Bothwell v. Employers Underwriters Agency, Inc.

³⁷ Offutt, J., delivered the opinion of the Court. In 1915 Edward C. Myers was employed by the National Mutual Safety Insurance Company, a Delaware corporation, operating in Philadelphia, which was engaged in the business of insuring its policy holders against losses which they might sustain as a result of strikes on the part of their employees; In that year the company, because of financial reverses, discontinued its business, and in consequence Myers was thrown out of employment. He had, however, from his work in it, become interested in the subject of strike insurance, and he devoted the next three years of his life to gathering actuarial data, statistics, and information pertaining to that subject and to the investigation and study of labor conditions, and other matters germane to it. As a result of his investigation he became convinced that a company organized to write strike insurance, if properly managed, would be practicable, would serve a useful purpose, and would be a profitable undertaking, and he succeeded in interesting a number of persons in Baltimore in his plans to such an extent that they agreed to “back” him in the organization of such a company, and with their encouragement he at once set about carrying out the plan which he had conceived.

In pursuance of that purpose the Employers Mutual Insurance and Service Company was, on November 18th, 1918, incorporated, to “conduct the business of insurance on the mutual plajn without capital stock against losses caused directly or indirectly by strikes or walk-outs, of the employees of the persons insured.” And on December 1th, 1918, the Employers Underwriters Agency, Incorporated, was incorporated, as stated by the appellants, “to act as a general agency of insurance companies, to solicit business for insurance companies, to enter into agency agreements with insurance companies, to conduct the business and affairs of such companies, and to act as agents thereof in all respects, and for other purposes.” The capital stock of the agency company “consisted of 1,000 shares of preferred stock of the ³⁸ par value of $50.00 each and 1,000' shares of common stock without any nominal par value.” The charter provided that the preferred stock should be entitled to eight per cent, cumulative diviends" and should be redeemable on any dividend date upon one months’ notice, and should be nonvoting unless two semi-annual dividends were not paid, in which event the sole voting power, lodged under the charter in the common stock, should shift to the holders of the preferred stock; that on the 6th day of January, 1919, 1,000 shares of said common stock and 600 shares of said preferred stock were issued for certain properties, including actuarial figures, data, forms, etc., then in the possession of a certain Edward C. Myers; that subsequently additional preferred stock was issued, and by an amendment to the charter which became effective on the 6th day of April, 1920, upon the vote of 616 shares of preferred stock, the voting power having in the meantime passed to the preferred stock, the authorized capital stock of the company was fixed at 2,000 shares of preferred stock of the par value of $50.00 per share, and 2,000 shares of common stock at no par value, at which time there were then outstanding 869 shares of the preferred stock of the par value.of $50.00 per share and 1,000 shares of common stock; and on said 6th day of April, 1920, there was recorded with the State Tax Commission a record showing that by resolution of a board of directors passed on the 11th day of March, 1920, it was declared advisable to issue 500 shares of common and 1,000 shares of preferred stock to be sold for cash at not less than $50.00 for two shares of preferred and one share of common stock; and subsequently at a meeting of the preferred stockholders of the company held on the 24th day of March, 1920, the issuance of stock as advised by the board of directors was duly authorized; that as a matter of fact the total amount of money paid by the stockholders to the company for stock issued to them was $38,025.00.” After the incorporation and organization of the two companies, they entered into a ³⁹ sealed agreement on December 18th, 1918, which contained these clauses: “The Agency Company hereby agrees to secure business 1‘or the Insurance Company, that is to say, to sell policies of insurance for said company or to secure members for said company, and to act as its general agent in selling such policies and securing such members, and to do any and all such acts and things as may be reasonably proper for the purpose of securing such business and the issuance of such policies and the selling of such insurance and the securing of such members for the Insurance Company, and the Agency Company will also assume full charge of all underwriting for the Insurance Company and shall pay all expenses of every kind incurred in or incidental to the carrying out of the above purposes, it being understood, however, that the Insurance Company is to pay all federal, state or municipal taxes or licenses for which it is or may become liable, and all expenses incurred in connection with the losses of said company. “All details as to the best method of procedure frathe purposes hereinbefore mentioned are left to the judgment and discretion of the said Agency Company and its duly authorized officers. “The Agency Company shall be the sole and exclusive agent of the Insurance Company for the purposes hereinbefore mentioned, and this contract shall continue for the period of nine (9) years from the first issuance of policies. “The Agency Company shall receive as compensation hereunder 30 per cent, of all gross premiums paid to or secured for the Insurance Company during the eontinuco of this agreement. Said percentage, however, is not to be paid on any assessments which the Insurance Company may make against its members.” On December 1st, 1919, that agreement was modified by a supplemental agreement made by the same parties, which among others contained these provisions: ⁴⁰ “The Agency Company shall receive the following compensation for its services: (a) During the first year of the operation of the Insurance Company, that is to say, during the period of one year from the day on which the first policies issued by said company take effect, the Agency Company shall receive as compensation thirty per cent. (30%) of all gross premiums (less cancellations) paid to or secured for the Insurance Company for premiums covering insurance for said first year; (b) for the remaining term of the contract after the first year above specified, the Agency Company shall receive each year as compensation, in lieu of the thirty per cent. (30%) provided for the first year, the following percentage on each year’s business: fourteen and three-tenths per cent.

