As to casualty and surety risks in Virginia, insured against by
corporations authorized to do business in that State, a Virginia
law requires that the insurance shall be "through regularly
constituted and registered resident agents or agencies of such
companies" and that such resident agents shall receive "the usual
and customary commissions allowed on such contracts," and may not
share more than one-half of a commission with a nonresident
licensed broker.
Held:
1. That the regulation is constitutionally within the power of
the State, even though one effect of it may be to increase the cost
of "master" policies negotiated by brokers in other States, through
which an assured may obtain a reduced rate and commission by
pooling all of his risks, in and out of Virginia, in one contract.
Pp.
310 U. S.
62-65.
2. As a basis for this legislation, the legislature was entitled
to act on the belief
Page 310 U. S. 54
(1) That, by requiring participation by responsible resident
agents, it would lessen the difficulty of enforcing the Virginia
system of insurance regulation and detect unlawful rebating. P.
310 U. S.
63.
(2) That the limitation on sharing of agents' commissions would
assure the use of resident agents for the procuring and "servicing"
of policies covering local risks -- functions which, when
adequately performed, benefit the company, the producer, and the
assured and, by minimizing the risks of casualty and loss, redound
to the benefit of the community. P.
310 U. S.
64.
(3) That the agency system in view is better calculated to
further these ends than other modes of "production." P.
310 U. S.
64.
3. The regulations are well within the power of the State over
insurance against local risks. P.
310 U. S.
66.
29 F. Supp.
71 affirmed.
Appeal from a decree of the District Court of three judges
dismissing a bill to enjoin the enforcement of a statute regulating
insurance in Virginia.
Page 310 U. S. 58
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
Appellants have challenged the validity of a Virginia statute
regulating the insurance of Virginia risks, and have brought this
suit to enjoin state officers from enforcing
Page 310 U. S. 59
it. Its relevant provisions, copied in the margin, [
Footnote 1] forbid contracts of
insurance or surety by companies authorized to do business within
that Commonwealth "except through regularly constituted and
registered resident agents or agencies of such companies." § 4222,
c. 218, Acts of 1938. Such resident agents "shall be entitled to
and shall receive the usual and customary commissions allowed on
such contracts," and may not share more than half of this
commission with a nonresident broker. § 4226a, as amended by Acts
1938, c. 218. Disobedience of these provisions (from which life,
title, and marine companies are exempted) may entail a fine or
revocation of the corporate license in Virginia, or both. A
district court of three judges, convened under § 266 of the
Judicial Code as amended, 28 U.S.C. § 380, dismissed appellants'
bill on the basis of elaborate findings of fact and conclusions of
law, set forth in an opinion by Circuit Judge Soper.
29 F. Supp.
71. From this
Page 310 U. S. 60
decree, the case comes here on appeal under § 238 of the
Judicial Code as amended, 28 U.S.C. § 345.
The bill was brought by foreign corporations authorized to do
casualty and surety business in Virginia, and by some of their
salaried employees. It is their claim that the statute deprives
them of rights protected by the Fourteenth Amendment of the
Constitution. The exact nature of these claims will appear more
clearly in the setting of the illuminating findings below, which
may here be abbreviated.
The "production" of insurance -- "production" being insurance
jargon for obtaining business -- is, in the main, carried on by two
groups, agents and brokers. Though both are paid by commission, the
different ways in which the two groups perform their functions have
important practical consequences in the conduct of the insurance
business, and hence in its regulation. The agent is tied to
Page 310 U. S. 61
his company. But his liability to "produce" business depends
upon the confidence of the community in him. He must therefore
cultivate the goodwill and sense of dependence of his clients. He
may finance the payment of premiums; he frequently assists in the
filing and prosecution of claims; he acts as mediator between
insurer and assured in the diverse situations which arise. The
broker, on the other hand, is an independent middleman, not tied to
a particular company. He meets more specially the needs of large
customers, using their concentrated bargaining power to obtain the
most favorable terms from competing companies. His activities,
being largely confined to the big commercial centers, take place
mostly outside Virginia.
A policy, whether "produced" by broker or agent, must be
"serviced" -- an insurance term for assistance rendered a customer
in minimizing his risks. To this end, the companies exert
themselves directly, but the "producer" may render additional
service. Only to a limited extent can risks be minimized at long
range; local activity is essential. When the contract is "produced"
by a nonresident broker, the "servicing" function is normally
performed by the company exclusively. When the "producer" is a
resident agent, the case is ordinarily otherwise. For this as well
as for other reasons, it is obvious that nonresident brokers prefer
to negotiate their contracts covering Virginia risks with companies
authorized to do business in that Commonwealth.
