314 Mass. 558 | Mass. | 1943
The Massachusetts Accident Company, a domestic insurance company formerly doing an accident and health insurance business only, after having been the subject of a rehabilitation proceeding under G. L. (Ter. Ed.) c. 175, § 180B, as inserted by St. 1939, c. 472, § 3, and having later been adjudged insolvent, is now in process of liquidation by the commissioner of insurance as receiver appointed by this court for that purpose under the provisions of G. L. (Ter. Ed.) c. 175, § 180C, as inserted by St. 1939, c. 472, § 3. Various questions have arisen as to the allowance and priority of claims and the ascertainment of the assets of the company for the purpose of distribution. Issues of fact have been, determined by a master whose original and supplemental reports have not yet been confirmed.
Section 180C provides in part that the commissioner as receiver “shall endeavor to obtain a proposal from a solvent company or companies to take over or assume the policies of the company [of which liquidation has been ordered] in whole or in part, or to take over or assume, on modified terms, the liabilities of the company to its policyholders, and shall submit to the court such proposal as he deems best for the interest of the policyholders.” Accordingly the receiver sought and obtained from the Union Mutual Life Insurance Company, organized under the laws of Maine, a “Reinsurance and Management Agreement,” hereinafter referred to as the Reinsurance Agreement or the agreement, which he was by decree of the court in this cause, dated February 23, 1940, authorized to execute, and which he did execute on that day. The questions before us are affected in various ways by the provisions of the Reinsurance Agreement to which we now refer in brief outline, leaving further details to be státed in connection with matters hereinafter discussed to which they particularly relate.
There were about thirty-five thousand holders of cancellable policies and four thousand nine hundred sixty-six holders of noncancellable policies, exclusive of fourteen policies in dispute. Of these four thousand nine hundred sixty-six noncancellable policyholders, one hundred eighty-seven were disabled and entitled to benefits, and four thousand seven hundred seventy-nine were nondisabled, or as
1. Preliminary to several of the other issues is the question raised by the receiver and others whether the claims of policyholders upon these accident and health policies are contingent claims and therefore not provable against the insolvent estate except subject to the conditions prescribed in § 180H hereinafter set forth. We are not here concerned with claims accrued and actually due and payable on February 23, 1940, the date when liquidation was finally ordered, for disability suffered before that date. Obviously such claims were not “contingent.” See Attorney General v. Equitable Accident Ins. Association, 175 Mass. 196. We are here concerned with claims of policyholders who, because of the insolvency of the company, have lost the rights their policies would have given them of indemnity for disability which they might suffer after February 23,1940. One paragraph of G. L. (Ter. Ed.) c. 175, § 180C, under which this liquidation is proceeding, reads, “The rights and liabilities of the company and of its creditors, except those holding contingent claims, and of its policyholders, stockholders or members, and of all other persons interested in its assets, shall, unless otherwise ordered by the court, be fixed as of the date of the decree ordering liquidation. The rights of claimants holding con
In our opinion the policyholders in general have claims which are in their nature provable and which are not “contingent” as that word is used in the statute for any loss of future rights under their policies, which they may have sustained in consequence of the ■ insolvency of the company. It is true that the nondisabled policyholders might never become disabled, and that those already disabled before February 23, 1940, might not continue disabled or might die and so cease to become entitled to benefits. Whether the nondisabled policyholders would ever receive benefits, and whether the disabled policyholders would continue to receive benefits was therefore uncertain on February 23, 1940. Nevertheless both classes of policyholders had contracts under which they were entitled to insurance protection, and those contracts, or at least some classes of them, must have had value. The policyholders have been deprived of their contracts by liquidation of the company. In effect the company has completely broken its contracts of insurance with its policyholders and is no longer accepting their premiums and giving them protection. Upon the
In Carr v. Hamilton, 129 U. S. 252, at page 256, the court said, “By that act [going into liquidation] the company becomes civiliter mortuus, its business is brought to an absolute end, and the policy holders become creditors to an amount equal to the equitable value of their respective policies, and entitled to participate pro rata in its assets.” The great weight of authority supports this view. Fuller v. Wright, 147 Ga. 70, 72. Shloss v. Metropolitan Surety Co. 149 Iowa, 382, 384. Casteel v. Kentucky Home Life Ins. Co. 258 Ky. 304, 308. People v. Palmer, 363 Ill. 499, 508. American Casualty Ins. Co.’s Case, 82 Md. 535, 570. Dean & Son’s Appeal, 98 Penn. St. 101. Commonwealth v. American Life Ins. Co. 162 Penn. St. 586. People v. Security Life Ins. & Annuity Co. 78 N. Y. 114, 124, 125. People v. Commercial Alliance Life Ins. Co. 154 N. Y. 95, 99. Davis v.