(14.3%) on the gross premiums, less cancellations, up to and including the first five million dollars ($5,000,000) of such gross premiums. * * * “(a) The Agency Company agrees to conduct research work for the purpose of collecting data with a view to fixing proper rates for the business of the Insurance Company and for the purpose of obtaining information as to the relative risks involved in issuing policies to persons or corporations engaged in various lines of business; (b) the Agency Company also agrees in the event of a strike occurring at the plant of any assured, when requested so to do, to furnish a suitable person or persons to act as mediator or mediators in an endeavor to adjust differences between the members and its employees, and to terminate the strike. “It is understood and agreed that in consideration of the changes herein made the obligation heretofore imposed on the Agency Company by the original contract to pay all expenses of every kind of the Insurance Company except federal, state and municipal taxes and licenses and the expenses incurred in connection with the losses of said company, shall apply only to the first year as defined in paragraph 3, and that in subsequent years the Agency Company shall be relieved from the obligation of paying expenses of the Insur ⁴¹ anee Company, except that in such subsequent years the Agency Company shall continue to pay all expenses incurred in connection with obtaining business or members and expenses incidental to the underwriting and research work hereinbefore mentioned and the expenses of furnishing mediators hereinbefore mentioned. “It is also understood and agreed that the Insurance Company shall at all times have full control of its own business and affairs, except as herein expressly limited and provided.” On January 2nd, 1920, the agency company entered into an agreement with Myers which in part contained the following recitals and undertakings: “Whereas the said agency is the sole agent for Employers Mutual Insurance and Service Company, a Maryland corporation, organized to issue policies of insurance to indemnify employers against loss through strikes, and as such agent the said agency has undertaken to sell strike insurance; and “Whereas the said Meyers has evolved a system to be used, and the said agency desires to secure his services to sell such insurance, and the said Meyers is willing to devote all his time and energy and use his knowledge of the business of strike insurance for the benefit of the said agency and for the consideration hereinafter set forth. “Now, therefore, this agreement witnesseth that in consideration of the premises and the mutual promises and undertakings of the parties hereto and the sum of one dollar each to the other paid, the receipt whereof is hereby acknowledged, the parties hereto covenant and agree as follows: “1. The said agency hereby appoints the said Meyers as its sole agent for the sale of strike insurance for the world for a period of ten years, accounting from the first day of January, in the year nineteen hundred and twenty. “2. During the first year of the operation of the Employers Mutual Insurance and Service Company, ⁴² accounting from the day on which the first policies issued by the said company take effect, the said agency agrees to allow the said Meyers a commission of fifteen per centum on all premiums and renewals paid to it or to the said Employers Mutual Insurance and Service Company, or to any other company or companies which may be organized hereafter for which it may be agent for strike insurance, and settlement shall be made on or before the 10th day of each month for the preceding month. Eor and during each remaining year of the contract after the first year above specified, the commission of the said Meyers shall be as follows: twelve and five-tenths per cent.

