STATE BD. OF INS. v. TODD SHIPYARDS
Legal provision: 15 U.S.C. 1012
Argument of Bob E. Shannon
Chief Justice Earl Warren: Number 144, State Board of Insurance et al., Petitioners, versus Todd Shipyards Corporation.
Mr. Bob E. Shannon: May it please the Court.
This Court grants certiorari to the Third Court of Civil Appeals in Texas back in October of 1961.
That Court of Civil Appeals had held a provision of the Texas Insurance Code invalid as a violation of the Due Process Clause of Federal Constitution.
That provision is Section 2 (e) of Article 2138 of the Insurance Code.
This provision simply lays a 5% tax upon the premiums paid by a person owning taxes risks who insures those taxes risks with unauthorized insurance companies.
Now, an unauthorized insurance company is simply a company not licensed to do business in Texas.
The respondent here contracted for an unauthorized insurance outside the State of Texas, paid the tax under protest and brought suit in the District Court of Travis County to recover the payments of these taxes.
The Travis County Court held that the respondent should recover, the State been appealed to the Court of Civil Appeals sitting in Austin and as stated, that court held on the basis of the Allgeyer holding in the St. Louis Cotton Compress holding that it was a violation of federal due process.
Then the State applied to the Texas Supreme Court for an application for writ of error.
The Texas Supreme Court refused to grant the application and in a per curiam opinion noted that it refused to do so because of a holding of this Court in the Allgeyer case and in the St. Louis Cotton Compress case.
The question presented to this Court is whether or not Texas may regulate a licensed -- a corporation which is licensed to do business in Texas, who is insuring Texas property at risks with an unauthorized company when the formalities of the contract were made outside Texas.
The statement of facts were primarily stipulated in the trial court and I may simply and I believe rather rapidly cover them.
The respondent is a foreign corporation, a New York Corporation in fact but it has done business in Texas since 1934.
It owns property and his plants in Galveston and Houston Texas.
This property is by -- it's somewhere in the neighborhood of $900,000.
At these plants, it employs about 1500 people.
In fact, the total volume of business of the respondent amounts to about 27%.
That is done in Texas over its overall operations over the country.
Now, on this property, certain insurance and on these other risks, certain insurance was purchased with these unauthorized companies in New York.
Now, the insurance was purchased from two English companies and it is stipulated and admitted in the record that these companies are not authorized insurance companies that they do not submit to any regulation in any form or any fashion to the Texas State Board of Insurance.
Now, as I stated a moment ago, the contracts themselves were negotiated for, premiums were paid, the contracts were made outside of Texas and New York.
In fact, in the contracts themselves, which appear in the record, it is stated that as between the insured, that is Todd, and as between the insurance company, it could be considered that the contracts were made in New York.
And one from this brief resume of facts, there are several points which could -- the petitioner feels that are important and would like to bring to attention of this Court.
One that -- that Todd is a foreign company but it has licensed itself to do business in Texas since 1934.
And that Todd did purchase the insurance from unauthorized companies that the tax in question, Section 2 (e), places the tax on the insured, that is, the people who are buying the insurance and add up on the insurance company which admittedly has not submitted itself to the regulation by Texas.
At this time, I think it -- it's important that the Section 2 (e) or of Article 2138 be briefly examined and the purpose of the background of statute going into.
Petitioners feel that the purpose of the tax in question is primarily regulatory.
It is helpful in understanding the tax to know something about the background of insurance regulation in Texas to see where this particular tax fits into regulatory scheme.
Prior to 1876, there was no insurance regulation in Texas.
Unfortunately, the era is well-known as one in which the insurance business did frankly what it was -- what it wished to do and there were situations for a frequent failures, financial failures by the insurance company.
In many cases in that period, the officials of the insurance companies conducted themselves more or less for -- and conducted the companies more or less for their own benefit rather than for the benefit of stockholders of the companies or for the policy holders of the company.
In this period also, it was problem of discriminatory rates between certain insured companies and insurers.
Chief Justice Earl Warren: What was that period did you say Mr. Shannon?
Mr. Bob E. Shannon: Mr. Justice, prior to 1876, prior to any state regulation --
Chief Justice Earl Warren: Yes.
Mr. Bob E. Shannon: -- by the Board.