These basic elements in the insurance business attain special
significance in the case of enterprises operating not only in
Virginia, but in other states as well. For them, the brokerage
system offers the attractions of large-scale production. Through
what is known as a master or "hotchpotch" policy, the assured may
obtain a cheaper rate by pooling all his risks, whether in or out
of Virginia. This wholesale insurance may furnish not only a
reduced rate,
Page 310 U. S. 62
but a reduced commission to the customer. These are advantages
which naturally draw the Virginia business of interstate
enterprises away from local agents in Virginia to the great
insurance centers.
In effecting the cost of these master policies, say the
appellants, Virginia is intruding upon business transactions beyond
its borders. Not only is a licensed company forbidden to write
insurance except through a resident agent, but the agent cannot
retain less than one-half of the customary commission allowed on
such a contract for what may, so far as the requirements of the law
are concerned, be no more than the perfunctory service of
countersigning the policy.
But the question is not whether what Virginia has done will
restrict appellants' freedom of action outside Virginia by
subjecting the exercise of such freedom to financial burdens. The
mere fact that state action may have repercussions beyond state
lines is of no judicial significance so long as the action is not
within that domain which the Constitution forbids.
Alaska
Packers Assn. v. Industrial Accident Comm'n., 294 U.
S. 532;
Great Atlantic & Pacific Tea Co. v.
Grosjean, 301 U. S. 412.
Compare Equitable Life Assur. Society v. Pennsylvania,
238 U. S. 143. It
is equally immaterial that such state action may run counter to the
economic wisdom either of Adam Smith or of J. Maynard Keynes, or
may be ultimately mischievous even from the point of view of avowed
state policy. Our inquiry must be much narrower. It is whether
Virginia has taken hold of a matter within her power, or has
reached beyond her borders to regulate a subject which was none of
her concern because the Constitution has placed control elsewhere.
Compare Wallace v. Hines, 253 U. S.
66,
253 U. S.
69.
Virginia has not sought to prohibit the making of contracts
beyond her borders. She merely claims that her interest in the
risks which these contracts are designed to prevent warrants the
kind of control she has here
Page 310 U. S. 63
imposed. This legislation is not to be judged by abstracting an
isolated contract written in New York from the organic whole of the
insurance business, the effect of that business on Virginia, and
Virginia's regulation of it.
A network of legislation controls the surety and casualty
business in Virginia. Insolvent companies may not engage in it.
Virginia Code, § 4180. Neither companies nor agents may give
rebates. § 4222(c). Rates for workmen's compensation, automobile
liability, and surety contracts are determined by its Corporation
Commission. §§ 1887(75), 4326-a-1, 4350(3). The difficulty of
enforcing these regulations, so the District Court found, may be
increased if policies covering Virginia risks are "produced"
without participation by responsible local agents. Rebates evading
local restriction may be granted under cover of business done
outside the state. Contrariwise, if resident Virginia agents are
made necessary conduits for insurance on Virginia risks now
included in master policies, the state may have better means of
acquiring accurate information for the effectuation of measures
which it deems protective of its interests. [
Footnote 2]
Page 310 U. S. 64
It is claimed that the requirement that not less than one-half
of the customary commission be retained by the resident agent is a
bald exaction for what may be no more than the perfunctory service
of countersigning policies. The short answer to this is that the
state may rely on this exaction as a mode of assuring the active
use of resident agents for procuring and "servicing" policies
covering Virginia risks. These functions, when adequately
performed, benefit not only the company, the producer, and the
assured. By minimizing the risks of casualty and loss, they redound
in a pervasive way to the benefit of the community. [
Footnote 3] At least Virginia may so have
believed. And she may also have concluded that an agency system,
such as this legislation was designed to promote, is better
calculated to further these desirable ends than other modes of
"production." [
Footnote 4]
When
Page 310 U. S. 65
these beliefs are emphasized by legislation embodying similar
notions of policy in a dozen states, [
Footnote 5] it would savor of intolerance for us to
suggest that a legislature could not constitutionally entertain the
views which the legislation adopts.