Our view that the claims of policyholders who have not yet suffered loss are not contingent claims within the meaning of § 180H is strengthened by the language already quoted from § 180C wherein the phrase “except those holding contingent claims” seems to qualify the preceding word “creditors” and to have been intentionally so placed that it would not qualify the following words “policyholders, stockholders or members” and “all other persons interested in its assets,” thus singling out “creditors” whose claims are contingent as distinguished from “policyholders” and others as the “claimants holding contingent claims” whose rights are to be determined as provided in §§ 180G and 180H. Some light as to the classes of claims that are regarded as contingent may also be derived from § 180G where causes of action by persons not parties to the insurance against persons insured under liability policies are referred to as possibly contingent. Such claimants have no direct contract relation with the insurance company and have lost nothing unless they succeed in establishing in some manner the liability to them of the persons insured. Their claims may well be regarded as “contingent.” Compare Matter of Empire State Surety Co. 214 N. Y. 553, where the claimants were policyholders.
Our attention has been called to decisions holding under varying circumstances that claims for future instalments of
We conclude that all policyholders who were such on February 23, 1940, the date of the decree fixing the rights and liabilities of the company and of its noncontingent creditors, whether such policyholders were then disabled or not, and whether they had cancellable or noncancellable policies, held noncontingent claims for loss of their contracts, which claims were provable in their nature, if their policies then had value ascertainable in any reasonable way, and if they have suffered loss of that value. In a “straight liquidation” proceeding, unaffected by any reinsurance agreement,
2. We come next to the problem of ascertaining the value of the policies for the purpose of fixing the amounts of the policyholders’ claims against the company.
Throughout the discussion of this matter and of other matters hereinafter dealt with it must be kept in mind that § I860 provides that the rights and liabilities of the company and of its policyholders and of all other persons interested in its assets shall, unless otherwise ordered by the court, be fixed as of the date of the decree ordering liquidation. The wording of that section makes it clear that that date may be, and seemingly is expected to be, prior to the negotiation and approval of any reinsurance agreement. (See second paragraph of § 180C.) Although in this instance the date was fixed by the decree of February 23, 1940, as of that day, and the Reinsurance Agreement was authorized by the same decree, we think it was the legislative design that the distributive shares to which claimants, who, having by the terms of the agreement a right of election, choose to rely upon their rights in liquidation rather than to accept any agreement modifying those rights, might become entitled should be determined as if ordinary liquidation had begun on the date fixed and had proceeded to the end without any reinsurance agreement. See Doty v. Love, 295 U. S. 64; Neblett v. Carpenter, 305 U. S. 297, 303-305. In this way, if a reinsurance agreement is in fact negotiated and approved by the court, policyholders having a right of election may accept its benefits if they see fit, but if they do not see fit, or if no agreement is negotiated and approved, their rights will be determined as in ordinary liquidation without regard to reinsurance. It follows for this and other reasons that the terms of the Reinsurance Agreement are not available as a measure of the rights of nonassenting policyholders. Moreover, the Reinsurance Agreement was the result of a bargain with a different company (the Union Mutual) and contains provisions entirely foreign to the original poli
It is obviously wholly impracticable to attempt to determine, with respect to the particular state of health and circumstances of each policyholder, the probability of his becoming disabled at some future time or, if he is already disabled, the probability of his continuing to live and to remain in that condition. No one interested in the case advocates such a method of valuing claims. Some conventional method of estimating chances on principles of average experience similar to those on which insurance risks are always calculated must be sought. See People v. Security Life Ins. & Annuity Co. 78 N. Y. 114, 126, 127.
