UNITED STATES SUPREME COURT DECISIONS ON-LINE

The business of insurance is so far affected with a public interest as to justify legislative regulation of its rates.

A public interest can exist in a business, such as insurance, distinct from a public use of property, and can be the basis of the power of the legislature to regulate the personal contracts involved in such business.

Where a business such as insurance is affected by a public use, it is the business that is the fundamental thing; property is but the instrument of such business.

Munn v. Illinois, 94 U. S. 113; Budd v. New York, 143 U. S. 517; Brass v. North Dakota, 153 U. S. 391, demonstrate that a business, by circumstances and its nature, may rise from private to public concern and consequently become subject to governmental regulation, and the business of insurance falls within this principle.

The fact that a contract for insurance is one for indemnity and is personal does not preclude regulation.

A general conception of the lawmaking bodies of the country that a business requires governmental regulation is not accidental, and cannot exist without cause.

What makes for the general welfare is matter of legislative judgment, and judicial review is limited to power, and excludes policy.

The liberty of contract guaranteed by the Fourteenth Amendment is not more intimately involved in price regulation than in other proper forms of regulation of business and property affected by a public use, and so held as to the regulation of rates of fire insurance.

The inactivity of a governmental power, no matter how prolonged, does not militate against its legality when exercised. United States v. Delaware & Hudson Co., 213 U. S. 366.

Whether rate regulation is necessary in regard to a particular business affected by a public use, such as insurance, is matter for legislative clubjuris

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judgment. This Court can only determine whether the legislature has the power to enact it.

A discrimination is not invalid under the equal protection provision of the Fourteenth Amendment if not so arbitrary as to be beyond the wide discretion that a legislature may exercise, and so held as to a classification exempting farmers' mutual insurance companies doing only a farm business from the operation of an act regulating rates of insurance.

A legislative classification may rest on narrow distinctions. Legislation is addressed to evils as they appear, and even degrees of evil may determine its exercise. Ozan Lumber Co. v. Union National Bank, 207 U. S. 251.

The Kansas statute of 1909, so far as it provides for regulating rates of fire insurance, is not unconstitutional under the Fourteenth Amendment as depriving insurance companies of their property without due process of law, as abridging the liberty of contract, or as denying companies charging regular premiums the equal protection of the law by excepting farmers' mutual insurance companies from its operation.

Bill in equity to restrain the enforcement of the provisions of an act of the State of Kansas entitled, "An Act Relating to Fire Insurance, and to Provide for the Regulation and Control of Rates of Premium Thereon, and to Prevent Discriminations Therein." Chap. 152 of the Session Laws of 1909.

The grounds of the bill are that the act offends the Constitution of the state and of the United States.

A summary of the requirements of the act is as follows:

Sec. 1. Every fire insurance company shall file with the superintendent of insurance general basis schedules showing the rates on all risks insurable by such company in the state, and all the conditions which affect the rates or the value of the insurance to the assured.

Sec. 2. No change shall be made in the schedules except after ten days' notice to the superintendent, which notice shall state the changes proposed and the time when they clubjuris

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shall go into effect. The superintendent may allow changes upon less notice.

Sec. 3. When the superintendent shall determine any rate is excessive or unreasonably high, or not adequate to the safety or soundness of the company, he is authorized to direct the company to publish and file a higher or lower rate, which shall be commensurate with the character of the risk; but in every case the rate shall be reasonable.

Sec. 4. No company shall engage or participate in insurance on property located in the state until the schedules of rates be filed, nor write insurance at a different rate than the rate named in the schedules, or refund or remit in any manner or by any device any portion of the rates; or extend to any insured or other person any privileges, inducements, or concessions except as specified in the schedules.

Sec. 5. Any company making insurance where no rate has been filed shall, within thirty days after entering into such contract, file with the superintendent a schedule of such property, showing the rate and such information as he may require. The schedule shall conform to the general basis of schedules, and shall constitute the permanent rate of the company.

Sec. 6. The schedules shall be open to the inspection of the public, and each local agent shall have and exhibit to the public copies thereof relative to all risks upon which he is authorized to write insurance.

Sec. 7. No company shall, directly or indirectly, by any special rate or by any device, charge or receive from any person a different rate of compensation for insurance than it charges or receives from any other person for like insurance or risks of a like kind and hazard under similar circumstances and conditions in the state. Any company violating this provision shall be deemed guilty of unjust discrimination, which is declared unlawful.

Sec. 8. The superintendent may, if he finds that any clubjuris

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company, or any officer, agent, or representative thereof has violated any of the provisions of the act, revoke the license of such offending company, officer, or agent, but such revocation shall not affect liability for the violation of any other section of the act, and provided that any action, decision, or determination of the superintendent under the provisions of the act shall be subject to review by the courts of the state as provided in the act.

