Merchants' Mutual Automobile Liability Insurance Company v. Smart/Opinion of the Court

The Merchants' Mutual Automobile Liability Insurance Company, the plaintiff in error, is a New York corporation authorized to insure against recoveries of damages by persons injured by automobiles and other vehicles, for whose operation the insured is responsible. It issued a policy November 16, 1919, to Frank Coron, thus to indemnify him in the operation of his automobile truck to the extent of $5,000, together with interest and costs. The policy contained a provision, inserted pursuant to the requirement of section 109 of the Insurance Law of New York. Laws 1919, c. 182. The section reads as follows:

'On and after the first day of January, nineteen hundred and     eighteen, no policy of insurance against loss or damage resulting from accident to or injury suffered by an      employee or other person and for which the person insured is      liable, or, against loss or damage to property caused by      horses or by any vehicle drawn, propelled or operated by any      motive power, and for which loss or damage the person insured      is liable, shall be issued or delivered to any person in this      state by any corporation, *  *  * authorized to do business in      this state, unless there shall be contained within such      policy a provision that the insolvency or bankruptcy of the      person insured shall not release the insurance carrier from      the payment of damages for injury sustained or loss      occasioned during the life of such policy, and stating that      in case execution against the insured is returned unsatisfied      in an action brought by the injured, or his or her personal      representative in case death results from the accident,      because of such insolvency or bankruptcy, that then an action      may be maintained by the injured person, or his or her      personal representative, against such corporation under the      terms of the policy for the amount of the judgment in the      said action not exceeding the amount of the policy.'

Smart was injured by the truck of Coron. He brought suit against Coron for damages and recovered a judgment for $11,000. He issued execution against Coron upon the judgment, which was returned unsatisfied, and supplemental proceedings were undertaken against him without success.

The Supreme Court of the state held that on the record Coron was insolvent, that under the clause of the policy embodying the provision of section 109 the action lay, and because of a failure to set up any good defense a summary judgment was entered for $5,000 and interest and costs in favor of Smart against the company.

The case has been brought here by the company under section 237 of the Judicial Code (Comp. St. § 1214), upon the claim that section 109 is invalid, first, in that it deprives the insurance company of its property without due process of law; and, second, because it is in conflict with the bankruptcy laws of the United States. It is well settled that the business of insurance is of such a peculiar character, affects so many people, and is so intimately connected with the common good, that the state creating insurance corporations and giving them authority to engage in that business may, without transcending the limits of legislative power, regulate their affairs, so far, at least, as to prevent them from committing wrongs or injustice in the exercise of their corporate functions. Northwestern Life Insurance Co. v. Riggs, 203 U.S. 243, 254, 27 S.C.t. 126, 51 L Ed. 168, 7 Ann. Cas. 1104; Whitfield v. AEtna Life Insurance Co., 205 U.S. 489, 27 S.C.t. 578, 51 L. Ed. 895; German Alliance Insurance Co. v. Lewis, 233 U.S. 389, 412, et seq., 34 S.C.t. 612, 58 L. Ed. 1101, L. R. A. 1915C, 1189; La Tourette v. McMaster, 248 U.S. 465, 467, 39 S.C.t. 160, 63 L. Ed. 362; National Insurance Co. v. Wanberg, 260 U.S. 71, 73, 43 S.C.t. 32, 67 L. Ed. 136. Such regulation would seem to be peculiarly applicable to that form of insurance which has come into very wide use of late years, that of indemnifying the owners of vehicles against losses due to the negligence of themselves or their servants in their operation and use. The agencies for the promotion of comfort and speed in the streets are so many and present such possibility of accident and injury to members of the public that the owners have recourse to insurance to relieve them from the risk of heavy recoveries they run in intrusting these more or less dangerous instruments to the care of their agents. Having in mind the sense of immunity of the owner protected by the insurance and the possible danger of a less degree of care due to that immunity, it would seem to be a reasonable provision by the state in the interest of the public, whose lives and limbs are exposed, to require that the owner in the contract indemnifying him against any recovery from him should stipulate with the insurance company that the indemnity by which he saves himself should certainly inure to the benefit of the person who thereafter is injured. Section 109 does not go quite so far. It provides that the subrogation shall take place only when the insured proves insolvent or bankrupt, and leaves the injured person to pursue his judgment against the insured if solvent without reliance on the policy.

Another reason for the legislation is suggested in the opinion of the Appellate Division of the Supreme Court of New York (Roth v. National Automobile Mutual Casualty Co., 202 App. Div. 667, 674, 195 N. Y. S. 865), to wit, that it was enacted on the recommendation of state superintendent of insurance to make impossible a practice of some companies to collude with the insured after an injury foreshadowing heavy damages had occurred, and to secure an adjudication of the insured in bankruptcy, whereby recovery on the policy could be defeated, because the bankrupt had sustained no loss.

Whatever the especial occasion for the enactment, it is clear that the exercise of the police power in passing it was reasonable and cannot be said to deprive the insurance company of property without due process of law. It is to be remembered that the assumption of liability by the insurance company under section 109 is entirely voluntary. It need not engage in such insurance if it chooses not to do so.

The second objection is that the policy in this clause makes provision for an unlawful preference under the National Bankruptcy Act (Comp. St. §§ 9585-9656), when the owner who is indemnified is a bankrupt at the time of the injury.

Passing by the difficulty that suggests itself that the insurance company is not one of the creditors of the insolvent insured, and so is hardly in position to question the validity of law for a defect of this kind (Heald v. District of Columbia, 259 U.S. 114, 123, 42 S.C.t. 434, 66 L. Ed. 852, and cases cited), we prefer to deal with the objection on its merits. It has no substance. As we have already suggested, the Legislature might have required that policies of this kind should subrogate one injured and recovering judgment against the assured to the right of the latter to sue the company on the policy. It simply would create a secured interest in the recovery on the policy for the benefit of the injured person when ascertained. It would not be an unlawful preference any more than security given for any lawful claim against the assured while solvent would be unlawful in the event of subsequent bankruptcy. The clause we have before us is just the same save in one respect. It secures to the injured person the indemnity which his injurer has provided for himself in advance to avoid payment for the injury. But the clause becomes operative only in the event of the insolvency or bankruptcy of the assured when he can no longer use the indemnity to pay the injured person as he should. The title to the indemnity passes out of the bankrupt or insolvent person and vests in him in whom the contract and the state law declare it should vest. The assured is divested by the terms of the instrument under which the interest of the assured and the interest of the injured then contingent, and now absolute, were created. The general creditors have lost nothing because by the fact of bankruptcy the interest of the assured in the policy passed to the injured person and did not become assets of the assured. The provision for the divesting of the interest on bankruptcy was not made to defraud creditors or in expectation of bankruptcy, but was made so far as we can know when the assured was solvent and merely to provide against a future contingency.

We think that there is in this state legislation complained of, no conflict with the policy or the letter of the bankrupt law.

A third objection is made that there was no sufficient evidence that the insured was insolvent. This was a question of fact under the proceedings which were instituted by execution and what followed. The state courts have found it to exist and it is not for us to question their findings.

The judgment is affirmed.