In 1876, the legislature did pass an act setting up a state department of insurance and from that date, down to the present, it has passed various laws which comprehensively regulate the whole of the insurance business in Texas.
The present regulatory bodies called the State Board of Insurance and they exercise, as I say, a fairly comprehensive control over the insurance done by licensed companies in the State.
A few examples of the kinds of regulations which were imposed by the State Board or the fact that minimum capital and surplus are required to be met, that the company's license do business in Texas come into Texas and submit themselves to examination by examiner by the State Board of Insurance that these companies submit annual statements of their financial condition, that a certain kinds of insurance rates are prescribed by the Board and other kinds of insurance policy forms are even prescribed on the Board.
Now, these regulations are few and these among many others set a minimum standard of performance for insurance companies which operate lawfully in Texas.
Justice John M. Harlan: Did the respondent here paid the tax, large -- that have gone into Texas, in fact the charge content with Todd.
Mr. Bob E. Shannon: If he paid the tax Your Honor?
Justice John M. Harlan: Yes, this -- if Todd had paid the tax.
Mr. Bob E. Shannon: Todd did pay the tax Your Honor on protest.
Justice John M. Harlan: And yes, I know but assuming that Todd -- assuming that you prevail in this lawsuit as far as Texas is concerned, Lloyd can write insurance in there with anybody who was going to pay 5% tax.
Mr. Bob E. Shannon: Through certain -- through certain agencies Your Honor, through Article 21, its various sections within the act to setup special licensing agency.
Justice John M. Harlan: I understand, yes but as far as that's given compliance in -- in those respects, Lloyd's can go ahead and write to its heart's content.
Mr. Bob E. Shannon: That's true Your Honor --
Justice John M. Harlan: How do -- what my question is how does this regulate law that's why I can't understand?
Mr. Bob E. Shannon: Alright, Your Honor, it actually has no regulation directly on Lloyd's of London.
Actually, it tends to end the encouragement to persons owning risks in Texas from going outside the companies which are licensed in Texas to purchase insurance because of placing a tax on these transactions.
Justice John M. Harlan: They're making it tougher to the out of state company to come in.
Mr. Bob E. Shannon: In effect, yes.
As I have stated a moment ago, the purpose of the tax is primarily regulatory and this is revealed in the first section of 21-2038 which is the purpose clause and stated as follows, The legislature declares that it is the subject and concern that the placing of such direct lines of insurance with an unauthorized insurance companies is not properly regulated.
As I stated a moment ago, 2138 does several things.
In Section 2 -- or subsection (a), (b), (c), and (d), it sets up a means by which persons owning risks in Texas may purchase insurance from unauthorized companies if they will go through specially licensed agents.
Now, these agents on under certain categories and they -- they must pass certain -- certain test before they can provide this sort of insurance.
Also, the agent pays a 5% tax upon the gross premiums taken upon these transactions.
And Section 2 (e) which is under consideration before this Court, the -- is in effect a tax which is used as a regulation to -- as Mr. Justice said a moment ago to in effect, lessen the advantage of these -- of Texas people owning Texas risks to go outside the state and purchase insurance from unauthorized companies.
Now, under the tax -- under the tax, it is the person purchasing the insurance that pays the tax and not the insurance company.
And as I stated a moment ago, the unauthorized insurer is not one licensed by the State Board of Insurance and could be one of several kinds of insurance companies.
It could be a non-licensed insurance company of a foreign country or it could be a non-licensed insurance company of another state or for that matter, it could be a domestic company which had not complied in all respects with the regulations of State of Texas.
Now, the effect of this tax and the regulatory effect is that it lessens the advantage formally enjoyed to unauthorized insurers and that they could insure insurance property in Texas at a lower cost and could companies which would come into Texas and submit themselves to regulation by the Board.
Chief Justice Earl Warren: Well, I understand that domestic corporations that do not conform to insurance laws can -- can do business in the State?
Mr. Bob E. Shannon: Not if we can find them Your Honor.
Chief Justice Earl Warren: Well, I thought you said that -- said that --
Mr. Bob E. Shannon: Possibly so this --
Chief Justice Earl Warren: You mean in the event that it's found that someone has some domestic company that it's not complied as sole insurance that the -- that the purchaser must pay?
Mr. Bob E. Shannon: Yes sir.
