Appeal, No. 19 March T., 1961, from order of Court of Common Pleas of Dauphin County, No. 309 Commonwealth Docket, 1959, in case of Insurance Department of the Commonwealth of Pennsylvania et al. v. City of Philadelphia. Order affirmed.
David Berger, City Solicitor, with him Lewis Kates, Deputy City Solicitor, and Levy Anderson, First Deputy City Solicitor, for City if Philadelphia, appellant.
Michael J. Stack, Jr., Deputy Attorney General, with him Charles V. Walsh, General Counsel, Insurance Department, and Anne X. Alpern, Attorney General, for Commonwealth, appellee.
Robert H. Young, with him Donald A. Scott, Arthur Littleton, John A. Skelton, and Morgan, Lewis & Bockius, for Middle Department Association of Fire Underwriters, intervening appellee.
Before Ervin, Wright, Woodside, Watkins, Montgomery, and Flood, JJ. (rhodes, P.j., absent).
[ 196 Pa. Super. Page 225]
This is an appeal from an order of the Court of Common Pleas of Dauphin County sustaining an adjudication of the Insurance Commissioner approving a rate filing by the Middle Department Association of Fire Underwriters.
The filing and adjudication were made under The Fire Marine and Inland Marine Rate Regulatory Act of June 11, 1947, P.L. 551, 40 P.S. § 1221 et seq. We are concerned here with fire insurance rates only.
As this is the first insurance rate filing case to reach either of our appellate courts, a brief history of insurance regulation and rate making is in order. It has long been settled that the insurance business is charged with a public interest, and that its regulation is constitutional. Commonwealth v. Vrooman, 164 Pa. 306, 30 A. 217 (1894); German Alliance Insurance Co. v. Lewis, 34 S.Ct. 612, 233 U.S. 389, 58 L.Ed. 1011 (1914). Historically, the regulation of insurance has been recognized as a function of the states rather than a function of the federal government. For many years no effort was made in any court proceedings to apply the Sherman Anti-Trust Act and other Acts of Congress to insurance, on the grounds that insurance was not interstate commerce, and that Congress did not intend its general acts to relate to insurance.
In 1944 the Supreme Court of the United States held that insurance companies which conduct their activities across state lines are within the regulatory power of Congress under the Commerce Clause of the Federal Constitution, and that insurance was subject to the Sherman Anti-Trust Act. United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 S.Ct. 1162, 88 L.Ed. 1440 (1944).
[ 196 Pa. Super. Page 226]
Congress, thereupon, enacted the McCarran-Ferguson Act of March 9, 1945, 59 Stat. 33, 15 U.S.C.A. §§ 1011-1015, which, as amended, provided, inter alia, that the business of insurance should be subject to the laws of the several States, and not to the Acts of Congress (unless such acts specifically relate to insurance), except that the Sherman Act, and certain other acts should be applicable to the business of insurance after June 30, 1948, to the extent that such business is not regulated by State Law.
Relatively few states had entered into the field of insurance rate regulation prior to 1945, but by June 30, 1948, all of the states had passed rate regulating legislation. The opinion of the Supreme Court of the United States in 1944 and the action of Congress in 1945 caused the National Association of Insurance Commissioners to prepare model rate regulatory acts which, with variations, were promptly adopted by Pennsylvania and most other states.
Pennsylvania adopted The Casualty & Surety Rate Regulatory Act of June 11, 1947, P.L. 538, 40 P.S. §§ 1181-1199, with which we are not here concerned, and The Fire Marine and Inland Marine Rate Regulatory Act of June 11, 1947, P.L. 551, 40 P.S. §§ 1221-1238, supra, with which we are here concerned, and which we shall hereafter refer to as the Regulatory Act.
The purpose of the Regulatory Act as expressed in its first section "is to promote the public welfare by regulating insurance rates to the end that they shall not be excessive, inadequate or unfairly discriminatory, to enable authorized insurers to meet all requirements of the insuring public of this Commonwealth, and to authorize and regulate cooperative action among insurers in rate making and in other matters within the scope of this Act. Nothing in this Act is intended (1) to prohibit or discourage reasonable competition, or (2) to prohibit or encourage uniformity in insurance rates, rating systems, rating plans or practices.
[ 196 Pa. Super. Page 227]
This Act shall be liberally interpreted to carry into effect its purpose as herein set forth." (Emphasis supplied.) 40 P.S. § 1221.