In the record before us and in the briefs little is said about the possible claims of the approximately thirty-five thousand holders of cancellable policies. Probably this is because of the cancellable element in their policies and because by assenting to the Reinsurance Agreement they became fully reinsured and suffered no loss. Possibly all have assented to the agreement. At any rate it does not appear that any have sought to prove claims. No argument has been made as to their rights, and we do not attempt to determine whether, if they did not assent to the agreement, they could have established any such actual damage as to entitle them to prove claims.
The valuation of the claims of holders of noncancellable policies presents difficulty. These policies were worth more to the policyholder not only because their terms were advantageous to him and disadvantageous to the company and they could not be cancelled but also because of the level premium feature, as a result of which premiums paid in earlier years when the risk was smaller helped to carry the policy through later years when the risk became greater, thereby building up an "equity” in the policy. See New York Life Ins. Co. v. Statham, 93 U. S. 24, 30. This is fully explained in Massachusetts Protective Association, Inc., v. United States, 114 Fed. (2d) 304, at pages 309-310. Some of the nonassenting claimants under noncancellable policies
In this case as in many others the law must adopt a rule of damages which can be applied generally without undue difficulty and which will approach the theoretically perfect method as closely as circumstances will allow. In our opinion the plan proposed by the receiver in general fulfills these conditions. He contends that the value of the insurance coverage of the noncancellable policies held by persons not disabled on February 23, 1940, is the present value as of that day of the benefits that would have been payable to their holders if there had been no insolvency, less the present value as of that day of the gross premiums which would have become payable upon the policies, but which, because of the insolvency, need not now be paid. In order to carry this plan into effect he has calculated a so called “reserve” representing the company’s total “liability” on these policies, amounting in all to $2,525,557, and consisting of two items, an “unearned premiums” reserve of $162,200.39, which we understand represents pro rata unearned premiums, and a further sum of $2,363,356.61, designated “Additional Active Lives (Non-Disabled) Reserve,” which represents the accumulation of value that ought to be in the policies because of the level premiums. This Additional Active Lives Reserve was calculated from the actual experience of the accident company in writing noncancellable policies between 1915 and 1938 (which the master found to be sufficiently broad for this purpose), with the aid of standard disabled life and mortality tables. If correctly calculated and actuarially sound, this Additional Active Lives Reserve would represent a sum sufficient so far as actual losses are concerned (i.e. disregarding operating expenses) to carry the noncancellable policies of non-disabled policyholders from February 23’, 1940, to full completion. It would be the net present worth of the future benefits to be anticipated from the policies. It would be a sum which a solvent company would actually possess and would include in the investments appearing on the
(a) It is contended that in calculating that “reserve” the present value of future net premiums instead of the present value of future gross premiums should be deducted from the present value of future expected benefits. The difference between gross and net premiums is the “loading,” and it is argued in substance that the receiver’s method of calculation leaves the loading with the company, and that if policyholders sought reinsurance in other companies they would have to pay loading on their new policies. But we think that since damages cannot be assessed on the basis of unobtainable comparable policies, the measure adopted must simply be that which will as nearly as possible put the policyholders in as good financial position as they would have been in if there had been no breach. John Hetherington & Sons, Ltd. v. William Firth Co. 210 Mass. 8, 21. Bucholz v. Green Bros. Co. 272 Mass. 49, 54. This can be done most consistently by allowing the claimants what they would have got out of their contracts less what it would have cost them to get it. What they would have got would not have been affected by the expense to the company of doing business, and the cost to them would have been the gross premiums. We think that gross premiums were rightly used in the calculation. The “reserve” thus calculated would be sufficient, so far as the premium element used in calculating it is concerned, to pay them what they would be entitled to receive. It is therefore, so far as this element is concerned, a proper “reserve” to set up on the “liability” side in stating the company’s condition.
