Front Page Titles (by Subject) § 105.: Regulations of the business of insurance.— - A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1
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§ 105.: Regulations of the business of insurance.— - Christopher G. Tiedeman, A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, vol. 1 
A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint (St. Louis: The F.H. Thomas Law Book Co., 1900). Vol. 1.
Part of: A Treatise on State and Federal Control of Persons and Property in the United States considered from both a Civil and Criminal Standpoint, 2 vols.
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Regulations of the business of insurance.—
The business of insurance, both fire and life, is the occasion of a most extensive and far-reaching regulation by statute; and the general reason for the extensive regulation of this business is the necessity therefor to prevent fraud, misrepresentation and sharp practice on the part of the insurance company, and to protect the insured against his own negligence in not reading the terms of the contract of his insurance. The regulations, which have for their purpose the inspection and supervision of the affairs and business of the insurance companies, in order to insure the honesty and solvency of the companies who are doing business in the State, and to prevent companies from doing business which cannot show a clear bill of financial health; the requirement of a deposit of funds with the State officer as a security for the payment of death and fire loss, as well as other claims which might arise on the policies against the companies;—all regulations of these kinds are reasonable regulations for the prevention of fraud in the insurance business, similar to the general regulations of the banking business. In both businesses, on account of their nature, the individual is obliged to repose unquestioning confidence in the company, and has no convenient means of satisfying himself as to its financial soundness. Such regulations are undoubtedly constitutional.
But, recently, the regulations of the business of insurance have been greatly extended; and State laws now undertake to prescribe what kind of a contract of insurance the insured can agree to make. In some of the States; notably, Michigan, Minnesota, North Dakota, and Pennsylvania, official forms of policies are provided by statutes, which are required to be employed in making all contracts of fire insurance. In Wisconsin, a statute authorizes the insurance commissioner to adopt a printed form of policy for fire insurance, limiting his power by the requirement that the policy he prescribes shall be as near as possible to the form which had been adopted in another State. This statute was held to be unconstitutional, because it was a delegation of legislative power to the insurance commissioner.1 In some of the States it is also provided that the amount written in the policy shall be the amount recoverable in case of loss, and that the stipulation of the policy, that the actual value of the property at the time of loss shall be the measure of damages, shall be void and of none effect. The statute has been sustained as a reasonable regulation on the ground of public policy.2 In Missouri, the statute prohibits an insurance company, in a suit for the recovery of the face value of a fire insurance policy, from denying that the property insured was worth, at the time that the policy was issued, the full amount for which it was insured. The Supreme Court of Missouri sustained the constitutionality of this statutory interference with the right of private contract in its application to all new policies, and to old policies, which have been renewed subsequently to the enactment of the law.3
Similar regulations by statute of the contracts of life insurance obtain in many of the States. Thus, it is common for warranties in life insurance contracts to be declared by statute to have only the effect of representations; and it was held to be doubtful whether the parties could, in the face of the statute, waive its operation by an express agreement that his representations shall have the effect of warranties.1 In New Jersey, a statute provides that all contracts of insurance, written in that State, shall be governed by the laws of that State.2 In Massachusetts, a copy of the signed application must be attached to the policy, in order that the original may be put in evidence in any suit on the policy.3 The most common statutory provision, relative to life insurance, is that which limits the grounds upon which a policy may be forfeited, and the extent of such forfeiture.
