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CHAPTER XXI

STATE SUPERVISION AND REGULATION

Beginning with the famous case of Paul vs. Virginia, decided in 1868, the United States Supreme Court has again and again asserted the doctrine "that there is no doubt of the power of the state (using that term as contrasted with the Federal Government) to prohibit foreign insurance companies from doing business within its limits. The state can impose such conditions as it pleases upon the doing of any business by these companies within its borders, and unless the conditions be complied with the prohibition may be absolute.'' Because of its broad jurisdiction over all foreign relations, the United States government, in theory at least, possesses the power to exclude or expel alien corporations from all parts of the country; likewise to admit them without regard to the regulation of the States. In actual practice, however, an alien insurance corporation wishing to do business in the United States first seeks admission to a certain state. By complying with its laws it establishes therein its headquarters for American business; and then, if business warrants, seeks admission to other states. Indeed, to such an extent has the jurisdiction of the several states over alien insurance companies been recognized that the Executive Department of the United States has not seen fit, in the absence of a treaty stipulation covering the subject, to consider a complaint of unjust discrimination lodged by an alien company against a state, and has expressed the view that the regulation of insurance corporaations by federal treaty would not be sanctioned by the representatives of the states.

Acting in accordance with the numerous decisions of the United States Supreme Court and the policy of our Executive Department, the several states and territories of the United States, including the District -of Columbia, have each assumed full supervisory powers over all alien and domestic corporations transacting an insurance business within their borders. In most of the progressive states this control has been entrusted to a supervisory officer, known as the Superintendent or Commissioner of Insurance, who, in nearly all cases, is appointed by the governor, and who is placed in charge of a separate department of the state government. In this matter, however, there is by no means uniformity among the states. In a number of states, including some of the large and wealthy ones of the West and South, the work of supervising insurance companies is left to the auditor or comptroller of the state, and, as we are informed, is "ministered oftentimes in a most perfunctory manner by the same machinery that is furnished by the state for looking after building and loan associations, savings banks, county treasurers, and the like." In certain other states and territories the work of supervising insurance companies is left with the secretary of state, while in a few the state treasurer is the supervising officer. In twenty-five states and territories at a recent date there had not as yet been established a separate insurance department, and the responsibility of supervising insurance companies was attached to some other department of government.

Although the legislatures and courts of the several states, as we have seen, play a prominent part in the enactment and interpretation of insurance legislation, the actual supervision of the companies and the enforcement of the laws is performed by the insurance commissioners. These officials, to say the least, are vested with extraordinary discretionary powers in the matter of application. Among other things, the commissioner of insurance must see to it that all the laws of the state respecting insurance companies and the agents thereof are faithfully executed, and that all the companies are in a solvent condition according to some fixed standard. No foreign company may transact business within the state without his permission, and no person may solicit business for such companies without the commissioner's certificate of authority. Every company must render an annual statement of its condition and business in the form and manner prescribed by the commissioner. He is also given power to require at any time statements concerning any company doing business in the state, from any of its officers or agents on any points he may choose to ask. For purposes of examination, he is empowered to require free access to all books and papers within the state of any insurance company, or the agents thereof, doing business within the state. He may summon and examine any person under oath relative to the affairs and conditions of any company; and for probable cause may visit at its principal office, wherever it may be, any insurance company not of a state in which the substantial provisions of the law of his own state shall be enacted, and doing business in the state, for the purpose of investigating its affairs, and may revoke its certificate if it does not permit such examination. Neglect or refusal on the part of the company to render any statement means a cessation of its new business, and neglect to furnish information within the time and manner prescribed by the commissioner usually subjects the company to heavy money fines.

Power is also given the commissioner to suspend the entire business of any company by revoking or suspending its license if in his opinion the company does not comply with any provision of the law, or whenever its assets appear to him insufficient. He must see that the company has made the proper deposits of approved securities; that it makes a correct return of the taxes which are imposed by law; and that a resident of his state is appointed the attorney of the company so that in the event of litigation legal process may be served without the citizens being obliged to go outside of the state to serve the papers. It is also his duty to calculate the reinsurance reserve for unexpired fire risks, and to see that the assets of all companies organized in the state are properly invested in the form prescribed by law. He has supervisory powers over the organization of all companies from the time that the articles of agreement are arranged until the company is ready to begin the writing of policies, and in every stage of the organization and in all matters pertaining thereto, it is necessary for the organizers of the company to have his approval. Finally, he owes it to the public as well as to the insurance companies to do all in his power to exterminate improper or unlawful insurance schemes. Numerous other duties and powers might be enumerated, but those mentioned will suffice to show that the insurance commissioner is clothed with extraordinary powers, and that consequently the personality of the commissioner is a factor, the importance of which cannot be overestimated.

State Supervision in Practice.—Directing our attention now to an examination of how state supervision works in practice, it seems to be generally conceded that it has proved expensive and annoying. First of all, attention should be directed to the multitude of taxes and fees to which the insurance business is subjected, variously estimated at from $20,000,000 to $25,000,000 annually, and to which fireinsurance companies contribute a very respectable share. This huge sum comprises a variety of taxes, annual license fees, agency fees, fees for filing papers, charters, and the like, and in some states municipal license fees. These charges in too many instances do not bear any direct relation to the service rendered by the state. A compilation of data for twenty-eight states made four years ago showed that, exclusive of all taxation, these states collected $5,000,000 more than was required to meet the expenses of their insurance departments^ In fact, as has been frequently pointed out, some of the state insurance departments have developed into little more than tax and fee gathering and salary-earning institutions.

Furthermore, a study of the insurance laws of the several states will show a conspicuous absence of method or uniformity in their tax policy. Some states tax gross premiums after deducting losses and expenditures of various kinds, but many others tax gross premiums without any such deduction. The rate on gross premiums varies all the way from 1 per cent in some states to 4 per cent in others, and the variety of additional fees and minor charges is almost beyond description. Many states provide for a greater tax rate against foreign companies than domestic companies, and some, in turn, provide for a higher rate against alien companies than companies of other states. Then, again, there are the so-called retaliatory laws existing in some thirty-two states of the union, which provide, to quote the recent Minnesota law of 1907 (chapter 420), that "whenever, by the laws of any other state or country, any taxes, fees, deposits, penalties, licenses or fees, in addition to, or in excess of those imposed by the laws of this state upon foreign insurance companies and their agents doing business in the state, are imposed upon insurance companies of this state and their agents doing business in such state or country, or whenever any conditions precedent to the right to do business in such state are imposed by the laws thereof, beyond those imposed upon such foreign companies by the law of this state, the same taxes, fees, deposits, penalties, licenses and fees and conditions precedent shall be imposed upon every similar insurance company of such state or coun

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