(b) It is contended that three per cent interest tables ought to have been used instead of the three and one half per cent tables that were actually used. The master found that three and one half per cent is a standard rate which has been in use for many years; that three per cent “is coming into more common use now that there has been a shrinkage in interest earnings”; that it is “an open ques
(c) The receiver states in his brief that some of the claimants contend that a so called “1937 Standard Annuity Table ” ought to have been used in computing the Additional Active Lives Reserve. If this contention is still made, it is disposed of by the further finding that this table is “wholly inappropriate” for any such group as the policyholders of the accident company because it is based on experience of life insurance companies with annuitants as to whom as a class there is “a terrific selection against the company in the matter of longevity.”
(d) It is further contended that the Additional Active Lives Reserve, as computed by the receiver, is inadequate because it assumes renewability of the policies only to age sixty (or for five years in cases of policyholders over fifty-five), whereas some of the policies were renewable for life. Concededly this is a defect in the calculation which should be remedied if possible, but the master finds that there are no reliable actuarial tables from which the rate at which nondisabled policyholders over sixty-five years of age will become disabled can be computed. The rate of becoming disabled increases with age, but since the coverage extends only to disability to perform duties pertaining to an occupation or business, and since the number of policyholders engaged in gainful occupations decreases with age, the rate of compensable disability might not increase after age sixty-five. The master finds, however, that an assumption that the rate of becoming disabled would remain constant after age sixty-five “would be favorable to the respondent com
(e) In one of the briefs the suggestion is made that the Additional Active Lives Reserve should be further corrected by making an allowance in computing the present value of premiums for “waiver-of-premium during disability” riders or for other riders on some of the policies. The record furnishes no basis for any correction in this respect. Moreover, on the master’s findings it must be assumed that any pertinent riders have already been taken into account in calculating “the present value of the gross premiums expected to be paid in the future” which was deducted from the present value of the expected benefits in computing the Additional Active Lives Reserve.
We next turn to the disabled claimants holding noncancellable policies. The master finds that the receiver has calculated a claim “reserve” for claimants of this class amounting to $2,431,252. He finds “on all the evidence” that the computation of this reserve “was made in accordance with sound insurance practice, and that said reserve was reasonable.” No attack has been made upon this “reserve,” and it must be taken as a proper item of “liability” against the claims of disabled noncancellable policyholders from which the provable amounts of their claims may be
3. Questions of priority have arisen. In the absence of a statute we see no reason why the claim of a disabled policyholder in a company of this kind should have priority over the claim of a nondisabled policyholder or over that of an ordinary creditor who is not a policyholder. All are creditors of the company having provable claims, and upon general principles they should share in its assets pari passu. The authorities are to that effect. Boyd v. Wright, 148 Ga. 216. Relfe v. Columbia Life Ins. Co. 76 Mo. 594. People v. Security Life Ins. & Annuity Co. 78 N. Y. 114, 128-129. Commonwealth v. American Life Ins. Co. 170 Penn. St. 170. In re International Life Assurance Society, L. R. 5 Ch. 424. See cases collected in 1 Am. L. R. 598. Compare Attorney General v. Massachusetts Benefit Life Association, 171 Mass. 193, and Attorney General v. American Legion of Honor, 206 Mass. 131, 138, dealing with fraternal benefit orders.
