Supreme Court of Canada
Pickles v. China Mutual Ins. Co., (1913) 47 S.C.R. 429
Date: 1913-02-18
Frank W. Pickles (Defendant) Appellant;
and
The China Mutual Insurance Company (Plaintiffs) Respondents.
J. William Smith (Defendant) Appellant;
and
The China Mutual Insurance Company (Plaintiffs) Respondents.
1912: October 21; 1913: February 18.
Present: Sir Charles Fitzpatrick C.J. and Davies, Idington, Duff, Anglin and Brodeur JJ.
ON APPEAL FROM THE SUPREME COURT OF NOVA SCOTIA.
Marine insurance—Mutual company—Cancellation of policy—Return of unearned premium—Cancellation by operation of law.
A mutual insurance company incorporated under the laws of the State of Massachusetts issued marine policies in favour of parties in Nova Scotia who gave notes for the premiums. The policies provided for a return of premiums “for every thirty days of unexpired time if this policy be cancelled.” Before any of the premium notes matured the policyholders were notified that the company had been put into liquidation at the instance of the Insurance Commissioner, the notice stating that the legal effect was “to cancel all outstanding policies.” In an action by the receiver in the company’s name to enforce payment on the notes:—
Held, affirming the judgment appealed against (46 N.S. Rep. 7) that the decision of the case must be governed by the law of Massachusetts; that the holder of a policy in a mutual company being both insurer and insured the notes sued on were assets for distribution among the creditors; and the receiver was, therefore, entitled to recover the full amount.
Held, also, that a cancellation resulting from the action of the State was not a cancellation within the meaning of the above clause providing for return of premium.
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APPEAL from a decision of the Supreme Court of Nova Scotia affirming the judgment at the trial in favour of the plaintiffs.
The plaintiff company was incorporated in 1853 by the legislature of Massachusetts for the purpose of carrying on marine insurance “on the mutual principle” subject to the laws of the State then existing, and all subsequent laws in force relating to such insurance companies.
The company successfully carried on business for many years; but on the nineteenth day of March, 1908, at the instance of the insurance commissioner under the Massachusetts statute (chapter 76, Acts of 1907) its affairs were placed in the hands of a receiver and its officers and agents were enjoined from further proceeding with the business of the company. This proceeding cancelled all policies.
In the late fall of 1907 and the early part of 1908, the respondent Pickles had insured a number of vessels in the company and had given his notes for the premiums aggregating thirty-five hundred and fifteen dollars and ninety-two cents ($3,515.92).
There were many similar transactions of the company both in Massachusetts and the Maritime Provinces of Canada, and the question arose after the receiver’s appointment as to his right to collect in full the outstanding premium notes, and as to the right of policy holders who had paid their premiums in cash or who had paid premium notes maturing before the date of receivership to recover back pro ratâ returns in the State of Massachusetts. A number of actions were brought at the instance of the receivership and
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the result of the litigation is reported in the case of Hill v. Baker.
Subsequently actions were brought in Nova Scotia in the name of the company at the instance of the receiver of which the Pickles and Smith cases (now on appeal to the Supreme Court of Canada) are two which have been tried, and another case not under appeal was also tried and abides the result of these appeals.
The following defences were raised in Nova Scotia:
(1) That the company when it entered into the insurance contracts, held itself out as solvent, whereas it was insolvent to the knowledge of its officers, and was fraudulently carrying on business, and that, therefore, it could not recover on the premium notes or on any contracts.
(2) That there was no consideration for the notes.
(3) That the makers were liable only for the proportion of the premium accruing pro ratâ from the date of the note up to the date of the receivership.
(4) That the contracts of the company, including the premium notes, were illegal and void because the company had not kept up as required by the Massachusetts statute a deposit of two hundred thousand dollars ($200,000), which had to be subscribed before the company could commence to do business and which it was required to maintain.
The actions were tried before the Honourable Mr. Justice Meagher, who gave judgment in favour of the company. Defences one and four were then principally relied upon, although the others were argued and are dealt with briefly by the learned judge.
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On the appeal to the Supreme Court of Nova Scotia defences (1) and (2) were not pressed, and the findings and judgment of the trial judge on those defences are not now in question. The defendant urged, however, defences (3) and (4), and especially that by reason of a provision in the Pickles policy as follows: “The consideration for this insurance is hereby fixed at the rate of 9¼ per cent. To return —— per cent. for every thirty days of unexpired time if this policy be cancelled,” and in the Smith policy the same except that the —— for return was filled in with a specified percentage, 75 per cent., the defendant could only be held for payment pro ratâ of premium up to date of the receivership, the contention being that the appointment of the receiver was a cancellation of the policy contemplated by the foregoing excerpt.