It was held by the United States Supreme Court, that the parties cannot by express contract waive the operation of the statute, which is mandatory; and that its provisions constitute a part of every contract of insurance which is written in the State, whether the insured wants it incorporated or not.4
In order to insure the fair and equal treatment of all policy-holders, a Pennsylvania statute prohibits any discrimination in favor of any individual in the gradation of rates of premium of the same class and of the same expectations of life, and makes any such arbitrary discrimination a misdemeanor. The statute has been declared to be constitutional. Nor can it be fairly characterized as unreasonable, or as a wrongful interference with the liberty of private contract, when it is borne in mind that the insurer is a corporation, enjoying extraordinary privileges as a gift from the State.1
But there are limitations to the power of the State to regulate insurance contracts, and the business of insurance. One limitation is that of the equitable prohibition of penalties and forfeitures. A Texas statute provided that whenever an insurance company of life or health failed to pay a loss, which has occurred on the policy, within the time after notice stipulated in the policy; the company shall pay to the holder, in addition to the loss, twelve per centum of such loss, together with all reasonable attorney’s fees which have been incurred in the prosecution and collection of the claim. The statute was held by the Texas Court of Civil Appeals to be unconstitutional. The requirement of the twelve per cent. penalty was doubtless the chief occasion for the adverse decision of the court.2
The most surprising regulation of the business of insurance is to be found in the New York statute, which makes it a crime for an insurance agent to allow, as an inducement to contract for insurance, to the insured a rebate on the first premium of a policy of life insurance. In the Pennsylvania statute, which is referred to above, the prohibition of discrimination against or in favor of individuals is directed against the insurance company and controls the terms of contract of insurance. In the present case, the statute prohibits the agent to pay, practically out of his own pocket, a part of the first premium, which redounds to the benefit of the insured, in the form of a rebate. This statute was held to be constitutional, as it is only a part of the extensive regulation of life insurance for the protection of policy holders.3
It is probably safe to say that the judicial indorsement of the constitutionality of these statutory regulations of the business of insurance was largely influenced by the fact that insurance companies are in most of the States foreign corporations, who are obliged to submit to any regulations of their business, which the legislature of a State may in its discretion see fit to impose, as an absolute condition precedent to their doing business at all. Foreign corporations are not citizens, in the constitutional sense, who are guaranteed by the national constitution equal privileges and immunities in all of the States.1
Dowling v. Lancashire Ins. Co., 92 Wis. 63.
Riley v. Franklin Ins. Co., 43 Wis. 449; Am. Queen Ins. Co. v. Leslie, 47 Ohio St. 1072; Am. Fire Ins. Co. v. State, 74 Miss. 24; Phoenix Ins. Co. v. Levy, 12 Tex. Civ. App. 45 (33 S. W. 992); Merchants’ Ins. Co. v. Levy, 12 Tex. Civ. App. 45 (33 S. W. 999); Dugger v. Mechanics & T. Ins. Co., 95 Tenn. 245.
Daggs v. Orient Ins. Co. of Hartford, Conn., 136 Mo. 382, s. c. 172 U. S. 557. In affirming the decision of the Missouri court, the national Supreme Court also declared that the statute in question was not objectionable on the ground that it was special legislation.
White v. Conn. Mut. L. Ins. Co., 4 Dill. 177. But see, contra, Insurance Co. v. Currie, 13 Bush, 313.
Mut. Ben. L. Ins. Co. v. Robison, 54 Fed. 580.
Considine v. Metropolitan L. Ins. Co., 165 Mass. 462.
Equitable L. Ins. Co. v. Clements, 140 U. S. 226. In this case, in the Circuit Court (32 Fed. 273), doubt was expressed by the presiding judge as to the correctness of his decision, because such a statute, when obligatory, might constitute an unconstitutional interference with the individual liberty of contract. But no such doubt is expressed by the Supreme Court.
Commonwealth v. Morning Star, 144 Pa. St. 103.
New York Life Ins. Co. v. Smith (Tex. Civ. App.), 41 S. W. 680.
People v. Formosa, 131 N. Y. 478. The court say: “The nature of insurance contracts is such that each person effecting insurance cannot thoroughly protect himself. He is not competent to investigate the condition and solvency of the company in which he insures, and his contracts may run through many years, and mature only, as a rule, at his death. Under such circumstances, it is competent for the legislature, in the interests of the people and to promote the general welfare, to regulate insurance companies and the management of their affairs, and to provide by law for that protection to policy holders which they could not secure for themselves. * * * The business of life insurance in this State is mainly carried on by insurance companies organized by law and minute provisions are made regulating their incorporation and their business; and a department of the State government has been constituted to supervise them. The corporations organized under the laws of this State for life insurance are absolutely under the direction and control of the legislature. It may specify how and on what terms they may do business and enact laws regulating their conduct and the conduct of their agents for their protection and the protection of their policy holders, and enforce obedience to such laws by such penalties, forfeitures and punishments as it may, within constitutional limits, prescribe. As all these corporations must act through agents, it has the same power and authority to regulate the conduct of their agents as it has to regulate the conduct of the corporations themselves. * * * We have not here the question as to what a private individual may do in the conduct of his private business, but the question here is as to the power of the legislature over corporations and their agents.” * * *
See State v. Stone, 118 Mo. 388.