Fred P. Thomas Co. v. Weil (52 Ohio App. 537, 1936)

Terrell, J.

The subject of this controversy is a claim of a general insurance agent, The Fred P. Thomas Company, against its sub-agent, Raymond M. Weil.

The Fred P. Thomas Company was a corporation. Raymond M. Weil was associated with this company for over thirty years. At one time he was secretary thereof, and during all the period around which the present controversy centers he was the vice president.

The Fred P. Thomas Company had a contract with The Public Indemnity Company, wherein it was appointed general agent to solicit and write various kinds of insurance and suretyship policies, under a definite commission arrangement. It was also authorized to appoint sub-agents. In the exercise of this latter power The Fred P. Thomas Company entered into a contract with Raymond M. Weil wherein it appointed him as a sub-agent. These parties did business for over thirty years as general agent and sub-agent under various written contracts, the last contract being dated December, 1926. The sub-agent’s contract provided generally that Raymond M. Weil would act as sub-agent in the procuring of acceptable applications for insurance and indemnity contracts in accordance with such instructions as the general agent might prescribe, which instructions should be in harmony with the requirements of the several insurance companies represented by the general agent. The sub-agent was authorized to receive and receipt for premiums upon such contracts. It was also agreed that the sub-agent would follow the agent’s rules and instructions and would collect such premiums for the general agent, and hold them as a fiduciary trust until delivered to the general agent. The sub-agent agreed to pay to the agent on or before the tenth of each month all premiums on contracts written by the sub-agent during the second preceding month.

It was further provided that in the event of credits to the sub-agent arising from cancellations, these credits ‘£ shall be allowed to the sub-agent in the statement for the month in which the cancellation actually occurs and not before.” The sub-agent agreed that if any premiums were not collected by him within forty-five days from the date of the contracts he would either return to the agent for cancellation the contract or would pay to the agent the premium upon such contract, irrespective of whether he had collected such premium. The sub-agent agreed generally to be responsible for and to pay to the agent, or its duly authorized representative, all premiums on policies, certificates, binders and bonds delivered for or to the sub-agent. In using the word ££contracts” herein above it is meant to include insurance policies, certificates, binders, bonds, and such contracts of indemnity as were written by the Public Indemnity Company, which will be hereinafter referred to as the insurance company.

The general agent provided office space and clerical hire to keep a record of the transactions and business and accounts of the sub-agent, for which it was agreed that the sub-agent should pay a definite amount of money monthly. The commissions due the sub-agent were the same commissions as allowed by the insurance company to the general agent.

The custom grew up between the agent and sub-agent, which continued for years and up to the time of the present dispute, that upon delivery by the agent to the sub-agent of an insurance policy or indemnity contract the agent would charge the sub-agent upon its books for the full premium upon the contract. If the contract was not accepted by the insured and paid for within forty-five days, and was returned by the sub-agent, the contract would be cancelled and the sub-agent would be given credit for the full amount charged. If the contract was later cancelled by the policy holder, and the policy was returned to the agent, the agent would credit upon the account of the sub-agent the amount of the unearned premium, less deductions for commissions already retained thereon. Upon receiving this credit it became the duty and obligation of the sub-agent to return to the policy holder the unearned premium.

If the insurance company cancelled a policy, the insurance company would thereupon return to the general agent, or adjust by credit to it, the pro rata unearned premium. It thereupon became the duty and obligation of the general agent to return to the policy holder the unearned premium, which was customarily-accomplished by the general agent returning to or giving credit to the sub-agent for such unreturned premium, whereupon it then became the duty and obligation of the sub-agent to return to the policy holder the unearned premium. It thus appears that as to this unearned premium on cancelled policies the custom was for the insurance company to use the general agent as a conduit to return it, and the general agent in turn used the sub-agent as a conduit to return it to the policy holder.

In October of 1932 the contract between the agent and sub-agent was terminated by mutual agreement. At that time their account showed a balance in favor of the agent against the sub-agent in the sum of about $13,000. The sub-agent thereupon paid upon said account $8,000, leaving a balance due of $5,000. As part payment thereon the sub-agent gave his note for $2,000, leaving an open account of $3,000. This present action is to collect the balance of note and account.

About six months after the termination of the sub-agency contract the insurance company went into the hands of a receiver in insolvency. The receiver notified the policy holders to file their claims for the unearned premiums upon their insurance and indemnity contracts. He also gave notice that further liability of the insurance company or receiver upon the contracts would cease. The agent’s contract with the insurance company terminated upon the insolvency of the insurance company.

At that time there were policies outstanding which had been written through the sub-agent, the unearned premium on which from the date of receivership to the date of the expiration in the policies amounted to approximately $5,000 in round figures. Thereupon, against the claim made by the agent, the sub-agent asked to be credited with the amounts of the unearned premiums, approximately $5,000 as a set-off. The agent denied the right of set-off. The Common Pleas Court found that the sub-agent was entitled to the set-off claimed and entered judgment in his favor. From this judgment these present error proceedings are brought.