Chief Justice Earl Warren: Yes, I see what you mean, yeah.
Mr. Bob E. Shannon: The other effect of the regulation is that it tends to equalize the burdens of the regulatory burden among all the risks in the State prior to Section 2 (e) only those risks which were insured with authorized companies for the cost of the regulation.
However, it's subsequent to the passage of the tax, all of these taxes risks more important because of the regulation.
As I stated a moment ago, the Court of Civil Appeals found in or based its opinion upon the Allgeyer case and the St.Louis Cotton Compress case.
These cases in effect held that a state was powerless to regulate contracts of insurance own risks within the State if the formalities of the contract were made outside the State's borders.
It was said in those cases that this was a violation of the liberty of contract and as such was a violation of the federal due process.
Since 1897, when the Allgeyer case was decided and at later points, this case has been criticized and questioned invalid by this Court.
Specifically, in the area of labor legislation, this case had been used to curtail the power of various states to regulate working conditions within the State.
In 1949, the Linking Union against Northwestern case expressly repudiated this philosophy which curtailed the power of the State to so regulate.
I think it's significant that each time within the last, well, 20 years that this Court has been confronted with the Allgeyer case, our President based upon the Allgeyer decisions that the Court has either overruled that President or has made distinctions which in effect avoid deciding on that case.
Some of these cases or the Osborn against Ozlin case, the Hoopeston against Cullen case.
Justice Felix Frankfurter: What did you say?
Mr. Bob E. Shannon: The Travelers' Insurance against Virginia and the Watson against Employers Casualty Company cases.
Justice Felix Frankfurter: I still can't understand the issue.
Mr. Bob E. Shannon: This approach -- a new approach has been demonstrated by these cases to solve the problem of the State attempting to regulate insurance within its borders.
This approach is one of the realistic inquiries into the interest of the State which is attempting to regulate the insurance.
First of these cases and probably the most important from the standpoint of this lawsuit is the Osborn against Ozlin case which was decided in 1940 by this Court.
There, Virginia required that insurance companies which were licensed in Texas -- in Virginia excuse me, and which were insuring risks in Virginia to purchase insurance to licensed agents in Virginia then it was contended in that case that this was an interference with the contracts since these contracts were admittedly made out in New York, and it was placing a burden upon the contracts that the State could not validly do.
Have the Court in that case said that simply because there are repercussions across state lines in this matter that it did not invalidate the legislation if Virginia had a definable interest in the contracts of insurance sought to be regulated.
The petitioner submits to this Court that the interests of Texas and the insurance contracts here involved is certainly is -- as substantial as those in Virginia in the Osborn case.There, the person sought to be regulated was in Virginia.
Here, the person regulated or taxed is in Texas.
There, the risks were located in Virginia and here, the risks are located in Texas.
Justice John M. Harlan: What do you do with the St. Louis Cotton case as Mr. Justice Holmes write on them, is that identical with your situation?
Mr. Bob E. Shannon: That's true Your Honor and we feel that in order to hope and state, this Court would have to overrule St. Louis --
Justice John M. Harlan: We would have to overrule --
Mr. Bob E. Shannon: Compress (Voice Overlap) --
Justice John M. Harlan: -- I would suppose that's the case, yes.
Mr. Bob E. Shannon: The next case announcing this new approach in the regulatory approach is the Hoopeston against Cullen.
This case upheld the validity of New York regulation of reciprocal insurance companies.
In those -- even though the contracts in those cases were made in Illinois, the premiums were made in Illinois and the attorney in fact was located in -- in Illinois.
The -- of course, the contention was made there based upon the Allgeyer line of principles that the State could not interfere with the making of contracts outside the state.
However, the Court said that in determining the power of state to regulate that the conceptualistic approach employed in the Allgeyer line of cases no longer was to be employed but instead recognize that a court might have a substantial -- that a state might have a substantial interest in the insurance of persons located within that state or property located within that state.
The interest in the regulation could be measured by such realistic considerations as protection of the citizen involved or the protection of the State from incidents of loss.
In that case, it was much emphasized that the risks of property was located in New York, the State attempting to regulate.
In fact, the Court stated there then I quote, “There's no more reason to bar the State from authority over the insurance of property within it and to exclude it and control of all other property interest mentioned.”