Sec. 9. The superintendent shall give notice of any order or regulation made by him under the act, and any company, or any person, city, or municipality which shall be interested shall have the right, within thirty days, to bring an action against the superintendent in any district court of the state to have the order or regulation vacated. Issues shall be formed and the controversy tried and determined as in other cases of a civil nature, and the court may set aside one or more or any part of any of the regulations or orders which the court shall find to be unreasonable, unjust, excessive, or inadequate to compensate the company writing insurance thereon for the risk assumed by it, without disturbing others. The order of the superintendent shall not be suspended or enjoined, but the court may permit the complaining company to write insurance at the rates which obtained prior to such order upon the condition that the difference in the rates shall be deposited with the superintendent to be paid to the company or to the holders of policies as, on final determination of the suit, the court may deem just and reasonable. During the pendency of the suit, no penalties or forfeitures shall attach or accrue on account of the failure of the complainant to comply with the order sought to be vacated or modified until the final determination of the suit. Proceedings in error may be instituted in the supreme court of the state as in other civil cases, and that court shall examine the record, including the evidence, and render such judgment as shall be just and equitable. No action clubjuris

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shall be brought in the United States courts until the remedies provided by the act shall have been exhausted. If any company organized under the laws of the state, or authorized to transact business in a state, shall violate the section, the superintendent may cancel the authority of the company to transact business in the state.

Sec. 10. Infractions of the act are declared to be misdemeanors, and punishable by a fine not exceeding $100 for each offense, provided that, if the conviction be for an unlawful discrimination, the punishment may be by a fine or by imprisonment in the county jail not exceeding ninety days, or by both fine and imprisonment.

Sec. 11. No person shall be excused from testifying at the trial of any other person on the ground that the testimony may incriminate him, but he shall not be prosecuted on account of any transaction about which he may testify, except for perjury committed in so testifying,

"provided, that nothing in this act shall affect farmers' mutual insurance companies, organized and doing business under the laws of this state and insuring only farm property."

The bill alleged that it was brought by the German Alliance Insurance Company in behalf of itself and all other companies and corporations conducting a similar business and similarly situated, and that Charles W. Barnes was the duly elected Superintendent of Fire Insurance of the State of Kansas. It alleged the jurisdictional amount, and that the controversy was one arising under the Constitution of the United States and of the State of Kansas. It alleged further the following facts, which we state in narrative form, omitting those which relate to the constitution of the state, no assignment of error being based upon them. The appellant, to which we shall refer as complainant, was incorporated under the laws of New York as a fire insurance company in 1879, and immediately entered upon such business, and it has for long periods of clubjuris

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time conducted the business of fire insurance in Kansas and other states of the United States.

The business of fire insurance, as conducted by it, consists of making indemnity contracts against direct loss or damage by fire for a consideration paid, known as a premium; that the rate or premium is the amount charged for each $100 of indemnity. The property which is the subject of insurance is ordinarily known and designated as the risk. Complainant issues indemnity contracts or fire insurance policies covering all kinds and descriptions of improvements upon real estate and the contents thereof, and all kinds and descriptions of personal property, and also farm houses, barns, and granaries and their contents. The rate of premium varies with the kind of property covered, its physical characteristics and situation, its exposure, the presence or absence of fire protection, and many other causes.

The establishment of the basis rate for the premium to be charged is a matter of technical and mathematical deduction from the experience of all fire insurance companies, covering a long period of years, and, territorially, the whole civilized world. To make such deduction it is necessary not only to be in possession of the compiled statistics of fire insurance business, but also to be skilled in the mathematical "theory of probabilities" and in the "law of large numbers" so as to be able to apply with technical accuracy such laws and such data, and that no one not specially trained as an insurance statistician is competent to make such deductions.

A theoretically correct basis rate, having thus been arrived at, is subject to variation according to the risk, whether in town or country, and, if in the former, according to the class of town or city in which it is situated. The classification of towns and cities depends upon water supply, fire protection, and general physical conditions. In addition to ascertaining the individual risk, if a building, clubjuris

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the size, material of which, and the manner in which it is constructed, the character of the occupancy, and the character of the occupancy and construction of adjacent buildings, also the character of the contents of the buildings, and the manner in which they are stored, and the precautions used to detect and prevent fires are necessary to be ascertained.

Complainant and others engaged in the insurance business employ a large number of men skilled as inspectors to report upon individual risks, and it is impossible to fix and adjust a reasonable rate of premium for each and every individual risk without the information so obtained and having the same applied by experts. And such training and information are necessary to determine whether a basic rate or actual rate, as applied to any particular risk, is or is not reasonable, and the respondent is not possessed of the requisite information or special training necessary to qualify for such determination, and any conclusion to which he might come would be a mere guess or arbitrary determination, and the provisions of the act can only be properly administered, in any event, by the employment by the state of a corps of inspectors and experts specially trained in the business of fixing rates of fire insurance.

