payment of a given sum in full for a particular hazard will be taken to be the established price of such a risk, and any person who sets up, in a particular case, that the amount was arrived at by the application of other principles must show it. In the next place, it appears affirmatively in this case that no such theory was adopted. By the 5th section of the by-laws the proportion is stated between the premium notes, which were liable to be assessed for their full amount, and the cash premiums; by which it appears that the cash premiums were one-tenth, and one-twentieth of the amount of the notes, there being two classes of notes called the small ones and the large ones. We cannot intend that any mutuality was designed between two persons, one of whom pays $1 in full and the other executes an engagement to be responsible for casualties to an amount not exceeding $20.
But under the provision in question in this charter, any person applying for insurance may pay a definite sum of money in full for the insurance. If any person may do it, all the persons who wish to be insured may; and thus we have an insurance company in which the insured parties have no relation with each other, but each one has paid in full for his risk to the corporation, and the corporation has undertaken to indemnify him, and there is no other contract in the case. This is precisely the course of business of stock companies, and if a mutual company may thus transact its business, there is no difference between them. The position is that a sum certain contributed by one man may be so adjusted as to be substantially equivalent to the guarantee of another against the casualties of fire. That is true in a certain sense, and it is the principle upon which the rates of premium are ordinarily arrived at. The companies fix upon such rates of premium as that, upon the calculation of the chances of an extensive business, running through a course of years, they will receive an aggregate amount of money sufficient to pay all the losses, the expenses of the office, and a certain profit upon the funds employed. This is precisely what the argument supposes may take place between a mutual company, representing the makers of the premium notes on the one hand, and the parties who obtain policies upon the payment of a fixed sum in cash, on the other, except that no addition is made to the rate for interest on capital; none being required. There is no doubt a sort of mutuality between parties thus dealing. If the terms are fairly adjusted, the payment of money and the engagement of indemnity are just equivalent to each other. It is the same kind of mutuality which obtains between buyer and seller in contracts of sale: between employer and employed in contracts for services: and borrower and lender, and the like. But such parties are not mutual vendors, mutual employers and mutual lenders. So, in the business of insurance, the man who pays a fixed sum to be insured, and does not assume any hazard for any other person, may be considered as engaged in a matter in some sense mutual, but he is not a mutual insurer, for he is not an insurer at all. So of the assured in this case; if he is a party to a business of mutual insurance, he must have insured his associates as a consideration for being insured himself. To be a mutual insurer, he must in the first place be an insurer. An insurer is a person who undertakes to indemnify another against certain risks. They may happen, or they may not; and the essence of the contract is the assumption of the hazard. If he assumes no hazard — if, when he has paid his money, he is under no further liability — he cannot be in any conceivable sense an insurer; and if not an insurer at all, he cannot be a mutual insurer; and unless by his policy he becomes a mutual insurer, it cannot be said that the contract was made in the course of carrying on the business of mutual insurance.
The 21st section of this act has been sometimes relied on to sustain policies like the one under consideration. It would be enough to say that no such capital as the section refers to has been furnished to the defendants, and that therefore the provision has no application to them. But the section has not, I think, any bearing upon the question in any case. It is in substance an authority to the mutual companies to borrow money, and to allow the lender not only an interest on the amount, but a participation in the profits of the business besides. As the money is to be liable, like capital stock, to the payment of the company's debts, it was but reasonable that the lenders should be permitted to contract for an advantage proportionate to the risk of losing the principal. It resembles somewhat lending upon bottomry or respondentia; but I do not perceive that it bears at all upon the question whether a mutual company can make a policy for a sum certain where the insured does not take the obligations of an insurer upon himself.
I think the judgment of the Supreme Court was right, and that it ought to be affirmed.
After a line of argument — corresponding so nearly with that of DENIO, J., as to render its repetition unnecessary — to show that the act regards the systems of joint stock and mutual insurance as distinct and inconsistent; that it provides only for these two; requires each company to declare in its charter which of the two it will adopt; and that having made its election of either, it derives no power under the act to insure upon the other plan, and is forbidden by the general laws from exercising powers not so derived, the learned judge proceeded:
It is a fair inference, and should be assumed, that this policy was issued under the provision last referred to, of the 8th section of the charter, as there is no color or semblance of authority for it elsewhere, either in the charter or the act.
