Nos. 12 and 14 May Term, 1976, Appeal from the Order of the Commonwealth Court at No. 371 C.D. 1974
Roger C. Peterman, Andrew F. Giffin, Asst. Attys. Gen., Gerald Gornish, Deputy Atty. Gen., for appellant at No. 12 and appellee at No. 14.
Malcolm H. Waldron, Jr., Pittsburgh, for appellant at No. 14 and appellee at No. 12.
Jones, C. J., and Eagen, O'Brien, Roberts, Pomeroy, Nix and Manderino, JJ. Jones, former C. J., took no part in the consideration or decision of this case. Pomeroy, Nix and Manderino, JJ., concur in the result. Roberts, J., files a dissenting opinion in which Eagen, C. J., joins.
Safeguard Mutual Insurance Company (Safeguard), is a domestic mutual fire insurance company,*fn1 writing
assessable policies.*fn2 The Commonwealth of Pennsylvania, Department of Insurance (Department), contends that Safeguard has been operating in violation of the Insurance Department Act, Act of May 17, 1921, P.L. 789, § 1, 40 P.S. § 1, et seq., and as such is in an unsound financial condition that jeopardizes the interests of its policyholders, creditors and the public. It has on that basis made attempts to liquidate the company. The first time the Department took action against Safeguard on these grounds, the company was suspended from doing business in April, 1967, by order of the Insurance Commissioner, pursuant to the Insurance Department Act, supra. The suspension was later overturned. See Commonwealth v. Safeguard, 91 Dauphin 305 (Dauphin County Court, sitting at Commonwealth Docket) (1970).
The present litigation began after Safeguard filed a quarterly statement with the Department on June 20, 1973. The report did not satisfy the Department that Safeguard was solvent. The Department, therefore, audited the company pursuant to the Insurance Department Act, supra. The Department then conducted a formal hearing, after which the Insurance Commissioner ordered Safeguard suspended and petitioned in Commonwealth Court for its liquidation, pursuant to 40 P.S. § 202.
Commonwealth Court was satisfied that Safeguard was neither insolvent nor in a hazardous financial condition and overturned the suspension order. Pa. Insur. Dept. v. Safeguard Mtl., 18 Pa. Commw. 195, 336 A.2d 674 (1975). The Department appeals. Safeguard cross-appeals on those points on which the rulings of the Commonwealth Court were adverse to it.
The dispute of Safeguard's financial condition is based on the parties' conflicting views as to how the company's assets and liabilities are to be determined. There are several items that Safeguard would count as assets which the Department would disallow. Safeguard also disputes the Department's
contention that Safeguard is required to maintain certain reserves and count them as liabilities. If the Department's view is accepted, Safeguard's liabilities would exceed its assets and render it insolvent. The dispute is centered on the interpretation of the Insurance Department Act, supra.
In its statement to the Department, Safeguard reported that it had assets of $3,802,864.65 and liabilities of $1,766,183.09, giving it a surplus of $2,036,681.56. The Department's accounting would give Safeguard assets of $1,864,847.83 and liabilities of $2,390,247.24, meaning that Safeguard would have a deficiency of $525,399.41. According to the Department, the assets improperly claimed by Safeguard are as follows: A $29,320.57 overstatement of the value of certain United States treasury bonds, a $220,347.79 debenture issued by the C. M. Clark Insurance Agency, Inc., $105,846.23 in accounts receivable from the Clark Agency, $103,280.34 in stock, $138,131.64 in mortgages, $682,051.18 in real estate (offset by $4,000 in accrued real estate taxes which Safeguard owes only if it is allowed to claim the property as an asset), $27,847.91 in accrued interest, dividends, and real estate income, and $638,765.05 claimed to be recoverable from the Commonwealth as the cost incurred by Safeguard in sustaining its license after the 1967 suspension. The Department would add the following liabilities to those admitted to by Safeguard: $110,588.95 in unpaid premium taxes and $530,705.63 as a reserve for unearned premiums. The Department found that other assets were understated by $7,573.89 and other liabilities were overstated by $13,230.34. We will discuss those items that were adjudicated by the Commonwealth Court and are now before us.
I. UNEARNED PREMIUM RESERVES
The first issue we will discuss is whether Safeguard is required to maintain an unearned premium reserve as a liability. When an insurer collects a premium on a policy before its expiration, part of the premium is unearned, i. e., the part collected for that period of time that has not elapsed. If a policy is cancelled before expiration, the
insurer must refund the unearned premium. The purpose of an unearned premium reserve is to guarantee that money will be available for any such required refund. The Insurance Department Act requires the maintenance of such a reserve, 40 P.S. § 91, but exempts certain companies, 40 P.S. § 917. The exemption section states in relevant part as follows:
". . . Except when cash premiums are payable in advance, the provisions relating to unearned premium reserve shall not apply to policies issued by a domestic mutual fire insurance company which policies set forth therein, or in the promissory note attached ...