Compare Prudential Ins. Co.
v. Cheek, 259 U. S. 530,
259 U. S.
537.
The present case, therefore, is wholly unlike those instances in
which a "so-called right is used as part of a scheme to accomplish
a forbidden result."
Fidelity & Deposit Co. v. Tafoya,
270 U. S. 426,
270 U. S. 434.
For it is clear that Virginia has a definable interest in the
contracts she seeks to regulate, and that what she has done is very
different from the imposition of conditions upon appellants'
privilege of engaging in local business which would bring within
the orbit of state power matters unrelated to any local interests.
It is not our province to measure the social advantage to Virginia
of regulating the conduct of insurance companies within her borders
insofar as it affects Virginia risks. Government has always had a
special relation to insurance. The ways of safeguarding against the
untoward manifestations of nature and other vicissitudes of life
have long been withdrawn from the benefits and caprices of free
competition. [
Footnote 6] The
state may fix insurance rates,
German Alliance Ins. Co. v.
Lewis, 233 U. S. 389; it
may regulate the compensation of agents,
Page 310 U. S. 66
O'Gorman & Young v. Hartford Ins. Co., 282 U.
S. 251; it may curtail drastically the area of free
contract,
National Union Fire Ins. Co. v. Wanberg,
260 U. S. 71.
States have controlled the expenses of insurance companies, New
York Insurance Law, Consolidated Laws of New York, c. 28, § 244,
and Wisconsin Statutes, § 201.21,
and see Report of Joint
(Armstrong) Insurance Investigation Committee (N.Y.) pp. 403-418
(1906). They have also promoted insurance through savings banks;
see Berman, The Massachusetts System of Savings Bank Life
Insurance, Bulletin No. 615, U.S. Bureau of Labor Statistics, and
New York Laws of 1938, c. 471. In the light of all these exertions
of state power it does not seem possible to doubt that the state
could, if it chose, go into the insurance business, just as it can
operate warehouses, flour mills, and other business ventures,
Green v. Frazier, 253 U. S. 233, or
might take "the whole business of banking under its control,"
Noble State Bank v. Haskell, 219 U.
S. 104,
219 U. S. 113.
If the state, as to local risks, could thus preempt the field of
insurance for itself, it may stay its intervention short of such a
drastic step by insisting that its own residents shall have a share
in devising and safeguarding protection against its local hazards.
LaTourette v. McMaster, 248 U. S. 465. All
these are questions of policy not for us to judge. For it can never
be emphasized too much that one's own opinion as to the wisdom of a
law must be wholly excluded when one is doing one's judicial duty.
The limit of our inquiry is reached when we conclude that Virginia
has exerted its powers as to matters within the bounds of her
control.
In reaching this conclusion, we have been duly mindful of the
cases urged upon us by appellants. In
Allgeyer v.
Louisiana, 165 U. S. 578,
apart from the doubts that have been cast upon the opinion in that
case, the state attempted to penalize the making of contracts by
its residents outside its borders with companies which had never
subjected themselves to local control. Thus, the statute
Page 310 U. S. 67
was thought to be directed not at the regulation of insurance
within the state, but at the making of contracts without. This was
followed in
St. Louis Cotton Compress Co. v. Arkansas,
260 U. S. 346;
but see the refined distinctions drawn in
Compania
General de Tabacos v. Collector, 275 U. S.
87. In
Fidelity & Deposit Co. v. Tafoya,
supra, the Court found that New Mexico had exceeded its power
by forbidding "the payment of any emolument of any nature to any
[nonresident] for the obtaining, placing or writing of any policy
covering risks in New Mexico." The Court was of opinion that this
statute went "beyond any legitimate interest of the State . . . ,"
ibid., at
270 U. S. 435,
but carefully withheld its judgment as to the validity of a later
New Mexico statute not unlike the Virginia law here under review.
[
Footnote 7]
The decree must be
Affirmed.
[
Footnote 1]
The relevant portions of the Virginia statute are as
follows:
"Section 4222. . . . (a) Insurance companies, legally authorized
to do business in this State, except life, title and ocean marine
insurance companies, shall not make contracts of insurance or
surety on persons or property herein, except through regularly
constituted and registered resident agents or agencies of such
companies; no contract of insurance or surety covering persons or
property in this State, except contracts of life, title and ocean
marine insurance and except temporary binders covering other forms
of insurance, shall be written, issued, or delivered by any such
authorized insurance company, or any of its representatives, unless
such contract is duly countersigned in writing by a resident agent
or agency of such company; provided, however, that the
countersignature of an insurance agency shall not be considered
valid unless such countersignature be attested to in writing by a
regularly constituted and registered resident agent of such
company."