(12.5%) on the gross premiums, less cancellations, up to and including the first five million dollars ($5,000,000) of such gross premiums, less cancellations. * * * “And the said agency further agrees not to appoint any other agents or agent, general or special, for solicitors, or engage any broker to sell strike insurance during the continuance in force of this agreement, or any extension or renewal thereof, but agrees that the said Meyers shall have full and exclusive right and power to engage and discharge all employees, agents, solicitors and brokers and to fix their compensation. “And the said agency further agrees to provide suitable offices, furniture, stationery, postage, telephone, advertising of every description and to pay the salaries and wages of an adequate office force (not engaged in selling insurance) and incidental office expenses.” At the time these several agreements were made, Mr. Myers was oil the directorate of both companies, and appears to have been president of the insurance company, and, as a result of the agreement last referred to, he became the general agent of the agency company. With the appointment of Myers as general agent, the plan which he had conceived was complete, and the companies began to function. That plan in brief was this: the insurance company was to issue the policies of insurance and the ⁴³ agency company was to sell them through Myers as its salesman, all expenses incurred in operating the insurance company as well as the agency company and Myers’ commissions and expenses to be paid out of the agency company’s commissions. The plan operated for a while apparently with success.

A number of policies were sold, its business steadily expanded, and a number of prominent and successful manufacturers became interested in it, and some of them accepted positions on the directorate of the insurance company. The dividends on its preferred stock were reguarly paid up to the end of 1921, and seventy-five per cent, of that stock was redeemed at par. In the beginning of 1921, however, certain warning indications had appeared that presaged the possibility of an interruption of its success. In the course of its business the insurance company had written a large number of policies for printers and publishers in various parts of the country, covering losses incident to an interruption .of their business as a result of strikes or walk-outs.

At that time the “closed shop'” printers were operating under an agreement with their employees, covering the terms of their employment, which expired on or about- May 1st, 1921, and those conversant with the situation apprehended that with the expiration of that agreement differences would arise between the employers and employees engaged in that business as to tbe hours of employment, compensation, etc., which might result in a general strike. Notwithstanding these warnings, the agency company continued to> solicit and accept applications for strike insurance from persons engaged in the printing business up until May, 1921, and tbe insurance company issued strike insurance policies to such persons on the applications brought to it by tbe agency company. The only thing which was done to lessen the risk which it assumed in issuing these policies was to increase its rates, and to except from the protection of the policies losses occurring during a certain number of days at the beginning of any strike, covered by them. ⁴⁴ The anticipated strike did occur, and in consequence of the number and amount of claims against the insurance company arising from it, and also from claims growing out of a strike of the textile workers in companies insured by the company, in the early part of 1921 it became apparent that the insurance company was getting into financial difficulties, and its financial condition became progressively worse as other claims came in, until it ceased to do' business on August 26th, 1921. In September, 1921, certain of its policy holders, who were also1 members of the insurance company, asked that the directors then holding office resign, which they accordingly did and other directors were elected in their places.

Prior to that, on August 26th, 1921, the condition of the company having been brought to the attention of the State Insurance Commissioner, he filed a bill of complaint against it in Circuit Court No. 2 of Baltimore City, in which he asked that it be restrained from continuing its business, and .that a commission be appointed to examine into its' affairs. Upon that bill an order was passed and a commission appointed as prayed, but no receiver was appointed at that time. From the time of the organization of the two companies, the insurance company and the agency company, while the personnel of the directorates was not identical, yet several men interested in both companies held positions on both boards, and the active directors of the agency company appear also to have conducted the affairs of the insurance company. Upon the resignation of the “old” directors, “new” directors were elected and continued, with the consent of the court, to carry on the business of the insurance company, except that they did not undertake to issue new policies.