The next case that the petitioner feels important in this field is the Travelers Health Association against Virginia.
It is a jurisdiction case.
We feel that it's important because in that case, the Allgeyer line of cases was heard before the Court and the Court refused to be bound by that group of cases.
There, the Virginia Government had issued a cease-and-desist order against certain mail order insurance activities of the Nebraska Corporation.
There, the contracts were made in Nebraska and it was maintained that since they were made in Nebraska, Virginia could not reach them.
Have the Court found that Virginia did have a power to issue the cease-and-desist order.
Justice Felix Frankfurter: Did I -- I didn't understand you to claim that Texas could compel the insurance to be written by a state insurance company or state licensed insurance company.
Mr. Bob E. Shannon: No sir, Your Honor I'm not -- I'm not taking that position.
Justice Felix Frankfurter: Now, let me ask you then this.
Could Texas pass a statute saying that this foreign corporation shall be excluded from doing business in the state until and unless it takes out insurance in the foreign -- in a state regulated insurance company?
Mr. Bob E. Shannon: Your Honor, I believe there is authority in the Osborn case which could possibly sustain the State in that contention, yes.
Justice Felix Frankfurter: Could -- could Texas say that you can't remove a case to the federal court if you take out insurance in the foreign insurance company?
Mr. Bob E. Shannon: Well, I'm not so sure about that Your Honor whether we have the power.
Justice Felix Frankfurter: Why -- why do you think those cases are more doubtful in this case if it can't exclude the corporation that's within it from doing business on that condition, if it can't exclude it from going -- from removing a case, the starting case in the federal court?
It must be because that's beyond the power of the state to impose such a condition and why.
What's the difference in that in exacting a tax?
Mr. Bob E. Shannon: I think Your Honor, the federal courts are open to all persons who wish to litigate there and have these requisite conditions in their cases.
Justice Felix Frankfurter: You don't have to let him in at all, do you?
Mr. Bob E. Shannon: Pardon me?
Justice Felix Frankfurter: You don't have to let him in if you can keep him out for any reason at all.
Mr. Bob E. Shannon: That's right.
Justice Felix Frankfurter: This Court has said you can't impose that condition, why not?
Mr. Bob E. Shannon: Well, now Your Honor, there are certain conditions that can be laid down for foreign corporation before it can come in and if they don't meet those conditions --
Justice Felix Frankfurter: That's right.
Mr. Bob E. Shannon: -- you can exclude them.
Justice Felix Frankfurter: But you can't exclude them for that reason.
You can't exclude them -- you can't make it as a condition if they should central to the federal courts, that's what's called an unconstitutional condition, isn't it?
Mr. Bob E. Shannon: No sir, I wouldn't -- I wouldn't say that it could make that condition.
Justice Felix Frankfurter: Well, then it's not clear whether they could say you can't -- you must take out insurance from a company over which we have power of regulation, that certainly is not settled, is it?
Mr. Bob E. Shannon: No, it's not settled Your Honor.
Justice Felix Frankfurter: Would you think it's more doubtful or less doubtful to this?
Mr. Bob E. Shannon: I think it's much less doubtful.
Not -- not -- Your Honor, are you speaking of your second hypothetical situation as referred to the cases -- the case barred here?
Justice Felix Frankfurter: Instead of doing what Texas did here, it said outright, we have supervisory control over the insurance company that do business in their state.
We make certain exaction as to reserves, as to the percentage of -- control over dividends etcetera, etcetera, investigatorial power by the commission of insurance or whatever your regulatory body is.
And therefore, we want to have that kind of control.
Now, if you think it's doubtful whether he could do that?
Mr. Bob E. Shannon: No sir, I'm sorry I misunderstood you a moment ago.
I think we could do that.
I think it's constitutionally possible to acquire these -- these exactions.
Justice Felix Frankfurter: Constitutionally -- it's constitutionally clear you think for Texas to say to a -- to a resident in Texas, you must take out insurance from a company that does business here?
Mr. Bob E. Shannon: I feel that under holding the Osborn case that the State probably could exercise that power Your Honor.
Justice Felix Frankfurter: Well, that isn't quite that case, was it?
Mr. Bob E. Shannon: Well, no, that wasn't the case but there's language in the Osborn -- Osborn against Ozlin case that would indicate the State does have that power.