The rights of the agent and sub-agent are determined by the written contracts. The agent and sub-agent in the final analysis were both agents of the insurance company. The ultimate contracts they were dealing with, for which premiums were paid, were contracts between the insurance company and the policy holders. The premiums for such policies paid by the policy holders were premiums due to the insurance company. The unearned premiums for policies can-celled, either at the request of the policy holder or by the action of the insurance company, were funds due to the policy holders from the insurance company.

By the agreement of the insurance company with the agent, and of the agent with the sub-agent, the premiums from the policy holders were collected by the sub-agent as agent, and not as principal. He held these premiums in a fiduciary capacity and was accountable therefor to the agent, who in turn was accountable to the insurance company. The unearned premiums to be returned to the policy holders by reason of the cancellation of the policies were handled by the agent and sub-agent as agents, and not as principals. If these agents were derelict in their duty of returning the premiums to the policy holders, the insurance company would still be liable to the policy holders for the unearned premiums.

When an unearned premium was returned by the insurance company the custom was to return it to the agent, which in turn conveyed this unearned premium to the sub-agent. This arrangement grew out of the conveniences of the situation. The sub-agent was the only -one in personal contact with the policy holder, and it was more convenient for him to get in personal touch- with the policy holder than it-was for either the-insurance company or the agent to do so. It also helped toward the good will of the sub-agent’s business to deal personally with his customers. But there is not one word in the contracts of agency wherein there is a legal right established by which the title to any unearned premiums passed to the sub-agent. The title to the unearned premium was in the policy holder. The agent and sub-agent were mere messengers of the insurance company to make delivery thereof to the policy holder.

When the insurance company went into the hands of a receiver, the unearned premiums on the business of the sub-agent amounted to approximately $5,000. But no legal title thereto passed to the sub-agent. The sub-agent had no legal right or title to these unearned premiums, but if the insurance company, while solvent, saw fit to return the unearned premiums, and used the method and means of returning them through the agent and sub-agent, this did not create a title in such funds either in the agent or sub-agent. If the sub-agent did receive from the insurance company through the agent any unearned premiums, they would not belong to the sub-agent, but should be by him turned over to the policy holders.

In the present case it is apparent that since the insurance company is in receivership, and all the outstanding policies have been cancelled by the receiver, which is done by operation of law, and the contracts of the agent and sub-agent with the insurance company are thereby concluded, there is no obligation on the part of the receiver to return through the agent and sub-agent to the policy holders any unearned premiums. In fact, the receiver has already notified the policy holders to file their individual claims against the estate of the insurance company for any unearned premiums. The sub-agent was not within his legal rights in demanding of the agent that all unearned premiums, since the date of the receivership, upon business produced by him, should be credited on his note, or upon the open account with the general agent.

I have been unable to understand upon what theory counsel for the sub-agent base their claim. Nowhere in the wording of the agency contract can be found any clause or words from which it can be concluded that the return premiums on cancelled policies belong to the sub-agent. Nowhere in the agreement does it appear that the agent or insurance company was bound to return unearned premiums to the policy holder through the sub-agent. It cannot be implied from the thirty years of dealing between these parties. During all that time no credit for unearned premiums had been made by the agent to the sub-agent, unless the insurance company had allowed a like credit to the agent to be passed on to the policy holder. The agent did not promise to pay from its own funds the unearned premiums on cancelled policies. The agent did not guarantee the solvency of the insurance company. The sub-agent, Weil, was vice president of the agent company and helped to select such insurance company. The receiver is not required to return the unearned premiums to the agent or sub-agent. The insolvency and receivership terminated the agency contracts.

Counsel for the sub-agent state in their brief that “The agent is the seller and the sub-agent the purchaser,” and contend that by reason thereof the unearned premiums should be returned to him because he had been charged with them. This contention is purely theoretical and argumentative and has no foundation in fact. Search will be made in vain in the agency agreement to find any language that would justify such an interpretation. The sub-agent specifically agreed to act in a representative capacity as an agent to procure applications and collect premiums in a fiduciary trust capacity. It would do violence to the English language and to common sense to conclude from the written contract of agency that the sub-agent was to be a purchaser and the agent a seller of insurance policies.

The Supreme Court of Minnesota had before it a case in many respects quite similar to the case before us. It was the case of Hedwall Co. v. Security Mortgage Co. of America, 156 Minn., 289, 194 N. W., 757. Hedwall was a general insurance agent. The Security Mortgage Company stood in the position of a sub-agent, an officer thereof having been licensed as a broker. The sub-agent received as its compensation 35 per cent of the premiums, and remitted 65 per cent of the premiums to the agent. For a long period of time the custom grew up between the parties whereby when policy holders demanded cancellation of the policies the sub-agent would pay to the policy holder the unearned premiums and charge that amount against the account of the agent in its proper proportion. There was no express agreement that this should be done, but it seemed to be a convenient course of dealing. The insurance company became insolvent. The sub-agent gathered together for cancellation the outstanding policies written through it, and requested the agent to refund its proportionate part of the unearned premium. The agent refused to do this because the insurance company was insolvent, and maintained that by reason of the insolvency it was no longer agent for the insurance company. Eventually the agent sued the sub-agent upon the open account between them. The sub-agent claimed a set-off for the unearned premiums upon these policies after the insolvency of the insurance company. The court said:

“An agent is not liable to the insured for a refund of unearned premiums upon cancelation. His company is. * * * An agent, making refunds to its patrons from time to time, out of his own money, instead of sending them to the insurer, does not hind himself to make refunds ever afterwards. From such a course of dealing a contract to make refunds continuously, though the company becomes insolvent, cannot be inferred.”