With or without regulation, it has always been in the public interest to have insurance premiums high enough to assure the payment of losses, and yet low enough to enable the public to secure protection upon the payment of a reasonable premium. To assure the availability of funds by insurers to pay losses, the state has long required insurance companies to be licensed, to maintain reserves and to submit to examination to determine solvency and compliance with the law. This has discouraged companies from charging "inadequate" rates. Generally, insurers were prevented from charging "excessive" rates by the keen competition which has long been prevalent in most segments of the insurance business.
Prior to the advent of state rate regulation, the fixing of rates having a proper relation to the risk involved, and thus not "unfairly discriminatory" had been a problem of long standing to insurance companies. It is evident that the risks in fire insurance vary substantially, and are influenced by many factors, including the type of construction of the building insured, its proximity to hazardous risks, the use to which it is being put, and the fire protection available in the area. It is evident, too, that with hundreds of insurance companies paying losses in the same area, the loss experience of any one company may not be sufficiently broad to form the basis for fair rates with any degree of refinement. On the other hand, the combined loss experience of all the companies paying losses makes possible the formulation of rates which more nearly reflect the actual risk. Rates based upon the experience of many insurers are likely to be more equitable to both the insurer and the insured than rates based upon a more limited experience.
[ 196 Pa. Super. Page 228]
The difficulty involved in each company establishing its own rates and the need for greater experience led to "co-operative action among insurers" and the formation of associations to gather loss statistics and make fire rates which the member companies generally agreed to follow. The Middle Department Association of Fire Underwriters, known in the trade as the Middle Department, is such an association. It has 360 members and subscribing insurance companies doing a fire insurance business in Pennsylvania. Under a license from the Insurance Department, issued under § 6 of the Regulatory Act, 40 P.S. § 1226, it prepares and files the premium rates which are charged by all of its members and subscribers except those which file deviations from those rates with the Insurance Commissioner. The member and subscriber companies of the Middle Department write approximately 78% of the total fire insurance business in Pennsylvania.
For many years fire insurance rates in Pennsylvania were established by four separate territorial rating bureaus with numerous subdivisions. These bureaus began merging their experiences in 1932, and in 1948 they merged into one association known as the Middle Department Association of Fire Underwriters. At that time, with the approval of the Insurance Commissioner, the state was divided into five major areas or zones for the purposes, inter alia, of gathering loss experience and of making rates.*fn1
[ 196 Pa. Super. Page 229]
When the Rate Regulatory Act became effective, the Middle Department was licensed as a rate making organization. It filed its constitution and by-laws with the Insurance Department and filed rates for its subscribing members. These rates were amended and changed from time to time, and deviations were allowed various companies with the approval of the Insurance Commissioner.
The Middle Department annually reviews its rates to determine whether they are excessive, inadequate or unfairly discriminatory. Its records showed that for 1952-1956, the loss ratio for the principal classes for which rate differentials are established were 70.4% of premiums for risks written in the City of Philadelphia against 42.1% for the balance of the Commonwealth. The loss ratio by zones was as follows: Zone 1, 39.3%; Zone 2, 47.2%; Zone 3, 40.8%; Zone 4, 70.4%; Zone 5, 48.3%. (See footnote 1). From these figures, filed by the Middle Department with the Insurance Commissioner in support of its rate filing, it is evident that fire insurance rates in these categories were unfairly discriminatory in favor of the owners of Philadelphia property and against the owners of property in the rest of the Commonwealth.*fn2
[ 196 Pa. Super. Page 230]
The Middle Department, thereupon, filed a rate adjustment with the Insurance Commissioner on September 17, 1958. The supporting statistics which the Middle Department filed with the commissioner in support of the rate adjustments, were supplied to it by the National Board of Fire Underwriters, The Mutual Insurance Advisory Association, and the National Association of Independent Insurers, all of which are advisory organizations operating under § 10 of the Regulatory Act, 40 P.S. § 1230, and are examined by the Insurance Department.