The true construction of this provision, authorizing persons so electing to insure upon paying a cash premium in full for the insurance, and in lieu of a premium note, unquestionably is, that such insurances might be made upon a different consideration than is required of persons giving a premium note. The language is, that they "may pay a definite sum, to be fixed by said corporation." It was beyond all doubt intended to allow the company to issue policies for cash premiums paid at the time at the same per cent upon the amount insured as stock companies usually adopt. If the charter in this respect can be sustained, there is clearly nothing to hinder a company thus organized, immediately upon commencing business, to depart from the plan of mutual insurance, and to transact all its business on the principle of a joint stock company, without a dollar of cash capital paid in, and in palpable evasion of the express requirements of the act, as the course adopted and pursued by the defendant fully illustrates.
The circumstance that it has in fact transacted some of its business on the mutual plan, does not weaken this view in the least. It is a mere question of power; and if the defendant could depart from that principle in any portion of its business, no good reason can be conceived why it could not abandon it altogether, and issue all its policies of insurance for such cash premiums as the corporation should direct, in full for the risks, and without any premium note or other obligation or liability on the part of the persons insured for the payment of losses or expenses, and thus become practically a joint stock corporation, or rather a company organized under the act, prosecuting business in manner and form as a joint stock company, without any stock paid in or invested, as expressly required by the act.
If any argument can be drawn from the history of the legislation on the subject of insurance, bearing on the question under consideration, instead of being in support of the validity of the policy in question, is against it. That legislation has been varied and fluctuating, evincing an unsettled state of the public mind on the subject. Mutual insurance corporations have been the invention of the present century. When first introduced they were purely mutual. When chartered to transact business simply on that plan, it was never supposed they possessed any corporate power to make insurance on the joint stock principle. The two plans are so diametrically opposite in their structures, and so incompatible in their operations, that it would be regarded by any intelligent court an unwarrantable assumption of power not given in a mutual insurance charter. At a later period, mutual companies were chartered with power to issue policies for cash premiums paid in full for the risks; and later still, companies in existence and in operation upon the mutual principle only, have procured amendments of their charters by which such power has been added. This shows that in the opinion of the Legislature the power did not exist in the absence of the legislative grant.
The Constitution of 1846 (art. 8, § 1), allowed corporations to be formed under general laws, and declared that they should not be created by special act, except for municipal purposes, and in cases where, in the judgment of the Legislature, the object of the corporation could not be attained under general laws.
The first general law on the subject of insurance corporations passed after the adoption of the Constitution, was the act of April 10th, 1849. That law, as has been shown, contemplated the formation of insurance corporations of only the two descriptions mentioned, in respect to the plan of operations, and to be at the election of the corporators which plan to adopt. This act is the organic law of all corporations organized under it, which can no more transcend the powers intended to be conferred by it upon them than Congress can assume and exercise powers not delegated by the Constitution of the United States. If a company should be organized with a charter allowing the exercise of its corporate powers, by transacting insurance business on both of the plans mentioned, indiscriminately, it would constitute a third class, for which the act makes no provision. It is reasonable, therefore, to suppose that the framers of the Constitution intended, by the provision referred to in that instrument, among other things, to check the fluctuations of legislation on the subject of insurance, as well as other corporations not municipal, and to bring about, by means of general laws, a greater uniformity in their features and principles of operation.
The conclusion to which I have arrived, after much reflection and a careful consideration of all the provisions of the act under which the defendant was organized, is, that the provision of its charter allowing persons to insure for cash premiums, paid in full for the risks and in lieu of the premium note, was inconsistent with its declared mode and manner in which the corporate powers given under and by virtue of the act were to be exercised. That having, in pursuance of the 10th section of the act, declared in its charter such mode and manner to be that of mutual insurance, and having been organized as a mutual insurance company, the corporation possessed no power to transact insurance business on any other plan. That the policy of insurance upon which the action was brought was not a mutual insurance policy, and the contract contained in it was therefore unauthorized and void, as being out of and beyond the corporate power of the defendant to make.
COMSTOCK, Ch. J., was for reversal on the ground first discussed in the opinion of SELDEN, J. DAVIES, CLERKE, BACON and WRIGHT, were understood to concur fully in Judge SELDEN'S opinion.
Judgment reversed, and new trial ordered.