The complainant has complied with all of the laws of the state, and has received the regular license or authorization of the state to transact the business of fire insurance therein.

It conducts its business by means of resident agents, of which it has seventy-two directly employed; it has a large and valuable established business, to secure which it has expended a large sum of money, and to be compelled to give up its business would result in irreparable damage and injury to it. A large number of the fire insurance policies issued by complainant are written upon farm buildings and their contents, and, in writing such business, clubjuris

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it comes into direct competition with various farmers' mutual insurance companies organized and doing business under the laws of the state and insuring only farm property.

The business of fire insurance is purely and exclusively a private business, and may be transacted by private persons in their individual capacity, or by unincorporated or incorporated companies; that the amount of indemnity and the premium is a matter of private negotiation and agreement, and the act of the Legislature of the State of Kansas attempts to regulate the business insofar as the fixing of the rate of premium is concerned, and in the attempted regulation distinguishes between fire insurance companies and individuals and partnerships, and thereby denies to complainant and other companies the equal protection of the law, contrary to the Fourteenth Amendment to the Constitution of the United States, and is therefore unconstitutional and void.

Under the laws of Kansas, mutual fire insurance companies may be organized, that such companies having a guaranteed fund of $25,000 may do business on a cash basis and accept premiums in cash, and that such premium measures the total liability of the insured under the policy, either to the company or to its creditors; that, by the eleventh section of the act under review, it is provided

"that nothing in this act shall affect farmers' mutual insurance companies organized and doing business under the laws of this state and insuring only farm property."

The complainant and many other companies insure farm property and come into direct competition with farmers' mutual companies of the character specified, and the act of the legislature in excepting the latter companies deprives complainant of the equal protection of the laws, and is therefore repugnant to the Fourteenth Amendment of the Constitution of the United States and is unconstitutional and void. clubjuris

Page 233 U. S. 397

The business of fire insurance is private, with which the state has no right to interfere, and the right to fix by private contract the rate of premium is a property right of value; the business is not a monopoly, either legally or actually; it may not be legally conducted by the national government or by the State of Kansas or other states under their respective constitutions, and is not a business included within the functions of government. Neither complainant nor others engaged in fire insurance receive or enjoy from the State of Kansas or any government, state or national, any privilege or immunity not in like manner and to like extent received and enjoyed by all other persons, partnerships, and companies, incorporated or unincorporated, respectively, engaged in the conduct of other lines of private business and enterprises. Complainant therefore is deprived of one of the incidents of liberty and of its property without due process of law, in violation of the Fourteenth Amendment to the Constitution of the United States.

The act distinguishes between fire insurance companies and other insurance companies, individuals, and persons, and distinguishes between insurance and other lines of business, and thereby offends the equality clause of the Constitution of the United States.

Complainant, under protest, filed the general basis schedules of its rates as required by the act, which were arrived at by the process hereinbefore set out. On the 19th of August, 1909, respondent made a reduction of 12% from the rates as filed and from the rates filed by other companies, with the proviso that it should not apply to residence property, churches, schoolhouses, farm property, or special hazards. The order was to become effective September 1, 1909. And it was further ordered that, on and after that date, the exception of churches and dwelling houses should be eliminated. Complainant notified the superintendent by letter that it would, under clubjuris

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protest, and reserving the rights which it had under the law, comply with the provisions of the order.

The risks included in the order, and not excepted therefrom, comprise all ordinary mercantile risks in the state, and that the reduction of 12% will result in a rate which is much less than the cost of carrying the risks.

Respondent is threatening to make further reductions, and it is proposed to revoke the license of any fire insurance company which may violate the provisions of the act, even though the rates fixed by him may be so low as to be confiscatory, and to inflict upon the officers of the company, including complainant, the penalties prescribed for such violation, and such companies and complainant, unless defendant be restrained by injunction, will be obliged to comply with the requirements of the act to their irreparable damage and injury.

Complainant finally alleges that it is not its purpose to attack the orders of respondent on the ground that they were not made in strict compliance with the provisions of the act, but to have the act in its entirety declared to be unconstitutional and void for the reasons alleged, and to have respondent restrained and orders made by him under the provisions of the act enjoined. And such an injunction is prayed.

Respondent filed a demurrer stating that he demurred to so much of the bill as charges the act of the State of Kansas to be repugnant to the Constitution of Kansas and the Constitution of the United States. The demurrer was sustained. Subsequently, upon the bill's being amended, a general demurrer was filed which was also sustained by the court, and the bill dismissed. Prior, however, to this action, it having been suggested that the term of office of Charles W. Barnes as superintendent of insurance had expired, and that Ike Lewis had succeeded to that office and to all of its duties and powers, he was made defendant in the place and stead of Charles W. Barnes. clubjuris

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