The language was, I believe, that the State could preempt the field of insurance if it so wished.
If it did not, he could do less than what it could do that is --
Justice Felix Frankfurter: There was a language indicating that when you deal with insurance -- when you deal with the insurance business long history and adjudication indicates that there's a -- if that comes so close to -- to the safety and the interest of the State, you can do a good deal to control the insurance business.
Mr. Bob E. Shannon: Yes, sir.
Justice Felix Frankfurter: But it's a very different thing to -- to tell a resident of Dallas or Houston or Fort Worth that if he's going to get insurance at all, he must take it -- he must take it from a local company.
Mr. Bob E. Shannon: Well, the same considerations Your Honor would -- would be involved there.
I can feel that in determinating -- determining after all, you're concerned about the residents who will take this insurance if you're controlling the insurance company.
You're not so much concerned about the insurance company itself.
Here, in this situation which you opposed, this is simply a way of determining that these residents of Texas would be -- have insurance that at least met a certain minimum requirements.
Justice Felix Frankfurter: And what is Texas of interest in that, that the fellow should be protected against himself?
Mr. Bob E. Shannon: Your Honor, I will now go into the Texas interest in the insurance contracts involved here.
One of the interests involved is the fact that the risks are located here and the cases, the Osborn case and in the Hoopeston case, both these cases emphasize -- emphasized a fact that the risks were located in Texas.
Now, these risks are substantial risks.
They're not few bales of cotton as in the Allgeyer case which were mainly shipped out and left the confines of Louisiana but these will remain in Texas for the -- for the most part.
Another factor is the fact that the insured that is the respondent here is located in Texas.
In case of failure or the inability of casualty company to pay for large casualty loses, some 1500 -- certain economic consequences would be sure to be felt by the State of Texas, some 1500 people would more or less be unemployed if the Todd Shipyards Corporation offices there were closed.
State agencies would be caught upon the supply relief in that situation and of course loss of purchasing power would have adverse effect on the business community in general.
Another important factor is Your Honor that the events which give rise to contractual obligation to pay on these policies will more than likely to occur in Texas.
In case of some of the insurances involved, persons compensated will be residents of Texas and they will be resorting to Texas courts more than likely unless they wish to resort to distant forums which would cause a great deal of trouble and expense.
The people having a claim under the liabilicy -- liability policies here would be treated in Texas hospitals by Texas doctors and unless reimbursed by insurance may well become more of the state or dependence upon residents of Texas to take care of.
Also, the State does extend police protection to the respondent.
It makes it possible for the respondent to carry on a profitable business in Texas.
Texas, I feel also has the vital interest in the effective enforcement of its regulatory program.
As I've stated a moment ago prior to the passage of this act, there had been certain regulatory -- certain regulatory scheme setup.
However, after the passage of -- there was this gap existing, this was passed and attempt to close this as much as possible and the effect simply was that it lessen the advantage of an unauthorized insurance companies which they get previously --
Justice Hugo L. Black: What do you mean by lessen the advantage?
Mr. Bob E. Shannon: Yes sir.
Justice Hugo L. Black: What do you mean by lessen the advantage practically?
Mr. Bob E. Shannon: Pre -- previously, Your Honor people in Texas who -- who could -- who owned risk in Texas could insure with unauthorized companies and the authorized companies could afford to offer him insurance for a lesser rate.
Justice Hugo L. Black: Why?
Mr. Bob E. Shannon: Because he didn't have to pay any taxes that the licensed companies didn't have to pay.
Justice Hugo L. Black: Suppose -- suppose Texas have called this a purchase tax, would that had made any difference?
Suppose they would have charged so much for each policy purchased by a merchant living in Texas, and apply that to a purchase or policies bought in other states?
Mr. Bob E. Shannon: No sir, I don't believe that would make any difference.
Justice Felix Frankfurter: But they have to impose the purchase tax and everybody who purchase their insurance, wouldn't they?
Justice Hugo L. Black: That's what I ask.
I said suppose they had put a purchase (Voice Overlap) --
Justice Felix Frankfurter: From all the (Voice Overlap) --
Justice Hugo L. Black: Suppose they had a claim you're talking about now, you said that to make it compensate, put them on a level with the others, you had to put on this step.