The appeal was heard by Justices Graham, Russell and Drysdale. Mr. Justice Russell delivered the judgment of the court (Graham J. concurring) affirming the right of the plaintiff company to recover the full amount of the notes, while Mr. Justice Drysdale dissented, acceding to the contention of the defendant just mentioned.
Hellish K.C. for the appellants. Hill v. Baker and similar American cases deal with insurance policies which do not contain the return premium clause. Consequently, they have no application to this case.
The permanent fund required by the Massachusetts statute to protect policy holders was not kept up. The issue of the policies to Pickles and Smith was, on that account, unauthorized and even prohibited and
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the policies were void. Reliance Mutual Ins. Co. v. Sawyer. The learned counsel referred also to Fayette Mutual Fire Ins. Co. v. Fuller, and Adam-son v. Newcastle Steam-Ship Freight Ins. Assoc..
Rogers K.C. for the respondents. The cancellation mentioned in the policy must be by act of the company. The Commonwealth v. Massachusetts Mutual Fire Ins. Co., per Morton J.; Hill v. Baker, and cases therein cited. Lion Mutual Marine Ins. Assoc. v. Tucker.
Hellish K.C. for the appellants
Rogers K.C. for the respondents
The Chief Justice.—I am of opinion that this appeal should be dismissed with costs for the reasons given by Mr. Justice Duff.
Davies J.—For the reasons given by Mr. Justice Russell in delivering the judgment of the Supreme Court of Nova Scotia in this case, adopting and applying the principle of the decision of Hill v. Baker, with which reasons I entirely concur, I think the appeal should be dismissed with costs.
Idington J.—The appellants gave their respective promissory notes by way of payments of premiums for insurances effected by the policies issued by respondent which was a mutual insurance company incorporated under and by virtue of Massachusetts statutes.
Respondent failed to comply with said statute and
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during currency of these policies in question was put in liquidation by direction of the court upon the application of the authorities having supervision of such institutions.
These actions are brought to recover the amounts respectively unpaid by the insured.
The appellants each acknowledge liability for the proportionate amount earned up to the order of liquidation, but claim that beyond that no liability exists because of a clause written in each policy. This clause fixes the premium and provides for a partial “return” thereof, as it is expressed, to be made on cancellation. The cancellation of the policy here in question is alleged to result by operation of law from the order for liquidation.
The frame of the said clause is as follows:—
The consideration for this insurance is hereby fixed at per cent. To return per cent. for every thirty days of unexpired time if this policy be cancelled.
In the Pickles policy the fixed rate intended by this clause is written in with figures “9¼,” but the rate to be returned is left blank, and in the Smith policy there is written in for fixed rate “10” and in the blank for return “75.”
It is conceded the insurance ceased with the suspension of the company.
The question raised in each case must be dependent upon the position occupied by the insured in his relation to the company. If we could treat these notes as ordinary promissory notes then something might be said in answer to the claim thereupon on the ground of a partial failure of consideration.
The term used is “to return,” and hence partial failure of consideration as usually understood relative
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to promissory notes is not capable of application, but even so, if no others interested than the parties hereto an equitable plea might conceivably be so framed, to avoid circuity of action, as to afford a complete answer to that part of the premium note never earned or possible now of being earned.
That is not, however, the actual position, for these notes are part of the security other policy holders are entitled by the law governing all concerned to look to for compensation of their losses which had been incurred before the liquidation proceedings.
What right has any one giving such a promissory note for such purpose to withdraw from what he had undertaken to meet or assist up to the limit of his promise in meeting?
By the law constituting the company each person insured became a member of the company and entitled during the currency of his policy to take a part in its management.
He became at once insurer and insured. He has no more right to escape from this position than a partner with limited liability in any other venture where the fundamental principle is that what he has given or promised shall stand good for losses though he may when all losses and liabilities are satisfied be entitled to rank upon any fund left for distribution when these are satisfied.
Then legal effect may be given the right expressed in the above clause to “a return.”
For these considerations I do not think the cancellation referred to in the clause covers the kind of cancellation resulting from the failure of the insured.
As to the other ground of defence that the violation of the law which led to suspension was such a
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fraud in itself apart from actual misrepresentation of the condition of things (of which there is no evidence) it seems to me hardly arguable.
I think the appeal should be dismissed with costs.
But lest there be ultimately a fund such as I have indicated upon which appellants may become entitled to rank, the judgment herein should not operate as an estoppel in answer to any such claim and if desired should be amended so as to avoid any such consequence by declaring it to be without prejudice to any such possible right.
