Kennedy v. Royal Highlanders

189 N.W. 612, 109 Neb. 24, 1922 Neb. LEXIS 8

• Court: Nebraska Supreme Court
• Decided: July 19, 1922
• Docket: No. 22346
• Status: Published

Opinion

Flansburg, J.

This was a proceeding brought by certain members of the Royal Highlanders, a fraternal beneficiary association, against the association and other members who were holders of what were called “pioneer certificates.” These certificates contained a provision for the payment of endowments. The object of the suit was to enjoin the society from paying such endowments on the ground that the provisions were unenforceable. The trial court denied the relief, held the endowment provision good and dismissed the proceeding. An appeal is taken from that order.

Prior to the year 1887 there were no laws particularly applying to mutual benefit associations, such associations being incorporated under the general insurance statutes. In 1887 a statute was enacted (Laws 1887, ch. 18) providing that secret societies and associations, where the management and control was confined to the membership of the society, and which, in addition to benevolent and fraternal features, issued certificates of indemnity, calling for payment of certain sums in case of death, disability or sickness of its members, should be exempt from the general insurance laws, but should be subject to other specific regulation. In 1895 a further statute of like import was enacted. Laws 1895, ch. 42. It provided for the organization of such societies not incorporated, and required all mutual benefit associations to submit their articles to the auditor of state and attorney general for their approval. Each corporation organized under the act, it was provided, must, before commencing business, have applications for insurance upon at least 250 lives for $1,000 each, and, where any such association did not have membership sufficient to pay the full amount of the certificate on an assessment, the association was required to signify in red ink on the application that the benefit was payable only in event that sufficient be collected upon an assessment to meet it. In 1896 the Royal Highlanders organized under this latter statute. For a period of two years, up to January 1, 1898, the association issued what was called its “pioneer certificates.” These contained provisions providing for the payment of the face of the policy as an endowment, in instalments of 10 per cent, a year, to members who reached the age of 50 years and had been a member in good standing for 20 years or more.

In 1919 the association amended its by-laws, the object and purpose of which amendment was to cancel the endowment provisions and hold them nugatory. It is argued that this was authorized under the reserve power of the society to amend its by-laws. The reserve power is based upon the provision in the by-laws and in the application for insurance, by which the member agreed to be bound by any future changes in the edicts of the society. Though such an agreement with the parties, reserving power to the society to amend its by-laws, would authorize it to raise its rates and adopt reasonable amendments affecting the relationship between the members as insurers, so far as such regulations might affect the organization, government or internal workings of the order, such, a provision does not authorize the society to cancel its contractual obligations. As pointed out in Case v. Supreme Tribe of Ben Hur, 106 Neb. 220 an increase in assessments is quite a different matter from a reduction of benefits specified in the policy. The reserve power, based upon an agreement of such a kind, does not authorize the society to reduce or change benefits which it has contracted to pay, where the contract to pay the benefit is one which the law recognizes as valid in its inception. Newhall v. Supreme Council, A. L. H., 181 Mass. 111; Gaut v. Supreme Council, A. L. H., 107 Tenn, 603, 55 L. R. A. 465; Russ v. Supreme Council, A. L. H., 110 La. 588; Knights Templars’ & Masons’ Life Indemnity Co. v. Jarman, 104 Fed. 638; Langan v. Supreme Council, A. L. H., 174 N. Y. 266; Supreme Lodge, Knights of Honor v. Bieler, 58 Ind. App. 550; Richey v. Sovereign Camp, W. O. W., 184 Ia. 10; Shepperd v. Bankers Union of the World, 77 Neb. 85.

It is further contended, however, that by reason of the provisions of the 1895 statute the endowment feature in these pioneer certificates was unenforceable, either as being an illegal contract or as being ultra vires of the powers of the association.

The 1895 law was entitled': “An act to regulate the organization and operation of mutual benefit associations, life insurance and life insurance companies.”