Suppose instead of putting it in this form, Texas had put a purchase tax on every purchaser of insurance in the state, would there been any reason why it couldn't put on this one this -- this out of state company, or purchasers from it by taking it directly?
Mr. Bob E. Shannon: No sir, I don't think so.
Justice Hugo L. Black: But are you arguing if that's in substance, what you're doing here that you -- states impose taxes on the companies that do business in Texas and then in order to compensate for it, it's necessary to require the purchasers from non-authorized Texas company to pay this tax?
Mr. Bob E. Shannon: Well, Your Honor we feel that the tax placed upon the domestic companies is in turned passed to the risks involved.
Here, then in that case a risk insured with the licensed company would bear a greater -- a proportionate cost or in -- as against a risk that was insured with an unauthorized company -- no burden whatsoever until this tax was passed.
Justice Felix Frankfurter: I don't see how -- how getting money into the Treasury of Texas, safeguards the safety interest etcetera, etcetera.
I can understand how -- I understand that Texas said, insurance is very important, it doesn't affect merely the insured person but it affects as you indicate those people out of employment, it may -- the buyer may go beyond the immediate unit etcetera, etcetera.
Therefore, we have a very strong interest or adequate interest to see to it that buyer protection is adequate, especially.
Therefore, we want to have insurance companies who can control by an oversight etcetera, etcetera.
But as much as Texas is done, Texas simply says, “We want to make money out of the person who wants to insure himself outside the state.”
Mr. Bob E. Shannon: Your Honor, with all do deference to Your Honor's conclusion, I feel --
Justice Felix Frankfurter: I have no conclusion, I'm asking a question.
Mr. Bob E. Shannon: I feel that this is not the case.
A tax is only used as a regulatory device.
Justice Felix Frankfurter: Meaning how is it?
Mr. Bob E. Shannon: Well, it places a tax upon this -- this -- this transaction or this -- this person purchasing the insurance and that person is less likely to purchase that insurance if he's going to have to pay this tax.
Justice Felix Frankfurter: I know but that's merely of -- as you say, this operates a special concept to get insured by locally regulated company.
But suppose for better or bad reasons, some big concerns and the questions referred to take insurance from companies that a resident in localize New York or in Chicago or whatnot, some of the insurance companies is in Massachusetts.
But what you're saying is the likelihood of pressure is sufficient state -- about the interest of the State and its interest of the State --
Mr. Bob E. Shannon: That's correct.
I feel that we have gone -- we stop short that the power of the state could have exercised and we have -- by this Section 2 (e) have -- as Your Honor appraised, applied to pay some pressure.
Justice Felix Frankfurter: You haven't cut short the use of bludgeoning tax, your result in which for one reason or another, you do not think it's important enough to impose directly.
Mr. Bob E. Shannon: The respondent is only one of many large from all the state concerns which tax insurance with unauthorized insurance companies.
If Section 2 (e) is struck down, many of these insurers will seek insurance elsewhere, Texas would find itself from the position of having many of its largest and most hazardous risks authorized in companies that it has no control over whatsoever.
Not only --
Justice Felix Frankfurter: Unless, the fact of such a statute as I've suggested to you.
Mr. Bob E. Shannon: Well, we feel that the legislature --
Justice Felix Frankfurter: Had a choice, you think?
Mr. Bob E. Shannon: Had a choice and it could -- it may well pay such -- such a statute.
And we feel that if Section 2 (e) is struck down, it will not only take long for those insurers who are now submitting a Texas regulation to realize that they can go outside the state and escape the burden of Texas regulation and still insure in Texas risks.
We feel that Texas has legitimate interest in keeping these licensed companies in Texas.
It is submitted, Your Honors, that the interest which I have outlined or ever been a substantial as those in the Osborn case or in Hoopeston case and we feel for that reason that the Court of Civil Appeals opinion should be overruled.
Co-counsel would like to reserve Mr. Chief Justice 20 minutes in rebuttal.
Chief Justice Earl Warren: You may -- you may Mr. --.
Argument of Charles R. Vickery, Jr.
Mr. Charles R. Vickery, Jr.: Mr. Chief Justice, may it please the Court.
From the admission of petitioner's counsel that St. Louis Compress controls this case and in order for the State to prevail in this litigation that St. Louis Compress must be overruled.
