Opinion — Hartford Steam Boiler Inspection & Ins. Co. v. Harrison

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SUPREME COURT OF THE UNITED STATES.

No. 355.—Octoner Term, 1936.

Hartford Steam Boiler Inspection and)

Insurance Company and W. M. Appeal from the Supreme

Francis, Appellants, | Court of the State of

vs.

William B. Harrison, Insurance Georg

Commissioner.

4

(May 24, 1937.]

Mr. Justice McReynoips delivered the opinion of the Court.

The Hartford Steam Boiler Inspection and Insurance Company,

a stock corporation organized under the laws of Connecticut carry-

ing on casualty insurance business in Georgia, and its salaried em-

ployee W. M. Francis, citizen of that State, asked the Supreme

Court, Fulton County, for a mandamus requiring the Insurance

Commission to license him as resident agent. The Commissioner

claimed that while duly qualified in all other respects, the employee

could not be so licensed because of the inhibition in Section 1, Act

of the General Assembly, approved March 28, 1935. Georgia Laws,

1935, p. 140.

‘‘No licensed fire or casualty insurance company or company

writing fidelity or surety bonds, shall write or issue any policy or

indemnity contract on any risk in this State except through a resi-

dent agent licensed by the insurance commissioner : Provided. . .

The words ‘resident agent’ as used in this section are deemed to

mean resident agents engaged in the solicitation of such business

from the public generally, and shal! not include any salaried em-

ployee of any insurance company doing business in this State; but

shall include any agents of mutual insurance companies, however

compensated. . . .”’

Appellants claimed that enforcement of the quoted inhibition

' would deprive them of the equal protection of the laws, contrary to

e Fourteenth Amendment.

The trial court ruled ‘‘that said act, in discriminating against

stock companies and the agents thereof, and in favor of mutual

3

,

2 Hartford Steam Boiler Inspection and Ins. Co. v8. Harrison.

companies and the agents thereof, sets up an arbitrary classi-

fication bearing no reasonable relationship to the subject-matter

of the legislation, and is discriminatory, depriving both petitioner,

The Hartford Steam Boiler Inspection and Insurance, Company, as *

an insurance company, and petitioner, W. M. Francis, as an in-

‘ dividual, of their constitutional rights.’ Accordingly, it directed

that mandamus issue.

In the State Supreme Court counsel agreed that the sole question

involved was the constitutionality of the statute. That Court, being

of opinion that the Act prescribed no undue discrimination and-did

not otherwise conflict with the Federal Constitution, reversed the

trial court. The cause is here by appeal.

The applicable principle in respect of classification has often

been announced. It will suffice to quote a paragraph from Lowts-

ville Gas & Electric Company v. Coleman, Auditor, 277 U.S. 32,

37, 38. =

‘‘It may be said generally that the equal protection clause means

that the rights of all persons must rest upon the same rule under

similar circumstances, Kentucky Railroad Taz Cases, 115 U. S. 321,

‘337; Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 293,

and that it applies to the exercise of all the powers of the state

which can affect the individual or his property, including the power

of taxation. County of Santa Clara v. Southern Pac. R. Co., 18

Fed. 385, 388-399; The Raslroad Tax Cases, 13 Fed. 722, 733. It

does not, however, forbid classification; and the power of the state

to classify for purposes of taxation is of wide range and flexibility, —

provided always, that the classification ‘must be reasonable, not ar-

bitrary, and must rest upon some ground of difference having a fair

and substantial relation to the object of the legislation, so that all

persons similarly circumstanced shall be treated alike.’ Royster

Guano Co. Vv. Virginia, 253 U. S. 412, 415; Air-way Corp. v. Day,

266 U. 8. 71, 85; Schlesinger v. Wisconsin, 270 U. S. 230, 240

That is to say, mere difference is not enough: the attempted classi-

fication ‘must always rest upon some difference which bears a re&-

sonable and just relation to the act in respect to which the classi-

fication is proposed, and can never be made arbitrarily and without

‘any such basis.’ Gulf, Colorado & Santa Fe Ry. v. Ellis, 165 U. 8. .

150, 155. Discriminations of an unusual character especially sug-

gest careful consideration to determine whether they are obnoxious

Hartford. Steam Botler Inspection and Ins. Co. vs. Harrison. 3

to the constitutional provision. Compare Martin v. District of

Columbia, 205 U. S. 135, 139; Bell’s Gap R. R. Co. v. Penmsylvama,

134 U. S. 232, 237.’

Despite the broad range of the State’s discretion, it has a limit

which must be maintained if the constitutional safeguard is not to

be overthrown. Discriminations are not to +e supported by mere

fanciful conjecture. Borden’s Company v. Baldwin, 293 U. S.