Section 1 of the act is as follows: “Every corporation of association organized under the laws of this state upon the mutual assessment, cooperative or natural premium plan, for the purpose of insuring the lives of individuals, or of furnishing benefits to the widows, heirs, orphans or legatees of deceased members, or of paying endowments or accident indemnity, shall, before commencing business, comply with the provisions of this act.”

Those representing the holders of the pioneer certificates argue that this provision of the statute recognizes the right of the associations named in the section to provide for the payment of endowments to the members. The petitioners and the association, on the other hand, point out that the writing of endowments is expressly prohibited by section 16 of the same chapter, being a part of the act and enacted at the same time as section 1. Section 16 is as follows:

“Any corporation or association doing business in this state, which provides, in the main, for the payment of death losses or accident indemnity by any assessment upon its members or upon the natural premium plan, shall, for the purpose of this act, be deemed a mutual benefit association, and shall not be subject to the general insurance laws of this state, regulating life insurance. No corporation or association, operating upon the assessment plan, promising benefits upon any other event than that of the death or disability resulting from accident to the member shall be permitted to do business in this state. This act shall not relieve any corporation or assessment association, now doing business in this state, from the fulfilment of any contract heretofore entered into with its members under its policies or certificates of membership, nor shall any member be released hereby from his or her part of said contract.”

It is to be noted that the prohibition found in section 16 literally applies only to those companies operating upon the “assessment plan.” It is the argument of the representatives of the holders of the pioneer certificates that the term “assessment plan,” as used in this section, was intended to designate those mutual benefit associations which made their assessments upon the members after a loss had occurred, and Avhen the amount, necessary to pay the loss, had become determined. It is argued that such associations, operating under what counsel denominates as- the “pass the hat” plan, are the only associations which are purely assessment associations, and that the association which collects regular payments from its members, with the idea of thus accumulating from the parties in advance only sufficient to pay the current losses as they occur, and with power to change the rate of assessnicnt from time to time as necessary, is not an association operating upon the “assessment plan.”

It may be that the legislature intended to make a distinction between associations which operated upon the assessment plan and those operating upon the “natural premium” plan. The two terms are used in seeming contradistinction to each other in the first sentence of section 16. The natural premium plan,' as we understand it, was based upon such a schedule of rates that each member was required to pay, during each year, the cost of insurance for him at his attained age for that year. Each member as he went along, in theory, paid the full cost of carrying his individual certificate, thus supposedly obviating the necessity of making assessments. The testimony shows, however, that some companies, operating upon the natural premium plan, were, in a broad sense, assessment companies.

The legislature may have considered that some of the associations, described in section 1, which were brought Avithin the act were associations which did not operate upon what was generally known to be the assessment plan, and, if so, the prohibition found in section-16 was not intended to apply to them. If, on the other hand, section 1 refers to companies only which operated under what was known to be the assessment plan, then the prohibition found in section 16, if section 1 should be construed’ to authorize the writing of endowments, Avould be directly contradictory of that authorization found in section 1.

The chapter, considered in its entirety, seems to us to contemplate that those companies covered by it were all companies which operated upon some plan of assessment basis. The regulations throughout have largely to do with assessments. In section 4 “each association organised under this act” is required to indicate on its policy that benefits are contingent on the amount of an assessment to meet them, wherever the membership in any such association is not sufficient to pay the full amount of a certificate on an assessment. It Avould appear that the legislature throughout the act was speaking of assessment companies only.