But our attention is called to a statute. General Laws (Ter. Ed.) c. 175, § 46, provides that “When any domestic company becomes insolvent . . . claims for unpaid losses under its policies, other than life or endowment policies or annuity or pure endowment contracts, shall, in the distribution of its assets, whether liquidation is effected by a receiver or otherwise, be deemed and treated as preferred over claims for return premiums on cancelled or unexpired policies.” Whether or not the claims for the future of holders of noncancellable policies who were , already disabled on February 23, 1940, are “claims for unpaid losses,” as it is said they are customarily considered to be in insurance practice, we are of opinion that claims of nondisabled holders of such policies are not “claims for return premiums.” For reasons already stated we hold that these claims are to be proved on the theory of damages recoverable for the loss of the policies and that they are to be assessed at the present worth of the probable future benefits that would have been derived
There are, however, a few claims of policyholders which we think entitled to priority. From the first appointment of the receiver on August 23, 1939, until the decree of February 23, 1940, the receiver continued to pay in full in the due course of business the losses as they accrued on policies. He did this under the authority of decrees of the court which permitted the continued payment of losses in order to preserve the business and its organization for rehabilitation or for transfer in the event of reinsurance and to prevent the business from disintegrating. When the receiver took over, some claims for accrued losses actually sustained were unpaid and were disputed by the company. The receiver continued to contest these claims until after February 23, 1940, and did not pay them, although all similar claims not in dispute were paid. Some of these claims have since been or may be established through proper proceedings, among them being a claim of Susan L. Stone, administratrix of the estate of Peter Stone, which has now been reduced to judgment in New Jersey and the amount of which is not now in dispute. Although the receiver may have been justified in contesting these claims, there is a certain lack of equity in a receiver paying in full the great bulk of claims of certain types from property in the custody of the court on the ground that such payment is a measure of preservation of the estate and at the same time refusing to pay a few other claims of the same kind to which the same reason was applicable and which would have been paid in full if the receiver had not been unsuccessfully contesting
4. It is contended by certain claimants who have not assented to the Reinsurance Agreement that the claims held on February 23, 1940, by holders of noncancellable policies who later did assent should be entirely ignored or excluded from consideration in determining the proportion of the provable claims of nonassenters that should be paid by the receiver. If this contention were adopted the result would be that the nonassenters would be paid one hundred per cent of their proved claims, and the sum ultimately to be paid over to the Union Mutual to add to the “non-can” fund for the benefit of those who did assent would be correspondingly reduced, thus giving the nonassenters an advantage over the assenters and much more than they would have received if the company had been liquidated immediately without any attempt at salvage through the Reinsurance Agreement. This contention allows little or no weight to the broad general plan of § 180C, to which attention has already been called, that the rights and liabilities of the company and of its creditors, policyholders, stockholders and members, and of all other persons interested in its assets should, unless otherwise ordered by the court, be fixed as of the date of the decree ordering liquidation, and it overlooks the provisions to the same effect in the decree of February 23, 1940, that the rights and liabilities of the company and of its creditors, policyholders, stockholders, and of all other persons interested in its assets should be
The nonassenters contend that they have found sufficient reason in the first of two consecutive paragraphs contained in the Reinsurance Agreement. Since it is plain that the two paragraphs must be read together and not separately we reproduce both paragraphs in the order in which they appear in the agreement.
"Any person accepting the benefits herein contained
“Any person accepting the benefits herein contained or deemed to have accepted and assented to and be bound hereby, as above provided, shall thereby be conclusively deemed to have sold, transferred and assigned to the Receiver for the purpose of carrying out this agreement all his claim to and all his right, title and interest in and to all assets and other property of the Accident Company and the Receiver and any and all dividends or distributions to which he would be entitled upon and from the liquidation of the Accident Company in the above mentioned proceedings.”