194, 209. They cannot stand as reasonable if they offend the -plain

standards of common sense. In this instance, the appellant com-

pany had been licensed to do business in the State and was entitled

to equal protection in conducting that business. The answer of the

insurance commissioner admitted that he was ‘‘entirely satisfied as

to the character, standing, responsibility, ability, and knowledge’’

of the proposed agent, and that the license was refused solely be-

cause he was a ‘‘salaried’’ employee. . It is plain that the require-

ment that the resident agents of stock companies should not work

on a salary has no relation to economy or efficiency in management.

The answer of the insurance commissioner states that all of the

contracts of mutual fire and casualty insurance companies are ‘‘ne-

gotiated by salaried employees’’ and that this method of doing

business was adopted ‘‘in order to reduce the expenses of opera-

tion and thus benefit the policyholders themselves.’’

It is idle to elaborate the differences between mutual and stock

companies. These are manifest and admitted. But the statutory

discrimination has no reasonable relation to these differences. We

can discover no reasonable basis for permitting mutual insurance

companies to act through salaried resident employees and exclude

stock companies from the same privilege. If there were any such

basis, it would have been discovered by the state courts. The trial

court said there was none. Two Justices of the Supreme Court

‘were of the same opinion. The prevailing opinion in that court

fails to disclose any good reason for the discrimination. The dili-

gence of counsel for appellee has not been more successful. Thus

the efforts in the state courts, and here, to find support for the

statute have conspicuously failed. Statements as to the extent of

the business written by stock companies are obviously beside the

mark.

7

For the error indicated, the questioned judgment must be re-

versed and the cause returned to the Supreme Court for further

proceedings not inconsistent with this opinion.

Reversed.

SUPREME COURT OF THE UNITED STATES.

No. 855.—OcroBer TERM, 1936.

’ Hartford Steam Boiler inspection and)

Insurance Company and W. M.

Francis, Appellants,

vs.

William B. Harrison, Insurance

Commissioner.

[May 24, 1937.]

Mr. Justice Ropers, dissenting. 4

Appeal from the Supreme

‘ Court of the State of

Georgia.

The appellants petitioned the Superior Court of Fulton County,

Georgia, for a mandamus directed to the appellee as Insurance

Commissioner requiring him to issue a license to Francis, a salaried

employe of the Hartford Company, as an insurance agent for the

writing of casualty insurance in the State of Georgia pursuant to

the Act of the General Assembly of March 28, 1935. The petition

alleged that Francis possessed all the statutory qualifications for

a license save only that he was a salaried employe of the insurance

eompany and that the provision of the statute excluding salaried

employes of insurance companies from licensure is unconstitutional.

Section 1 of the act of 1935' prohibits licensed fire or casualty

insurance companies from writing or, issuing any policy or in-

demnity contract on any risk in the state of Georgia except through

a resident agent licensed by the Insurance Commissioner. The

section requires the applicant for a license to be a bona fide resi-

dent of the state, of good character and competent to perform the

duties of an agent. It farther provides: ‘‘The words ‘resident

agent’ as used in this section are deemed to mean resident agents

engaged in the solicitation of such business from the public gener-

ally and shall not include any salaried employe of any insurance

company doing business in this state; but shall include any agents

of mutua)] surance companies however compensated.’’

The ground upon which the act is held invalid is that it un-

reasonably discriminates between salaried employes of mutual! in-

surance companies and similar employes of stock companies.

1 Act of March 28, 1935. Georgia Acts 1935, p. 140.

Hartford Steam Bower Inspection and Ins. Co. vs. Harrison. 2

The answer alleges that there is a well recognized difference -

between stock and mutual insurance companies in that, in the

ease of the former, the relationship between the company and its

policy-holders is one of contract merely, they dealing at arm’s

length, whereas in the latter the policy-holders are the owners of

the company and constitute its membership. Other well known

differences between mutual and stock msurance are detailed in the

answer and will be referred to hereinafter.

The case was heard upon the petition and answer and the trial

court, in the view that the act was unconstitutional, ordered that a

mandamus issue.” Upon appeal the Supreme Court of Georgia re-

versed the judgment. I am of the opinion that its decision was

right and should be affirmed. .

First. On its face the statute is a proper exercise of the state’s

police power. The provision for licensing only bona fide residents

of the state is valid.* Regulation of the rates charged for insur-

ance, of the relations of those engaged in the business and of the

amount of agents’ compensation fall within the exercise of this

power." The claim here is that the particular regulation is un-

reasonable and discriminatory. The presumption of constitutional

validity must prevail unless the terms of the statute, or what we

judicially know, or facts proved by the appellants, overthrow that .

presumption. As it is conceivable that conditions existed in Georgia

which justified the difference in treatment of the agents of the two

sorts of companies, and as no circumstances are alleged or proved

or are of judicial knowledge which negative the existence of those

conditions, the attack upon the statute should fail.‘

Second. The appellant Francis asserts he is denied equal pro-

tection because agents of mutual insurance companies may be li-

censed even though their compensation consists of a salary rather

than commissions. The answer sets up that mutual insurance com-

panies are organized on a different basis from stock companies, do

business in a wholly different way and-sustain an altogether dif-

ferent relation to‘ their policy-holders than do stock companies.