The change in the personnel of the insurance company’s directorate was made in connection with a plan formed by certain of its policy holders to reorganize it and carry its business on and, on September 30th, 1921, a form of agreement was drafted and signed by certain “trustees,” which in part contained these provisions: ⁴⁵ “This agreement made this 30th day of September, 1921, by and between the Employers Mutual Insurance and Service Company * * * and such of the policy holders of said party of the first part as shall become parties hereto in the manner hereinafter provided * * * pallies of the second part, and James W. Bothwell, William E. Thomsen, W. J. Michel and C. Stanley Hurlbutt, together with an appointee of the Insurance Commissioner of Maryland (when he shall execute this agreement), trustees, hereinafter appointed for the purpose of carrying out this agreement, hereinafter called trustees, party of the third part. “At the instance of the Insurance Commissioner of Maryland, an application for the appointment of a receiver of the old company is now pending in the Circuit Court No. 2 of Baltimore City on the theory that the said company is insolvent. * * * and it is the purpose of this agreement to effect a reorganization of said old company, the organization as hereinafter provided of a new company with similar objects, and to provide an equitable, quick and economical method for the determination of the amount due on the respective claims of all of said policy holders, and of converting its assets into cash, including unpaid assessments due by certain policy holders to the said old company * * * . “The policy holders hereby make, constitute and appoint James W. Bothwell, Wm. E. Thomsen, W. J. Michel and C. Stanley Hurlbutt, and their successors, to be selected as hereinafter provided, the parties of the first part hereto, as trustees, with all the rights, privileges and powers given to and vested in said trustees by this agreement. * * * “Whenever in the judgment of the said trustees (and their judgment shall be final) there shall have been assigned to them seventy-five per cent, in amount of the claims filed with the old company against it, the old company shall pay over to the said trustees the sum of three hundred thousand dollars in cash, which shall be credited as a payment on account of the dis ⁴⁶ tributive shares of the assets of said old company, to which any, some or all the claims assigned to said trustees shall finally be determined, to be entitled, but shall be held, nevertheless, for the common benefit of all policy holders. * * * “Contemporaneously with the receipt by the trustees of said sum of three hundred thousand dollars, they shall incorporate or cause to be incorporated a stock company, or a stock and mutual company, for the purpose of conducting the business of insurance against losses caused directly or indirectly by strikes or walkouts of the employees of the persons insured, with a capital stock of one-hundred thousand dollars and a paid-in surplus of one hundred and fifty thousand dollars.” That agreement, although signed by the “trustees,” does not appear to have been executed by either of the other parties to it, but, on October 14th, 1921, the directors of the “old” company posted at the Baltimore post office the following' letter or notice to all of its policy holders: “Please take notice that in accordance with the terms and conditions of Policy No.....issued by the Employers Mutual Insurance and Service Company to you, the company hereby serves notice of cancellation effective fifteen (15) days from date hereof. “This notice has been posted at the United States Postoffice in Baltimore, Maryland, prior to noon, October 14th, 1921, Eastern Standard Time; therefore on and after noon, October 29th, Eastern Standard hime, your policy will cease and determine. “Employers Mutual Insurance and Service Company. “By order of the President. “¥m. Edward Thomsen, “Secretary.” That cancellation was given under the following clause of the policies issued by the company: “F. This policy may be cancelled at any time after the first policy year at the request of the assured, or, without prejudice to the rights of the assured as re ⁴⁷ spects anything that may occur during the period this policy is in force, by the company, during any year, by giving fifteen (15) days written notice of such cancellation; the effective date of such cancellation, to wit, the last of said fifteen (15) days, shall then be the end of the policy period. If this policy shall be cancelled as herein provided, or become void, or cease, the earned premiums shall be computed and adjusted at short rate in accordance with the table printed hereon; except that if this policy is cancelled by the company, or by the assured when actually retiring from the business herein described, the earned premium shall be adjusted pro rata; but in no event shall the earned premium be less than ............

($........) dollars.” On November 9th, 1921, receivers were appointed in the suit instituted by the Insurance Commissioner, and they demanded of the appellee a return of the commissions which it had received from the insurance company on the unearned portions of the premiums paid on the cancelled policies. The commissions thus demanded were computed in the following table, sworn to in the trial of the case by an accountant employed to audit the claims against the insurance company: Rate of Amount. Commission. Commission. “Unearned on premiums written prior to May 20, 1921 ..........$156,815.65 .30 $42,400.28 “Unearned on premiums written after May 19, 1921 ............. 28,229.95 .143 3,824.23 $185,045.60 $46,224.51 “Earned premiums collected but on which no commission has been paid 1,494.44 .143 229.27 $45,995.24." ⁴⁸ The appellee refused to return the