The by-laws of the Royal Highlanders association contained a provision setting forth a schedule of rates, and it was provided that the member, upon his entrance into the society, and where he procured a benefit certificate to be issued to him, should agree to pay a certain amount according to his attained age at the time of entrance. The schedule is as follows:

$500 $1,000 $2,000 $3,000 Age at Nearest Birthday

.40 .80 1.20 From 18 to 27 years........20

.50 1.00 1.50 From 28 to 32 years........30

.60 1.20 1.80 From 33 to 37 years........30

.80 1.60 2.40 From 38 to 43 years........40

.90 1.80 From 44 to 47 years ........50

1.20 2.40 From 48 to 49 years........60

1.40 2.80 From 49 to 50 years........70

The certificate provided that these assessments should be paid monthly. By another provision of the by-laws, the executive castle, being the representative body of the association, composed of the general officers and the delegates from the tributary bodies, was given the right to fix the rates of assessment. As these rates were fixed by the bylaws, it was necessary for the executive castle to change the rates, according to the rules of the order for amending by-laws, at a special or general session. Each member in addition to these assessments was also charged dues which were in the nature of a per capita tax of not more than $1 a year.

It is argued by the representatives of the holders of the pioneer certificates that this plan of operation was a stipulated premium plan, and not an assessment plan of insurance, as the rates were due at regular intervals and were fixed by the contract with the member. It cannot be said, however, that the assessments were unalterably fixed by the contract, for the contract itself contained the usual provision that the member agreed that “The edicts of the executive'castle of the Royal Highlanders, now in force, or that may hereafter be adopted, shall form the basis of this contract for beneficial membership;” and “This application and the laws of the executive castle now in force, or that may hereafter be adopted, are made a part of the contract between myself and the executive castle, and I for myself and my beneficiary or beneficiaries, agree to conform to and be governed thereby.” Unquestionably, the society had the right to amend its by-laws and change its rates in such a manner as was found necessary from time to time to carry out and perform the obligations which it had undertaken by its insurance contract, so far as that contract was valid and legal. Funk v. Stevens, 102 Neb. 681; Fowler v. Sovereign Camp, W. O. W., 106 Neb. 192; Case v. Supreme Tribe of Ben Hur, supra.

We think the Royal Highlanders association, under its plan, as above set out, comes clearly within what was generally known to be an association operating upon the assessment plan. State v. Root, 83 Wis. 667, 19 L. R. A. 271; Mutual Reserve Life Ins. Co. v. Roth, 122 Fed. 853; Hayden v. Franklin Life Ins. Co., 136 Fed. 285; Haydel v. Mutual Reserve Fund Life Ass’n, 98 Fed. 200; Moran v. Franklin Life Ins. Co., 160 Mo. App. 407; Westerman v. Supreme Lodge, K. of P., 196 Mo. 670.

It is true that in Missouri the legislature has defined the term “assessment plan,” but the reasoning in the Missouri cases, in the discussion of that definition, brings out what we believe to be the general acceptation of the term.

Our conclusion, then, being that the Royal Highlanders was an association operating upon the assessment plan, as that term is used in the statute, the question remains as to how far the provisions of the statute may be held to be effective in preventing such association from writing endowment insurance, and how far those provisions of the statute can be held to render the contracts to pay endowments void and unenforceable, as being beyond the extent of the powers of the association, or as being prohibited as in violation of the declared public policy of the state.

The provisions of the act are not clear statements of the exact intention of the legislature. Section 1 does not purport to be an express grant of the powers specified to those associations which should be organized under the act, though it seems to be an indefinite recognition that such companies should have those powers. Such a recognition of powers in associations to be organized under the act may be logically construed as an intention to grant to them the powers so enumerated. 11 A C. J. 259, sec. 2097.

Section 1, standing alone then, had it not been for the prohibition contained in section 16, might well have been construed as a grant of power to the associations to write endowment insurance.

But by section 16 we find a prohibition, declaring that any association, operating upon the assessment plan, if it promises benefits upon any other event than that of the death or disability of its members, shall not be permitted to do business in this state. The two sections of the statute, taken together, and each of them given the interpretation of which they are individually capable, lead to the result that section 1 purports to be a grant of authority to write endowment insurance, while section 16 declares that if any company, so authorized to write endowment insurance, should do so, it should not be permitted to do business in the state. The two provisions, thus construed, lead to an absurdity. The prohibition in section 16 is, furthermore, not a clear and definite statement that such associations shall not have the power to write endowment insurance, but purports to be simply a limitation upon their right to do business. The fact, standing alone, that they were unlawfully permitted to do business in the state would be no defense to their contracts.

