KEY SYSTEM TRANSIT LINES v. PACIFIC EMPLOYERS INSURANCE COMPANY (1959)

This is an appeal by plaintiffs, Key System Transit Lines and Railway Equipment & Realty Co., Ltd. from a judgment in favor of the defendants, Pacific Employers Insurance Company and Brown Zarley, entered after a non-jury trial limited to the issues raised by certain special defenses.

Plaintiffs seek to recover dividends to which they claim they are entitled upon an agreement made in conjunction with the purchase of a policy of workmen's compensation insurance.

The complaint to reform and enforce the contract alleged that at some time prior to May 2, 1950, defendant, by and through its agent and employee Brown Zarley, offered plaintiffs' insurance broker, to execute and deliver its Universal Workmen's Compensation and Employers' Liability Policy of Insurance in consideration for plaintiffs' payment of certain premiums. As an inducement to plaintiffs to purchase defendants' policy, defendants offered, as part of its policy, a participation, plan, under which an advance premium was payable. This advance premium was to be returned to the assureds to the extent that the advance premium paid was determined to exceed the sum of (1) the total amount of losses under the policy, including open reserves, and (2) 25.5% (administration fees to defendant Pacific Employees Insurance Company) of the premium paid during the effective term of the policy. Plaintiffs allege that in reliance on the defendants' oral representation that the participation agreement was to be considered a part of defendants' policy, they agreed to purchase defendants' policy No. 12C–105939. This policy was to be effective for one year from May 14, 1950 to May 14, 1951. Attached to the policy and incorporated as a part thereof was the participation endorsement. The plaintiffs paid all premiums and performed all acts and conditions, but that by the mutual mistake of the parties or by the mistake of the plaintiffs and fraud of the defendants, Policy No. 12C–105939 did not embody the specific terms of the oral agreement. The complaint alleged that in accordance with the agreed upon method of computation, the plaintiffs were entitled to a refund of $21,703.67 under the participation agreement, of which defendants had paid $2,665. The complaint prays that the balance of $19,038.67 be paid to the plaintiffs upon the determination of the existence of reserves sufficient to make the additional payment, and that the contract be reformed to express the true intent of the parties.

The above facts were alleged in two counts. The first is an action on the collateral agreement which the plaintiffs contend is a part of the contract of insurance. The second is on a common count alleging that defendants were indebted to the plaintiffs in the amount of $19,038.67. Defendants denied most of the allegations of the complaint but admitted the execution and delivery of the policy, and the payment of $2,665 as participating policy holders dividend. The answer alleged four special defenses: (1) Statute of Limitations; (2) Laches; (3) Failure to state a cause of action, and (4) Illegality as follows:

‘And for a Fourth Further, Separate and Affirmative Defense defendants allege that the policy contract if reformed as prayed by plaintiffs will be illegal, unenforceable and void by virtue of the provisions of the Insurance Code of the State of California, in particular Sections 380, 381, 750–756, and 11732–11738 thereof, and by virtue of the provisions of Section 1624(1) of the Civil Code of the State of California.’

Defendants' motion for trial of special defenses under section 597 of the Code of Civil Procedure was granted. After such trial, the court made the following findings of fact and conclusions of law:

‘Findings of Fact

‘1. That the findings of fact contained herein are made for the purpose of ruling on the issue of special defenses only and do not constitute an adjudication on the merits and are not in any way preventive or conclusive of further findings or decision on eventual issues raised except for the purposes of this trial on special defenses.

‘2. That for said purposes it is found that the allegations of the complaint are true and correct; and it is further found that the agreement intended to be established thereby would constitute a rebate and would result in the charging of a premium less than that established by the laws of the State of California.

‘Conclusions of Law

‘1. That the first special defense raised by the answer is not sustained as a matter of law.

‘2. That the second special defenses raised by the answer is not sustained as a matter of law.

‘3. That the third special defense raised by the answer is not sustained as a matter of law.

‘4. That the fourth special defense as raised in the answer on file herein is sustained in that the dividend agreement alleged in the complaint is contrary to law as constituting a violation of Insurance Code Sections 751, 752, 763, 11736, 11738 and 11742, and of Rule III of the ‘Manual of Rules, Classifications and Basic Rates for Workmen's Compensation Insurance,’ and that this defense constitutes a bar to the further prosecution of both causes of action set forth in the complaint.

‘5. That defendants are entitled to a judgment against plaintiff's herein, and each of them, for necessary costs expended in this action.

‘Judgment shall be entered accordingly.’

On appeal the plaintiffs argue that the dividend agreement would not constitute a rebate in violation of the minimum rating law, (Insurance Code, §§ 11730–11742) but is merely a participating dividend permitted by Section 763 and 11730 of the Insurance Code. The Insurance Commissioner as amicus curiae contends that enforcement of the dividend agreement would violate the minimum rating provisions of the Insurance Code and administrative rulings promulgated under the Code.

The participation endorsement reads as follows:

‘After the expiration of this Policy, this Employer shall be entitled to a refund payable from any surplus of premiums derived from all compensation insurance policies insuring Employers and Employees under the Workmen's Compensation Insurance and Safety Laws of the State of California, and which had accrued after adequate provision has been made for all losses, loss expenses, reserves, taxes and other charges. Such refund, if any, shall be computed as follows: From the amount of the entire premium earned and paid to the Company under this Policy, there shall be deducted amounts equal to the cost of incurred losses, including reserves on open claims, and incurred loss and other expenses chargeable to this Policy. The amount of the balance, if any, shall be payable to this policyholder as may be provided in the authorized refund plan of the Company in effect and applicable to this Policy.

‘Nothing herein contained shall be held to vary, alter, waive or extend any of the terms, conditions, or limitations of the policy to which endorsement is attached other than as above stated.’

We need go no further in this case than to follow the declaration of our Supreme Court in Contractor's Safety Ass'n v. Cal.Comp. Ins. Co., 48 Cal.2d 71, at page 74, 307 P.2d 626, 628, “participating premiums are those in which the profits therefrom are shared by those who have paid the premiums.' * * * Where a dividend agreement is not one to share profits the dividend cannot be said to be ‘participating’ within the meaning of section 763.'

In this case without regard to what the actual costs of operation might prove to be the court found the contract (as pleaded) to be to refund the difference between the premium paid and ‘the sum of (1) the total amount of losses under the policy, including open reserves, and (2) twenty-five and five-tenths per cent (25.5%) (administration fees to defendant Pacific Employers Insurance Company).’ The agreement in advance, without regard to what the actual costs of operation might prove to be, to deduct only 25.5% of the premium for operating expenses clearly binds the insurer to make a refund out of something other than profits, if in fact the operating expenses should turn out to be in excess of 25.5%.

Plaintiffs' other contentions relating to the enforcement of the contract with interpretation aided by ‘parole’ evidence have been examined and are without merit.

In view of the foregoing, the judgment must be affirmed.

Judgment affirmed.

KAUFMAN, Presiding Justice.

DOOLING and DRAPER, JJ., concur.