Duff J.—The respondent company was incorporated in 1853 by the Legislature of Massachusetts for the purpose of carrying on marine insurance “on the mutual principle.” On the 18th of March, 1908 (the assets of the company appearing to be insufficient to meet its liabilities) the company and its affairs were placed in the hands of a receiver at the instance of the insurance commissioner of Massachusetts pursuant to certain statutory provisions (chapter 576, Acts of 1907), and its officers and agents were restrained by the same order from continuing the business of the company. In the years 1907 and 1908 each of the respondents, Pickles and Smith, insured a number of vessels in the company, and the actions out of which these appeals arise were brought by the receiver in the name of the company upon the premium notes given under these contracts of insurance. In the Nova Scotia courts judgment was given against the appellants. In this court the defence relied upon rests upon a clause found in both sets of policies in terms which in the view I take of the case may be treated as identical.
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In the policies issued to the appellant Pickles the clause is as follows:—
The consideration for this insurance is hereby fixed at the rate of 9¼ per cent. To return per cent. for every thirty days of unexpired time if this policy be cancelled.
In the policy issued to the appellant Smith the blank in the second sentence is filled in, 75% being specified. The contention is that the proceedings already referred to in the Massachusetts courts constitute a cancellation of each of these policies within the meaning of this clause, and further, that the appellants are entitled to a deduction from the amount of the premium note in each case of the sum returnable by the company under the clause. In the view I take of the case it does not appear to be necessary to decide the question whether or not the order of the Massachusetts court appointing a receiver and restraining the company from further continuing its business (which admittedly had the effect of making legally impossible any payments under any of these policies in respect of losses occurring thereafter) constitutes a cancellation of the policies within the meaning of this clause. The conclusion to which I have come is this: Assuming the appellant’s construction to be on this point correct, and assuming further that in the events which have happened a right to recover a proportionate part of the premium has become vested in the appellants, this right is one which they can only assert as creditors of the company in the insolvency proceedings in Massachusetts and that in the actions with which we are concerned on these appeals they are liable for the full amount of their premium notes.
The appellants by accepting these policies became, by the by-laws of the company of which they had notice
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in the policies, members of the corporation. By virtue of the contract of insurance the insured stands in a two-fold relation to the company and the other policy holders. To the extent of his own policy he is insured; to the extent of his own premium note he is an insurer in the sense that he is a holder of unpaid capital in respect of which he is entitled to share in the profits of the company, and to the extent of that capital he is liable to contribute to the discharge of the obligations of the company. That this, according to the settled law of Massachusetts, is the position of the appellants is put beyond dispute by the decision of the Supreme Court of that State in Hill v. Baker, and the cases therein referred to; and it is, of course, indisputable that the appellants being members of the respondent corporation their relations, as members of the corporation, to the corporation itself as well as to other members of the corporation as such, are governed by the laws of Massachusetts. By the law of that State
the premiums paid or absolutely agreed to be paid by the members for their policies constitute a fund for the payment of losses; and the principle is the same whether the payment is in cash or by note, so long as the policy is issued upon the mutual principle to one who by accepting the insurance becomes a member of the insurance company: Hill v. Baker, page 308.
The appellants’ premium notes forming part of a fund for the payment of losses, the effect of the proceedings in insolvency on general principles would be that the company being insolvent would hold this fund in trust for a distribution among its creditors, according to the order and priority ordained by the lex fori concursus: Galbraith v. Grimshaw, at page 512; Chartered Bank of India, Australia, and China v. Henderson, at page 513. And this appears, from the
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authorities referred to, to be the law of Massachusetts; see also May on Insurance (4 ed.), 1900, sec. 596.
The receiver is, therefore, entitled to have the premiums which the appellants have agreed to pay applied in liquidation of the company’s obligations generally; and these premiums, although recovered in the name of the company, are affected by a trust for that purpose. Assuming then that the appellants have a just claim to recover a proportionate part of each premium from the company under the clauses relied upon that claim in the circumstances can only be recognized as a right to rank pro ratâ upon the assets available for the purpose of liquidating it together with other claims of equal rank, and it is a claim which must be presented and passed upon in the insolvency proceedings.
Anglin J.—The insurance policies in question should, in my opinion, be construed according to the law of the State of Massachusetts. According to that law, as proved in this case, I agree that there was not a cancellation of these policies within the meaning of the clauses in them providing for a rebate or return of premium on cancellation. For the reasons stated by Mr. Justice Russell I would dismiss this appeal with costs.
Brodeur J.—I would dismiss this appeal with costs.
Appeal dismissed with costs.
Solicitor for the appellants: W. H. Fulton.
Solicitor for the respondents: W. A. Henry.
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