The intent of the legislature, as gathered from the entire statute, cannot be said to be clear beyond doubt or ambiguity. It is open to construction. The officers, to whom the enforcement of the provisions of the statute has been delegated, as well as the society itself, have construed the uncertain and ambiguous provisions of the statute as an authorization to this company to write endowment insuranee. In 1896, when the Royal Highlanders association was organized, its articles and by-laws were submitted to the auditor and to the attorney general, as provided by the statute, and the plan of operation of the society was. approved and permission granted to operate upon the plan presented. The by-laws submitted to these officers set forth the form of benefit certificate which the association proposed to use. This form contained the endowment provision Avhich is noAV found embodied in the pioneer certificates in controversy. For 23 years the society has not questioned the validity of those endoAvment provisions. It furthermore appears that counsel for the association, in his report to the society in 1919, recommending that a by-law be enacted to cancel the endowment provisions, premised his remarks with a statement that the laws of Nebraska, existing at the time of the organization of the society and the issuance of the certificates, authorized the wilting of such proAÚsions.

The contemporaneous construction placed upon a statute by those charged with its execution, where such construction has long prevailed and been recognized by the parties Avho «are concerned and who are ruled by the statute, will not be disregarded, unless it is clear that such construction was erroneous. The statute is not so clear that it is free from doubt as to Avimt the legislature, intended, and we find no cogent reason for disturbing contractual obligations which have groAvn up based upon that construction, and which have existed and been recognized by the society for so many years. Clark’s Run & S. R. Turnpike Road Co. v. Commonwealth, 96 Ky. 525; City of Louisville v. Louisville Water Co., 105 Ky. 754; Van Veen v. Graham County, 13 Ariz. 167; The Allan Wilde, 264 Fed. 291; Moriarty v. City of New York, 110 N. Y. Supp. 842; Montgomery Light A Traction Co. v. Avant, 202 Ala. 404, 3 A. L. R. 384; Laub v. Furnas County, 104 Neb. 402; State v. Holcomb, 46 Neb. 88; 25 R. C. L. 1043, sec. 274; 26 Cyc. 1139.

It is beyond question that the society has failed to require of these members in the past payments sufficient in amount to cover the cost of carrying the endowment provisions. Moreover, the payments have been insufficient even to cover the cost of meeting the other benefit provisions, exclusive of endowments. The society had the power, however, and should have exercised it, to raise rates to such an extent as to make them adequate. It cannot defend upon the ground that it has not done so.

The endowment provisions of these certificates are of added value, and an additional assessment, to cover the difference-between the cost of carrying the policy with the endowment and the cost of carrying it without that provision, would have been 'justified.

In all other respects, aside from the endowment provision, the certificate provisions of the entire membership are the same, and, as to those provisions, held in common by all members in the society, the society was, of course, compelled to preserve absolute mutuality; but it was not compelled, nor was it even proper, as we view it, to require the members at large, who had no endowment provision in their policies, to pay the same rates as those members who were to receive endowments. The members at large could not justly be called upon to contribute to the payment of benefits in which they did not share. It seems to us that the society should, from the time it ceased writing endowment provisions, January, 1898, have charged an additional assessment to the holders of those certificates, according to the added value or cost of carrying the endowment provision. As the situation now stands, the pioneer certificate, holders have a vested interest in their contracts and in the funds which the society has accumulated. Of these rights they cannot justly be deprived. We see no reason why the society should not now amend its by-laws so as to require the holders of pioneer certificates to elect between surrendering the endowment provision or paying from this time forward an additional amount sufficient to cover the cost of carrying it, provided no discrimination is made against them as to the assessments to cover the other provisions of their certificates.

The judgment of the district court is therefore

Affirmed.