# Bullion v. Aetna Insurance > Supreme Court of Arkansas · January 30, 1922 · 151 Ark. 519 URL: https://www.frixlaw.com/law-library/cases/7811371 ## Case - **Full name:** Bullion v. Aetna Insurance Company - **Court:** Supreme Court of Arkansas - **Decided:** January 30, 1922 - **Citations:** 151 Ark. 519; 237 S.W. 716; 1922 Ark. LEXIS 266 - **Precedential status:** Published - **Opinion:** Concurring in part by Wood - **Judges:** Humphreys, McCulloch, Smith, Wood - **Cited by:** 8 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/7811371 ## Opinion text Wood, J., (concurring in part and dissenting in part). 1. It is contended by the appellant that the method adopted by him to ascertain the underwriting profit is favorable to the State and to the people, and that the method contended for by the appellees is favorable to themselves and no others. On the other hand, it is contended by the companies that it would be destructive to the insurance 'business in this State to write insurance on rates fixed upon the basis of premiums received and losses and expenses paid instead of premiums earned and losses and expenses incurred. J. G. Leigh, the general agent for ten insurance companies, testified that it would be ruinous to the insurance companies if they were required by the act under review to write insurance according to rates fixed by the method adopted by the Insurance Commissioner in determining the five per cent, of underwriting profit allowed by the statute; and that such method would result in driving the insurance companies out of business in this State. If this statement be correct, then it is manifest that no greater calamity in a business way could befall the people of this State than the passage of this law. For, it is well known that adequate insurance is a basis of credit and security in practically all lines- of business, and the Legislature would be doing the people of the State an irreparable injury and. a great wrong to deliberately enact, laws that would paralyze commercial and other business transactions. These respective contentions lead me to observe that if the Legislature intended by the use of the term “underwriting profit” to adopt'the method of computation used by the Commissioner to ascertain such profit, then it would be the duty of this court to so interpret the law, even though it had the effect of driving out every insurance company now engaged in business in this State. On the other hand, if it was the intention of the Legislature by the use of-the term “underwriting profit” to adopt a “trade term” which had a well understood and well defined meaning in trade circles, having certain definite and fixed methods of ascertainment by those engaged in the business of insurance, then it is the duty of the court to interpret the statute so as to give effect to the intention of the lawmakers as derived from the language of ihe enactment, regardless of whether such interpretation is favorable or unfavorable to the insurance companies or to the people of the State carrying insurance. In other words, the wisdom and policy of this law was addressed solely to the Legislature. Neither the Commissioner, nor the courts, out of any considerations of expediency, are authorized to give the act an interpretation which is plainly repugnant to the legislative purpose as expressed in the language of the act itself. We must interpret the act as we find it, regardless of the effect it may have on the insurance companies or those who buy insurance. See Little Rock v. North Little Rock, 72 Ark. 195 -201 and other cases cited in inv dissenting opinion in St. L. I. M. & S. R. Co. v. Webster, 99 Ark. 265 -290-291. The judiciary has no power to impute to the General Assembly any other than an honest intention through its enactments to promote the public weal. Grigsby’s Criminal Law, 17, sec. 21; State ex rel. Linde v. Taylor, 33 N. D. 76 , Am. Cas. 1918-A 538; People v. Glenn Co., 35 Pac. 302 -4; U. S. v. Des Moines, etc., Co., 142 U. S. 510 -44; Atchison, T. & S. F. R. Co v. State, 40 L. R. A. (N. S.) 1 and note, p. 29. Mr. J. G. Leigh testified that he was the general agent for ten insurance companies doing business in Arkansas; that he wrote every word of the act under review — -“fought, bled and died for every word of it”; that it was his purpose to create a condition fair and equitable and just to the insurance companies and to the people of the State who were buying insurance; that he was not representing the insurance companies in drafting it; that they objected strenuously to some of its provisions. This testimony, of course, could only mean that he drafted the bill which the Legislature, through its appropriate committees, and otherwise, investigated, and approved by enacting the same into a law. It was exclusively within the legislative function to fix the maximum per cent, of “underwriting profit.” It could have designated a greater or less per cent, than the five per cent, named; or it could have left the matter entirely to the judgment and discretion of the Insurance Commissioner to determine what would be a fair and reasonable per cent, of “underwriting profit.” It could have prescribed the particular methods which the Commissioner should use in malting the computation to ascertain whether the companies had made a profit exceeding the, five per cent, named; or, if unnamed, the specific methods to be used in determining what was a fair and reasonable profit. This the law-making power did not see fit to do, but on the contrary expressly used the term “underwriting profit” without further definition or explanation. All of which unmistakably shows that the trade term “underwriting profit” was used in the technical sense, i. e., with the meaning which that term has in insurance circles. The testimony of witness Leigh showing the history and source of the act