The argument of the nonassenters is that by the first of these paragraphs those who assented released all provable claims; that they had nothing left to assign to the receiver under the second paragraph; and that the second paragraph was therefore intended only as in the nature of a still further release or further assurance in support of the release contained in the first paragraph. We cannot agree. Whether these two paragraphs are phrased in the most happy manner or whether, if literally read, they may be inconsistent, is not worth extended discussion. If these two paragraphs are projected upon the background already described and are read in connection with the statute, the decree, and the Reinsurance Agreement as a whole and in the light of the purpose intended to be accomplished, the overall meaning is reasonably clear. The first paragraph makes it plain that the assenting policyholder is to release all right actually to prove for his own benefit any claim in the receivership, and so far as he himself is concerned he is to look solely to his rights against the Union Mutual under the agreement. The second paragraph is a device for keeping ostensibly alive the claims of assenters to the extent of using them in ascertaining the total of all provable claims as of February 23, 1940, in order to calculate the rate of
For the purpose of calculating the rate of dividend to be paid to nonassenters the assets must also be taken at their value as of February 23, 1940, before any payment was made by the receiver to the Union Mutual for the “non-can” fund or otherwise under the agreement. Consistency requires this. The nonassenting policyholders and the general creditors who were not policyholders at all and never had a chance to assent or dissent cannot be deprived of the benefit of assets turned over to the Union Mutual, since in “straight liquidation” proceedings they would have had the benefit of those assets. There is no provision to the contrary in Part II, paragraph 3, of the agreement. That paragraph seems to us to recognize that assets turned over by the receiver to the Union Mutual must be treated as assets of the company so far as affects the rights of nonassenters. Paragraph 3 also recognizes that the court is not necessarily bound to accept the method there provided for valuing these assets.
5. Questions arise as to whether the value of the cancellable business, together with the agency organization and the good will of the company as a going concern, should be included as an asset in calculating the dividends on proved claims, and if included at what value it should be taken. Although the noncancellable business had been conducted at a loss and had no value, the cancellable business, in connection with the agency organization and good will of the company, on the findings of the master, had a value even as late as February 23, 1940. This asset was capable of preservation and sale separately from the noncancellable business. The Reinsurance Agreement demonstrates that fact, although that agreement was more than a mere sale of the cancellable business. The master finds that it is difficult to ascertain the value of this business with any degree of accuracy. He nevertheless finds “on all the evidence” that “said assets had a value of at least $200,000” (italics ours). In view of the terms of the decree of recommittal after which the master made this finding it must be presumed that he made it “upon a solid foundation of fact and not upon guess or conjecture.” The evidence is not before us. The subsidiary findings are not inconsistent with the final conclusion. On the contrary they indicate that the master was fully aware of the difficulties involved in valuing assets of this kind and that he scrupulously carried out the direction of the court to find “a minimum valuation” which the evidence would support, even if beyond that there might possibly be additional value not capable of ascertainment by adequate proof. The receiver contends in substance that the value of the cancellable business should be ascertained by what the Union Mutual paid for it as shown by figures in the Reinsurance Agreement, But one sufficient reason why
We have dealt with all matters presented and argued. An interlocutory decree is to be entered overruling all exceptions to either of the master’s reports and confirming the reports, subject, however, to any finding the single justice may make in the matters hereinbefore left open as to exactly what sum is the net present value as of February 23, 1940, of the total expected benefits payable to nondisabled holders of noncancellable policies, and a decree, final as to the matters here determined, is to be entered in accordance with this opinion.
Ordered accordingly. ■
Commonwealth v. Massachusetts Mutual Fire Ins. Co. 119 Mass. 45, 51. Merrill v. Commonwealth Mutual Fire Ins. Co. 171 Mass. 81. Attorney General v. Equitable Accident Ins. Association, 175 Mass. 196. Shloss v. Metropolitan Surety Co. 149 Iowa, 382, 384. People v. Commercial Alliance Life Ins. Co. 154 N. Y. 95. Dean & Son’s Appeal, 98 Penn. St. 101. But it is held otherwise as to claims for instalments of rent accruing after the receivership. International Paper Co. v. Priscilla Co. 281 Mass. 22, 36.
It is true that § 180H provides for the possible case of a “surplus,” but it is not» believed that this was expected to be a usual and normal event in liquidation.