"No State agent, special agent, company representative, salaried
officer, manager, or other salaried representative of any legally
authorized insurance company, except a mutual insurance company,
shall countersign any contract of insurance or surety, or any
renewal thereof, covering persons or property in this State, except
contracts of life, title and ocean marine insurance; provided that
this sections shall not apply to railroad companies and other
common carriers engaged in interstate commerce."
"
* * * *"
"Section 4226-a. . . . No resident agent or agency may write,
countersign, issue or deliver any contract of insurance or surety
upon persons or property in this State unless there shall be
collected at the time the contract is written, issued or delivered,
or within a reasonable time thereafter, the full premium on such
contract, and the resident agent or agency shall be entitled to and
shall receive the usual and customary commissions allowed on such
contracts, provided that such resident agent or agency may write
such contracts at the request only of such other resident agents or
agencies, when such agent or agencies are properly licensed to
transact the class of business involved in such exchange, and
licensed nonresident insurance brokers who may be authorized by law
to broker such contracts, and on exchange of business between
resident agents or agencies in Virginia and licensed nonresident
insurance brokers in other states the resident agent or agency in
Virginia may allow or pay to such licensed nonresident insurance
brokers, a commission not exceeding fifty percentum of the resident
agent's or agency's commission allowed on such business."
[
Footnote 2]
Where out-of-state "production" actually leads to rebating in
defiance of § 4222(c), there would seem little doubt of a
substantial basis for Virginia's contention that the requirement of
participation by a resident agent will make the illegal practices
more susceptible of detection and control.
Cf. LaTourette v.
McMaster, 248 U. S. 465.
Virginia has also contended that the master policy makes it
possible for the companies to reduce their rates below the
requirements of state law, and to attribute the reductions to risks
in other states with requirements less stringent than those of
Virginia. Appellants strenuously contend that no law of Virginia
prohibits the reduction of rates for out-of-state risks to
compensate for the higher rates which might be required by
Virginia, and therefore there is no illegal practice in this
connection which the existence of a resident agent could aid in
uncovering. This argument, if met on the merits, would lead us into
the particularities of Virginia's rate laws. It is enough to say
that, even if these practices are not illegal, Virginia may have a
legitimate interest in discovering the extent of their prevalence
in order to devise, if she so chooses, effective laws to prevent
them.
[
Footnote 3]
See Hardy, Risk and Risk-Bearing, pp. 9-28, 66-67;
Kulp, Casualty Insurance, pp. 188-91, 467-68; Michelbacher,
Casualty Insurance Principles, pp. 448-78, 583-84; Crobaugh and
Redding, Casualty Insurance, pp. 17-20; Huebner, Foreword to Modern
Insurance Tendencies, 157 Annals of the American Academy of
Political and Social Science, pp. 3-4; Burns, Service of Casualty
Insurance, 15th Annual Meeting, Chamber of Commerce of the United
States, p. 4.
[
Footnote 4]
"The broker is not required to render any technical service
beyond the placing of business.' Michelbacher, Casualty Insurance
Principles, p. 403.
Compare id., pp. 401-402; Huebner,
Property Insurance, pp. 81-96; Proceedings, 73rd Annual Meeting,
National Board of Fire Underwriters, p. 123; Clark, Ellis and
Fletcher, The Service of the Broker to the Assured in Liability
Insurance, Howe Readings in Insurance, No. 18. But even if the
broker does 'service' the contract, his activities will take place
in Virginia, and will affect the welfare of those inside Virginia
who may be subject to the incidence of those risks which the
'servicing' function tends to reduce. If this be true, it is
Virginia's concern, and not ours, to prefer the agency to the
brokerage method of 'production."
[
Footnote 5]
Alabama Code, § 8379; Kansas, General Statutes (Supp.) 40-246;
Louisiana, Acts of 1918, No. 153; Maryland, Annotated Code, Art.
48A, § 65; Mississippi, Code, § 5205; Montana, Laws of 1937, c. 95;
Oklahoma, Statutes Ann., Title 36, §§ 126, 142, 249; South
Carolina, Code, § 7972; South Dakota, Code, § 31.2218; Washington,
Rev.Statutes, § 7080; Wisconsin, Statutes, § 201.44; Wyoming,
Rev.Statutes, 57-203.
