The problem to be resolved in this case is one of first impression in New Jersey. The defendant, a mutual life insurance company, issued five policies of ordinary insurance on the life of the plaintiff Herman L. Cohen, which he still owns. They were issued between April 14, 1919 and December 26, 1930. The first two were 20-payment life policies, and the latter three originally were whole-life policies but later were converted at the request of the insured to 15-payment life policies. The policies all contain substantially similar benefit provisions and vary in face amount of insurance payable on the death of the insured from $1,000 to $12,500. All of the policies became paid up between April 14, 1938 and December 26, 1944. Dividends were paid on all policies while premiums were being paid and thereafter through the year 1945, but no dividend has been paid on any of the five policies since 1945.
The defendant issued two policies on the life of the intervening plaintiff Norman Hertz, which he still owns. Both were issued in February 1922 and were 20-payment life policies. They became paid up in February 1941. Dividends on these policies were also paid through the year 1945, but not thereafter.
Since the contentions of each plaintiff are the same, they will be dealt with jointly. They say that, since this is a
mutual company, all policyholders are entitled to participate each year in the earnings of the company, and that the defendant has breached the terms of its contracts with them in failing to pay dividends on their policies after 1945. Plaintiffs further say that defendant's practice of grouping its policies into numerous classes, for the purpose, among others, of determining what the policies contribute to divisible surplus and whether they are entitled to dividends, finds no support in the terms of the insurance contracts. They argue that it was, and is, an abuse of discretion for the directors of the defendant to vote for the payment of dividends to some policyholders, but not to all, and particularly the plaintiffs and others similarly situated. Plaintiffs seek judgment requiring the company to pay dividends upon their policies for the omitted years -- during all of which years the company admittedly had divisible surplus and paid dividends to some policyholders -- and refrain from omitting payments to them in the future in years when dividends are paid. Plaintiffs also seek an accounting.
There is no charge of any bad faith on the part of the defendant's directors, nor of any neglect of duty, but an abuse of discretion in the apportionment and allocation of dividends is alleged. Defendant admits the non-payment of dividends after the year 1945, but says that after that date the plaintiffs' policies did not contribute to the divisible surplus of the company and hence were not entitled to dividends. It declares that the directors each year, upon receipt of a detailed report from the company's actuaries and upon recommendation of the dividend committee of the board, determine what part of the company's annual net surplus shall be considered divisible surplus to be paid as dividends to policyholders. The company further says that each year its actuaries, after grouping all policies into classes, make a detailed study and examination of them and determine which policies have contributed to the divisible surplus for that year. Dividends are allocated to these policies, but not to the others. Such examinations and analyses, beginning
in the year 1946 and continuing to date, revealed to the company that none of the plaintiffs' policies had made a contribution to divisible surplus, but in fact were in a deficit position. The company determined, therefore, that no dividends could properly be allocated to those policies.
The testimony reveals that there are several hundred thousand policies situated similarly to those of the plaintiffs, and the face amount of insurance involved is over 656 million dollars. It is said that a disposition of this case adversely to the defendant will not only affect existing contracts amounting to many hundreds of millions of dollars, but will disturb the methods and bases upon which business transactions have heretofore been conducted by mutual life insurance companies for over 75 years and will cause great confusion and disorder to the system under which this business has been conducted. If, however, the principle used in the dividend allocation is an incorrect one, the fact that it has been used for such a long period will not prevent the court from according relief to these plaintiffs. The mere fact that the plaintiffs have only seven policies out of many millions is unimportant if their cause of action is a just one. The courts must always be available to accord justice to all persons alike, and to remedy wrongs, regardless of the economic, social or other status of the persons involved. This has been a basic concept of our system of jurisprudence for centuries. See Magna Charta; 11 Am. Jur., Constitutional Law, sec. 326, p. 1121.
Dividends paid by mutual life insurance companies differ in concept from dividends paid by ordinary business corporations. The latter represent a return to the stockholder upon his investment. They are similar, however, in that the amount paid is discretionary with the corporation's board of directors both as to time and manner of payment. 13 Am. Jur., Corporations, sec. 645, p. 637; Murray v. Beattie Manufacturing Co. , 79 N.J. Eq. 604 (E. & A. 1912); Sanders v. Cuba Railroad Co. , 21 N.J. 78 (1956). In a mutual life insurance company, however, the dividend
represents a return to the policyholder of that portion of his premium which the company does not need to cover the actual cost of furnishing the insurance. This principle is aptly stated in Rhine v. New York Life Ins. Co. , 273 N.Y. 1, 6 N.E. 2 d 74, at page 76 (Ct. App. 1936):
"'Under such mutual plan, in order to provide for unforeseen contingencies, the premium to be paid by the member is fixed by the company at an amount somewhat in excess of that which the company anticipates will be necessary in order to cover the cost of furnishing the insurance. The member pays that amount for the insurance in advance but later receives back such excess payment, if any, as a dividend, and thus gets the insurance at actual cost.'"
Since the factors upon which premiums are calculated vary with different forms of insurance and groups of policyholders, the amount which the company anticipates will be necessary in order to cover the cost of furnishing insurance over the actual realized cost will vary. The apportionment must be based upon calculation each year of the actual cost of furnishing the particular insurance provided for by each policy. Accordingly, the defendant, in apportioning divisible surplus, ascertains the amount which each policy contributes to that surplus and then distributes it in the same proportion as the policyholders have contributed to the surplus. In Rhine v. New York Life Ins. Co., supra , the court said, 6 N.E. 2 d at page 77:
"* * * Accordingly the defendant company and all other mutual companies, in apportioning divisible surplus, use the 'contribution' method which aims to distribute the divisible surplus amongst policyholders in the same proportion as the ...