under consideration is illuminating, because it shows that the Legislature adopted the draft of the bill as it came from the hands of one whose position and long experience in the insurance business made him familiar with the meaning of the term “underwriting profit” and the methods used in insurance circles to determine same. Mr. Leigh’s testimon}^ and that of every other insurance rate expert shows that in insurance circles and according to insurance terminology the words “underwriting profit” have one and only one definite and well understood meaning; that meaning is arrived at by one and only one definite method of calculation. That meaning is: “What the companies have left over from the premiums earned after deducting the losses and leixpenses incurred” during the period designated. All of the witnesses give the same definition in practically the same language. To quote from one is to quote from all. Frank M. Speakman, who was employed by the appellant in the examination of different insurance companies from time to time as consulting actuary, and who was not in the employ of, or connected with, any insurance company, testified: “I am familiar with the Arkansas act of 1919 under consideration and know that the phrase “underwriting profit’ used in the act lias had for a number of years among accountants and the insurance fraternity a well established and well defined meaning. It has only meant one thing, and that is the profit left over after the company has been charged with premiums earned andtaken credit for losses and expenses incurred. ’ ’ The record shows that the committee of the National Convention of Insurance Commissioners, composed of commissioners of eleven States, and the actuarial bureau committee of the National Board of Fire Underwriters recommended the same method of ascertaining underwriting profits as is shown by the testimony of the insurance rate experts above. The appellant alone dissented from the views of these committees. Since the Legislature used the trade term “underwriting- profit” and nowhere in the act used any language indicating that it had employed this term in any other than a technical sense and with the meaning given it by those engaged in the insurance business, it must be conclusively presumed that the Legislature intended that the words “underwriting profit” should have the meaning given them in insurance circles. To ascertain what that meaning is, the testimony of insurance rate experts and the recommendation of the committees of the National Convention of Insurance Commissioners and of the National Board of Fir ' Underwriters were all competent evidence to prove the meaning of the term “underwriting- profit.” See National Union Fire Ins. Co. v. Dickinson, 128 Ark. 367 . If not the undisputed, at least the overwhelming, weight of the evidence shows that the meaning of the term is as above set forth in the testimony of Leigh and Speakman. Unless we shut our eyes to the facts and refuse to respond to the preponderance of the evidence, and fail to apply the law applicable thereto, the only correct conclusion on this branch of the case is that reached by us and voiced through the opinion of Mr. Justice Smith. He has stated the reasons for the conclusion of the majority on this subject with great cogency and clearness and has cited the authorities to sustain the views there expressed. I know of no authorities to the contrary. I wish, therefore, to express my unqualified concurrence in all that he has said of the meaning of the words “underwriting profit” used in the statute. From my viewpoint, there is no well founded room for a difference of opinion. Moreover, even if there had been no testimony in the record explaining the meaning of the technical term “underwriting profit” this court, applying business principles and correct rules of accounting, could have only reached the same conclusion without the aid of the testimony of insurance rate experts, that it has arrived at with such aid. For, to my mind, applying to the insurance business sound rules of bookkeeping and accounting —the tests applied in any ordinary business — the premiums earned represent the actual income or profits and the losses incurred (which includes expenses) represent (he losses. Therefore, deduct from the premiums earned the losses incurred, during any given period, and the result will show the net profit or loss for such period. For any given period this method represents a closed business transaction, and is a sound rule of computation. Any other would be mere speculation. See the able opinion of the House of Lords and Privy Council in Sun Insurance Office v. Clark, “House of Lords and Privy Council” Appeal Cases (1912) p. 443. 2. The statute makes any action of the Insurance Commissioner in the matter of determining whether or not the companies have made an aggregate underwriting profit in excess of five per cent, subject to “summary review in any court of competent jurisdiction.” Sections 5968 and 5969, Crawford & Moses’ Digest. The Insurance Commissioner, in making his computation, refused to allow the insurance companies credit for the Federal income and excess profits taxes as an element or item of expenses incurred, and refused to allow the companies credit as expenses incurred for such proportion of those taxes as should be borne by the underwriting end of the business in this State. The chancellor found that the “Insurance Commissioner should allow as expenses that part of .the income and excess profits taxes and all other taxes paid or incurred to the United States Government during the five-year period which is properly apportion-able to the underwriting business done in Arkansas.” The majority of the court reverses the finding and decree of the chancellor in this particular and sustains the finding of the Insurance Commissioner. I find myself unable