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decided: June 11, 1917.



Author: Pitney

[ 244 U.S. Page 585]

 MR. JUSTICE PITNEY delivered the opinion of the court.

This was an action brought by respondent, a fire and marine insurance company of the State of Pennsylvania, to recover a part of the excise taxes exacted of it for the years 1910 and 1911 under the Act of August 5, 1909, c. 6, § 38, 36 Stat. 11, 112. As the case comes here, only two items are in dispute, one for each of the years mentioned, representing the tax upon amounts added in each of those years to that part of what are called its "reserve funds" that is held against accrued but unpaid losses.

The act imposed upon every insurance company organized

[ 244 U.S. Page 586]

     under the laws of the United States or of any State an annual excise tax with respect to the carrying on or doing business, equivalent to one per centum upon its entire net income over and above $5,000, with exceptions not here pertinent. The second paragraph of § 38 provided: "Such net income shall be ascertained by deducting from the gross amount of the income of such . . . insurance company . . . (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds."

The italics indicate the particular words upon which the controversy turns; the question being whether, within the meaning of the act of Congress, "reserve funds," with annual or occasional additions, are "required by law," in Pennsylvania, to be maintained by fire and marine insurance companies, other than the "unearned premium" or "reinsurance reserve," known to the general law of insurance.

The District Court rendered a judgment in plaintiff's favor, excluding however the disputed items (218 Fed. Rep. 905); on plaintiff's writ of error the Circuit Court of Appeals reversed this judgment, with instructions to allow the claim in full (224 Fed. Rep. 657); and the case was brought here writ of certiorari.

Plaintiff was chartered by a special act, but is subject to the state insurance law. Its business is confined to fire and marine insurance.

The law of Pennsylvania (Act of June 1, 1911, P.L. 607, 608) creates a State Insurance Commissioner with supervisory control over the companies; provides in § 4 that he shall see that all the laws of the Commonwealth

[ 244 U.S. Page 587]

     respecting insurance companies are faithfully executed, authorizing him to make examinations, to have access to all the books and papers of any company, to examine witnesses relative to its affairs, transactions, and condition, to publish the result of his examination when he deems it for the interest of the policy-holders to do so, and to suspend the entire business of any company during its non-compliance with any provision of law obligatory upon it, or whenever he shall find that its assets are insufficient to justify its continuance in business; and whenever he finds any company to be insolvent or fraudulently conducted, or its assets insufficient for the carrying on of its business, he is to communicate the facts to the Attorney General. By § 15 every insurance company is required to file annual statements with the commissioner, upon blank forms to be furnished by him such as shall seem to him best adapted to elicit a true exhibit of their financial condition. Sections 7, 8, and 9, set forth in the margin,*fn1

[ 244 U.S. Page 588]

     make specific provisions for ascertaining the reserve for different classes of companies other than life insurance companies. Another act of the same date (P.L. 1911, p. 599) provides for judicial proceedings at the instance of the insurance commissioner looking to the dissolution of insolvent and delinquent companies. Its provisions need not be quoted.

A previous act (April 4, 1873, P.L. 20, 22), required a specific reinsurance reserve against unexpired risks on fire, marine, and inland policies. The Act of 1911, just quoted, requires the maintenance of a substantially similar reserve; and, with respect to casualty companies and these only, that a reserve be maintained against unpaid losses, based upon the amount of claims presented. The reference in § 9 to "reinsurance and loss reserves, as above defined" is limited by what precedes it; and the section deals not alone with "reserves," but requires "all other debts and claims" to be accounted as liabilities.

It appears that under this legislation, and under previous statutes in force since 1873, the insurance commissioner has required plaintiff and similar companies to return each year, as an item among their liabilities, the net amount of unpaid losses and claims, whether actually adjusted, in process of adjustment, or resisted. And, although this practice has not been sanctioned by any decision of the Supreme Court of the State, it is relied upon as an administrative interpretation of the law.

[ 244 U.S. Page 589]

     Conceding full effect to this, it still does not answer the question whether the amounts required to be held against unpaid losses, in the case of fire and marine insurance companies, are held as "reserves," within the meaning of the Pennsylvania law or of the act of Congress, however they may be designated upon the official forms. As already appears, the Pennsylvania act specifically requires debts and claims of all kinds to be included in the statement of liabilities, and treats them as something distinct from reserves. The object is to exercise abundant caution to maintain the companies in a secure financial position.

The act of Congress, on the other hand, deals with reserves not particularly in their bearing upon the solvency of the company, but as they aid in determining what part of the gross income ought to be treated as net income for purposes of taxation. There is a specific provision for deducting "all losses actually sustained within the year and not compensated by insurance or otherwise." And this is a sufficient indication that losses in immediate contemplation, but not as yet actually sustained, were not intended to be treated as part of the reserve funds; that term rather having reference to the funds ordinarily held as against the contingent liability on outstanding policies.

In our opinion the reserve against unpaid losses is not "required by law," in Pennsylvania, within the meaning of the act of Congress.

It results that the judgment of the Circuit Court of Appeals should be reversed and that of the District Court affirmed.



MR. JUSTICE McREYNOLDS took no part in the consideration or decision of this case.

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