The Middle Department, in determining whether the average statewide rate level required adjustment, compared the total annual earned premiums of stock and mutual companies averaged for a period of six years (1952 though 1957) with the total incurred losses of such companies for the same six-year period, making provisions for expenses and 6 per cent for underwriting profit and contingencies. It employed an expense ratio of 44.6% determined by deducting a loss adjustment expense estimated at a ratio of 3.4% from the aggregate 1956 expenses of stock companies attributable to Pennsylvania. It adjusted the earned premiums of stock and mutual companies for the years 1952 through 1957 to reflect former rate changes, and then weighed the premium and loss experience for such years by factors of 10 per cent for 1952, 1953 and 1954; 15 per cent for 1955; 25 per cent for 1956; and 30 per cent for 1957. The average loss ratio thus determined amounted to 46.3% to which was added a loss adjustment expense ratio of 3.4%, resulting in an average loss ratio of 49.7% for the six year period. The average loss ratio for stock companies for the six-year period (1952 through 1957) on an adjusted and weighed basis is 52.7% which includes a loss adjustment expense ratio of 3.4%. The Middle Department established a balancing point loss ratio of 49.4% by deducting from
[ 196 Pa. Super. Page 231100]
% the aggregate 1956 Pennsylvania expense ratio for stock companies of 44.6%, plus an allowance of 6% for underwriting profit and contingencies.
Since the adjusted and weighed average loss ratio of 49.7% for stock and mutual companies was within two percentage points of the balancing point loss ratio, no adjustment of the average state-wide rate level was requested in the Middle Department's Filing. Indeed, its filing projected an annual decrease of $36,158 in premiums on a state-wide basis.
The Middle Department's calculations for the period 1952 through 1957 show an underwriting profit on an average basis for both mutual and stock companies of 5.7 per cent, which is reduced to 2.7 per cent for stock companies, when the experience of mutual companies is omitted.
Losses for six state-wide occupancy classifications of property; namely, dwellings, household furniture, small stores and dwellings, apartments, mercantile buildings, and mercantile stock, are kept for each of the five separate geographic zones. (See footnote 2)
For rate adjustment purposes, the Middle Department grouped the 115 occupancy classifications established by the National Board of Fire Underwriters into 43 divisions. Proposed rate adjustments for six of such divisions were based upon loss experience applicable to the five geographical zones.
The rates proposed in this Filing on a zone and a state-wide basis for the 43 divisions were based upon loss experience of stock and mutual companies for the years 1952 through 1956. The Middle Department suggested, and the Insurance Commissioner found from the supporting data, that although the aggregate experience of stock and mutual companies did not justify an adjustment of the average state-wide rate level, an adjustment of rates between classifications and between zones was justified.
[ 196 Pa. Super. Page 232]
In proposing rate adjustments on a state-wide and zone basis, the Middle Department employed a loss ratio of 47% as a median point. No changes in rates were proposed where loss ratios on a zone or state-wide basis were within four percentage points above or below such median point, and the maximum rate adjustments upwards and downwards were 30%.
For the purposes of determining rates in Zone 4 (Philadelphia), the Middle Department established A areas and B areas; the B areas representing those sections of the city which have the highest fire incidence. We shall consider this division of Zone 4 in greater detail later in this opinion.
The Middle Department proposed no increase in rates for household dwellings and contents for 90% of the families in Philadelphia which occupy their own home as a single dwelling. Such owner-occupied single dwellings constitute 57% of all dwelling structures in Philadelphia.
One of the expressed purposes of the Regulatory Act is "to enable authorized insurers to meet all requirements of the insuring public of this Commonwealth." Rates which are so low that insurers consistently lose money on them not only violate the Regulatory Act because they are inadequate rates, but also because they do not enable the insurers to meet all requirements of the insuring public. Insurance companies are not required to write fire insurance in Pennsylvania. They cannot be expected to write policies at a loss over a period of years. The commissioner pointed out that the loss ratio was so high in parts of Philadelphia that many insurance companies refused to write insurance on property in the areas, and that it thus was becoming increasingly difficult for people owning property in those areas to obtain fire insurance. It would be a disservice to the insuring public of Philadelphia, as well as illegal, to insist upon the continuation of rates which are clearly inadequate.
[ 196 Pa. Super. Page 233]
By reason of § 4(d) of the Regulatory Act, 40 P.S. § 1224(d), the filing became effective October 17, 1958, and the Insurance Commissioner confirmed this by notice to the Middle Department. The following day the Solicitor of the City of Philadelphia, on behalf of that city, filed a complaint, and the Insurance Commissioner, acting under § 16(a) of the Regulatory Act, 40 P.S. § 1236(a), suspended the effective date of the new filing. Later the City of Pittsburgh filed a complaint, and the commissioner ...