The is matter of common knowledge. Section 56-1401 of the

gia Code 1933 is: ‘‘The contract of insurance is sometimes

upon the idea of mutuality, by which each of the insured becomes

? La Tourette v. MoMaster, 248 U.-8. 465.

*O’Gorman ¢ Young v. Hartford Insurance Co., 282 U. 8. 251, 257.

*O’Gorman ¢ Young v. Hertford Insurance Co., ewpra, 257-258; Borden's |

Farm Produsts Co. v. Baldwin, 293 U. 8. 194, 208, 209.

-

3 Hartford Steam Boiler Inspection.and Ins. Co. vs. Harrison.

one of the insurers, thereby becoming interested in the profits and

liable for the losses; without a charter, such an organization would

be governed by the general law of partnership ; when incorporated,

they are subject to the terms of their charters.’’ Sections 56-1401

to 56-1433 deal exclusively -with the incorporation and government

of mutual insurance companies setting up for them a system quite

apart from that prescribed for the incorporation and regulation

of stock companies. Thé decision law of the state also recognizes

the fundamental difference between the two kinds of company.’

The Supreme Court of Georgia quoted and relied upon its earlier

decision as to the radical difference between stock and mutual com-

panies and their methods of transacting business, and refused to

hold the classification of the statute arbitrary or unreasonable.

The literature on the subject shows that at its inception the fire in-

surance business in the United States was modelled upon the mutual

companies of Great Britain.” Stock companies, however, were soon

organized and rapidly grew to such proportions that today they

transact about seventy-five per cent of the nation’s fire insurance

business. Local and state mutual insurance companies now write

about ten per cent of the total of fire insurance and are strongest

in agricultural districts and the smaller cities; another ten per

cent of the total business is written by so-called factory mutuals;

the balance is cared for by Lloyd’s associations.”

The principle of assessment upon which mutual companies pro-

ceed is practical only for carrying risks closely uniform in kind

and degree, its chief advantage being low operating cost due to

simplicity of organization and it is said that the sales staffs of such

companies work either ‘‘on & salaried basis or on a lower scale of

commissions than do the representatives of stock companies.’”

There are approximately twenty-five hundred mutual fire and

casualty institutions operating throughout the United States the

vast majority of which concentrate their operations locally within

one or more counties or within a single state. ‘‘These companies

rarely compete with agency represented stock companies and there

has been no apparent inclination on their part to alter the scope

- 8 Carlton v. Southern Mutual Insurance Company, 72 Ga 371.

¢ Ene. of the Social Sciences, Vol. VI, 255; ¥ale Readings in Insurance,

Property, Chapter IV.

1 Ene. of the Social Sciences, Vol. VI, 258.

_ & Ene. of the Social Seiences, Vol. VIII, p. 100.

Hartford Steam Bowler Inspection and Ins. Co. vs. Harrison. 4

of activity or plan of operation. Of the many mutual fire insur-

ance companies probably no more than ten per cent extend their

fields of operation beyond the boundaries of their-home state.’”

Reference to the report of the Insurance Commissioner of Georgia

for 1934, the year preceding the adoption of the statute under

‘review, furnishes interesting data on the relative business of stock

and mutual insurances companies in the state of Georgia. For that

year the total of risks carried by stock fire insurance companies in

the state was $1,512,181,296. Foreign mutual fire insurance com-

panies carried oniy $82,727,816. Two domestic mutual companies

doing a state-wide business carried $73,370,177, and fourteen small

local mutuals carried $10,893,603. Thus, mutual companies carried

about ten per cent of the total fire insurance business of the state

and, of that ten per cent, over one-half was written by Georgia

mutual companies.

While Georgia does not exclude foreign mutuals and requires

them, like foreign stock companies, to register and comply with

certain statutory rules in order to write business within the state,

it is evident that the total mutual business written in Georgia is of

minor importance when compared with the vast amount written by

stock companies. This fact in itself may well be a persuasive rea-

son for not extending to agents of mutual companies the require-

ment that they shall not work upon a salary." When to this is

added the fact that ordinarily such agents work on salary because,

in effect, they are the agents of the policy-holders rather than of

independent owners of a stock corporation, it is plain that there is

reason for classifying them differently from agents of stock com-

panies. In the light of the facts the classification of the agents

of the two sorts of company cannot be said to be arbitrary or un-

reasonable, and so to deny the agents of the stock companies the .

equal protection of the laws. |

Mr. Justice Branpeis, Mr. Justice Stone, and Mr. Justice Car-

bOZ concur in this opinion.

* Best ’s Insurance News, October 1935, p. 314.

1°Compare Citisens’ Tel. Co. v. Fuller, 229 U. 8. 322.