The court refused to allow the claims for set-off by the sub-agent.

We conclude that the trial court was in error in allowing to the sub-agent this set-off of the unearned premiums upon the policies outstanding at the time of the insolvency of the insurance company; and now proceeding to enter the judgment that the trial court should have entered we make a finding and judgment for The Fred P. Thomas Company in the amount for which it has entered suit.

Judgment reversed and judgment for plaintiff in error.

Lieghley, P. J., concurs in the judgment.

Levine, J., dissents from the entry of final judgment.

Levine, J.,

dissenting. I am unable to concur in the opinion of the majority of this court, which rendered final judgment in favor of plaintiff in error. The nature' of the dispute between the parties has been fully set forth in the majority opinion. Some of the principles enounced therein I do not disagree from. There is but one point of difference. We are called upon to construe paragraph nine of the Agreement, called “Sub-Agent’s Contract,” which is the agreement between The Fred P. Thomas Company and Raymond M. Weil. It reads as follows:

“The Sub-Agent shall pay to the Agent, on or before the 10th day of each month, all premiums written for or through the Sub-Agent during the second preceding month, in accordance with monthly statement rendered by the Agent to the Snb-Agent. in the event of credits to the Sub-Agent, arising from cancellations, these credits shall be allowed to the Sub-Agent in the statement for the month in which the cancellation actually occurs, and not before.”

What was in the contemplation of the parties when paragraph nine was inserted into the contract? Unquestionably it was the intention that the sub-agent, Raymond M. Weil, was to be held personally for all policies written for or through him. Apparently The Fred P. Thomas; Company did not wish to depend upon the contingency of non-payment of premiums by anyone who purchased an insurance contract from the sub-agent. The Fred P. Thomas Company looked to Raymond M. Weil for the payment of all such premiums on insurance contracts written for or through him and by him sold to his customers. On the other hand, the sub-agent was to collect the premiums from his customers on all such policies sold by him. In the event of cancellation of policies credits were to be allowed to the sub-agent in his monthly statement. In effect and substance Raymond M. Weil was the purchaser of contracts of insurance which he in turn sold to his customers. When these contracts of insurance for which Raymond M. Weil became personally liable were delivered to him, he had a right to contemplate that the instruments in writing were in fact what they purported to be; that the duration of time specified in the policy during which these contracts of insurance were to have force and effect would be the life of the policy. He did not intend to bind himself personally to pay for policies which .through no fault of his would cease to exist.

Much discussion was had in the briefs and arguments of counsel as to the meaning of the term “cancellations.” As I view it, the insolvency and consequent receivership of the insurance company amounted in law to a breach of contract on the part of the insurance company. Raymond M. Weil was in no way responsible for this condition of the insurance company, nor did any act of his contribute thereto. It seems to me, in so far as Weil is concerned, that there was a failure of consideration; that the instruments in writing purporting to be contracts of insurance for a definite term of years turned out not to be such contracts of insurance because of the insolvency and subsequent receivership of the insurance company. He obligated himself ito pay for contracts of insurance, which are in fact in accordance with the terms and tenor thereof only. ■ Raymond M. Weil collected some of the premiums from his customers. The extent of these collections is left in doubt in so far as the record is concerned. One may reasonably be led to the conclusion that there are some premiums which were not collected by him. As to the premiums which he actually collected, it was perfectly equitable that he should be held to his agreement to pay for same. So far as he is concerned these transactions are fully completed. If the purchasers of the insurance policies could legally have recourse against Raymond M. Weil personally for a return of the premiums which he collected from them on their policies, which ceased to exist, it would perhaps be entirely equitable not to hold Raymond M. Weil to his obligation to personally pay for such policies delivered to him and in turn sold by him.

The trend of authority seems to be that the agent is not liable to the insured for a refund of unearned premiums, upon cancellation. To enable him to set off unearned premiums against his own obligation to pay for the policies delivered to him, while he is retaining the premiums collected by him on such policies, would be wholly inequitable. As to those policies sold by him to his customers, wherein the premiums were not collected by bim, he should be allowed to avoid his obligation to pay for same, because the policies which were delivered to him purported to have a definite duration of time — a life of a definite number of years. These policies were not what they purported to bp, because of the insolvency and subsequent receivership of the insurance company.

To accomplish an equitable accounting this case should be remanded to the Common Pleas Court for an ascertainment of the vital fact, namely, the extent of the premiums actually collected by Weil. The rendering of final judgment against Weil would obligate him to pay for policies wherein the premiums were not collected by him. This was not in the contemplation of the parties when Raymond M. Weil entered into a personal obligation to pay the premiums.

I, therefore, concur in the order of reversal, but dissent from the entry of final judgment.