to concur with my associates in this conclusion. I am convinced that the chancellor was correct in his decree and finding in this as well as all of his other findings. His decree, in my judgment, should be affirmed throughout. As I understand, the undisputed testimony shows that the Federal income and excess profits taxes allocated to the underwriting end of the business in this State, incurred and paid during the five-year period, amounts to the sum of $72,000, or about one per cent, of the total expenses incurred. Under the statute the Insurance Commissioner is not allowed to order any reduction in rátes until there has been an underwriting profit in excess of five per cent. As I construe the statute, it guarantees to the companies a net profit, of five per cent, on the underwriting end of their business in this State. Now, there is no.net profit in the business of insurance, or in any other business for that matter, until all the expenses of every character, including both State and Federal taxes as well as every other legitimate and necessary expense of carrying on the business, have been deducted from the gross income of such business. There is no more reason for deducting the State taxes as a necessary expense of the business than Federal taxes. These taxes, both State and Federal, are burdens on the business that must be borne. There is no escape from them. Assuming, as we must, that the companies are doing an honest and legitimate business, the Federal income and excess profits taxes are inescapable expenses incident to the business; as much so as office rent, agency service, or any other legitimate expense required in the operation of the business. Would any bank, insurance company, mercantile firm, or corporation of any character, or any individual engaged in any business enterprise leave out of their loss account the taxes incurred, during any given period in casting up an account of profits and losses on such business for such period? Certainly not. No correct system of accounting would justify entering any amount to the credit of the surplus account in any business until it had been first ascertained that there was an excess of income over outlay in the necessary conduct of the business. There is a vast difference between constitutions or statutes which merely protect public utilities in the right to a fair and reasonable return on their business and those statutes which guarantee a certain fixed per cent, or profit.. See Galveston Electric Co. v. Galveston, 272 Fed. 272 . Our statute, as I construe it, guarantees the insurance companies doing business in this State during the period named, in the aggregate an underwriting profit of five- per cent. That amount is definitely named as the maximum limit of underwriting profit. But they are entitled to, and are guaranteed, that much before the Insurance Commissioner is authorized to order any reduction in rates. I cannot comprehend the logic that leads to the conclusion that these taxes are not a necessary part of the expenses incurred, because, forsooth, they are laid by the general government on the income and profits of the business in solido; that is, including both the underwriting and investment or banking end of (he business. These taxes are levied and paid, it is true, upon the business of the companies as, a whole. They are an expense and burden to the business as a whole, but the underwriting end necessarily bears its proportion of the burden, and, assuming that the books are properly kept, as we must, no doubt these taxes are properly apportioned and distributed respectively to the underwriting and banking ends of the business. If they are not, it is certain that they can and should be. In determining whether or not there is a profit in excess of the five per cent, guaranteed by the statute these taxes should be apportioned and the companies given credit for the amount so apportioned to the'underwriting end as necessary expenses incurred in carrying on that end of the business. See Consolidated Gas Co. v. Newton, 267 Fed. 231 -259. Also Municipal Gas Co. v. Public Service Commission, 186 N. Y. Sup. 541-549. If these taxes, as the proof shows, when apportioned to the underwriting business in Arkansas, amounted to about one per cent., then, if the Commissioner fails to allow the companies credit for these taxes as a part of their expenses, instead of receiving the five per cent, which the statute guarantees them, they would receive only four per cent. It is not for the Commissioner or this court to say that they are only entitled to four per cent, net profit when the statute expressly guarantees them five per cent. In re Mutual Telephone Co., P. U. R. Anno. 1921-B p. 209, it is held by the Public Utilities Commission of Hawaii in an able opinion by Carden, the chairman of the commission, that all taxes, Federal and territorial, should be allowed as proper expenses of operation. Adopting in substance the language of that commission, if income taxes are disallowed as incurred expenses of the business, the net result is that, instead of being allowed the five per cent, which the statute.guarantees, the amount really allowed by the Insurance Commissioner would be five per cent, less the one per cent, of income taxes which the companies are compelled to pay. It seems to me, therefore, that the income and excess profits taxes should be considered as a part of the legitimate expenses incurred in carrying on the business, and that the insurance companies do not receive a net clear profit of five per cent, unless they are given credit for these taxes in the computation made by the Commissioner. Such was the view of the learned chancellor. His findings and decree are correct in all particulars, and should be affirmed. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/7811371. Public record. Not legal advice.