[
Footnote 6]
See Gephart, Principles of Insurance, pp. 233-55;
Dawson, Insurance Legislation (1895); Abstract of the Laws of
Virginia in Relation to Insurance Companies, etc., issued by the
Auditor of Public Accounts (1878); Patterson, The Insurance
Commissioner in the United States.
[
Footnote 7]
Hartford Accident & Ind. Co. v. Delta Co.,
292 U. S. 143,
resting on
Home Ins. Co. v. Dick, 281 U.
S. 397, held that the terms of a contract validly made
in Tennessee could not be subsequently enlarged by Mississippi as
to a condition of "substantial importance" when suit was later
brought on the policy in Mississippi, simply because "the interest
insured was in Mississippi when the obligation to indemnify . . .
matured, and it was [the company's] duty to make payment there."
292 U.S. at
292 U. S. 149.
At the time the contract was entered into, Mississippi had no
interest in the risk covered. The Court felt that, even at the time
of suit, "performance at most involved only the casual payment of
money in Mississippi," 292 U.S. at
292 U. S. 150,
and that was an interest so subordinate to that of Tennessee that
the latter was entitled to have the right of way. No question was
thus involved touching the right of a state to regulate companies
doing business within its borders as to contracts of insurance
covering local risks.
MR. JUSTICE ROBERTS, dissenting:
I am unable to agree with the decision in this case. I think it
sanctions an exertion of power by Virginia over transactions beyond
her jurisdiction.
Page 310 U. S. 68
Virginia may, of course, regulate the making of contracts of
insurance within her borders. She may require such contracts to
embody specified provisions. She may regulate the enforcement of
these contracts in her courts. She may supervise and condition the
activities of registered foreign insurance companies, agents, or
brokers within the Commonwealth. The statute in question has no
such purpose.
The purpose and effect of the statute is to compel an insurance
company which is a citizen of another state, and which negotiates a
contract of insurance with an agent or broker within such other
state, to pay a resident of Virginia for a service not rendered by
him, but rendered by another in another state. By force of the
statute, a Virginia agent must countersign a contract negotiated
outside of Virginia with an assured whose residence is outside of
Virginia, which contract of insurance was negotiated by an agent or
broker living outside of Virginia. The countersigning Virginia
agent must be paid one-half the usual commission, even though the
broker or agent who produced the business is licensed as a
nonresident broker by Virginia, although the only service such
Virginia agent is required to render and, in many cases all he does
render, is the mere countersignature of the policy. With respect to
this situation, the court below said:
"We do not overlook the peculiar situation of the nonresident
assureds who form no part of the Virginia public which the state
desires to protect. Undoubtedly their business methods will be
disturbed by the enforcement of the statute. It is contended, not
without merit, that they have no need for the services of the
resident commission agents, and that, in fact, the latter cannot
assume the function of producing agents in their behalf without
harmfully intruding themselves into confidential business affairs.
Moreover, it is fair to say that these affairs are so important and
so widespread in their scope as to be
Page 310 U. S. 69
beyond the technical knowledge and skill of the average Virginia
agent, and that the interests of the nonresident assureds can be
best looked after by the brokers at the great centers of population
where the head offices of the insurance companies and of the
assureds are located, and in Virginia by the engineering and claim
personnel of the companies. It is also true that the substantial
compensation required by the statute to be paid to the Virginia
agents will increase the cost of the business."
The plain effort of Virginia is to compel a nonresident to pay a
resident of Virginia for services which the latter does not in fact
render and is not required to render. The principles underlying
former decisions of this court are at war with the existence of any
such asserted power.
*
THE CHIEF JUSTICE and MR. JUSTICE McREYNOLDS join in this
opinion.
*
Allgeyer v. Louisiana, 165 U.
S. 578;
New York Life Ins. Co. v. Head,
234 U. S. 149;
Aetna Life Ins. Co. v. Dunken, 266 U.
S. 389;
Fidelity & Deposit Co. v. Tafoya,
270 U. S. 426;
Home Ins. Co. v. Dick, 281 U. S. 397;
Hartford Accident & Indemnity Co. v. Delta & Pine Land
Co., 292 U. S. 143;
Boseman v. Connecticut General Life Ins. Co., 301 U.
S. 196.