It is at least quite clear that the parties are met today on an old and familiar constitutional battleground and that is the boundary line which separates permissible from prohibited estate taxation.
This terrain in this litigation has been examined by this Court in at least five or six different cases.
The landmarks or the benchmarks are well-established and there is no doubt that the St.Louis Compress case, the Tafoya case, the Connecticut General case, clearly controls this litigation.
But in analyzing the boundaries that have been definitively established by this Court, we must apply those boundaries to this one simple issue.
Does due process prohibit -- does due process prevent the State of Texas from levying a discriminatory tax on early admitted insurance based on only one and only one possible Texas connection or Texas nexus and that is a Texas risk or its synonym Texas property.
The -- in answering that issue, you are forced, immediately met with -- with the question, should St. Louis Compress be overruled.
Now, the facts must be a little more minutely examined and were examined by the petitioner.
The insurance contracts were negotiated in New York.
They were delivered in New York.
They were paid for in New York.
The premium for paid for in New York.
All of the negotiations, all of the decisions is to whether to insure or not and where to insure were made in New York.
Now, that is true because Todd, the respondent is a large enterprise having shipyards and some five or six different states.
They have an insurance expert located in the City of New York.
He covers all of the -- all of these marine risks and I used that as a broad terminology which he places all the marine risks, some of them under one policy for five or six different yards, yards in Texas, yards in Louisiana, yards in New Jersey, yards in New York and yards in California and yards in the State -- State of Washington.
There isn't -- there is not and the State admits in this case that Texas has no connection that there is no transaction or activity by this New York corporation in the State of -- of Texas that can be connected in any way with the insurance contracts or the premium payments or for that matter the losses either.
The losses if it has and when occurring are adjusted in New York between New York's expert and the brokerage companies are authorized to do business in New York in a one capacity or another represent the London insurance.
Texas has absolutely no connection with either the contracts or with the losses.
Now, the London insurers, the London insurers are not doing business in Texas, they are not admitted to do business in Texas and these facts are all covered by stipulation that is crystal clear.
They have no agent in Texas.
They do not solicit or have any contract with the State of Texas whatsoever.
All of the insurance, negotiations and solicitation are in New York.
Lloyd is not admitted to do business in Texas and it is not doing business in Texas and its tax is not levied for the privilege or the right to do business in Texas or to obtain the privilege of doing a Texas insurance business.
The respondent is domiciled in the State of New York or it has its principal office and place of business and where it operates a shipyard.
Justice Felix Frankfurter: Lloyd's could be admitted to do business in Texas, could it?
Mr. Charles R. Vickery, Jr.: Yes sir, if it -- if it complied with the various statutes.
Of course, they have not.
I would not want to speculate on why not but they're not subject to Texas rate regulations.
They're not subject to Texas reserve requirements.
They're not subject to capital requirements and Texas also has some discriminatory taxation that are based on investments in the State in which they allow companies, preferential treatment if asked and when their investments in the State reach certain formulistic level.
And Lloyd's has not subjected himself and he's not now subjected to any state regulation.
Chief Justice Earl Warren: For that matter of curiosity, do any other states have this kind of a law to your knowledge Mr. --
Mr. Charles R. Vickery, Jr.: Yes sir, the State of Louisiana has filed a brief in this case in which they say that they have a similar statute.
Chief Justice Earl Warren: Oh, yes.
Mr. Charles R. Vickery, Jr.: The effect of their brief is that this Court held that statutes are similar statute unconstitutional in 1897 and they never have paid any attention to the holding in the Allgeyer case and that I find it to reverse it now.
They have had -- they have had that statute on their book for 65 years.
They come here and say they know it's been unconstitutional all that time but they like to make it lawful now as they could.
The State's brief presides --
Justice Felix Frankfurter: Did you say that they had paid no attention to mean that the statute has not been formally repealed but it's not been enforced to attach and enforce which?
Mr. Charles R. Vickery, Jr.: There, I do not know.
There, amici curiae then decide.
The effect of it is if they still have such a statute and if they have -- they didn't like the Allgeyer case in the beginning then they don't like the Allgeyer case --
Justice Felix Frankfurter: There are a lot of people didn't like it.
Mr. Charles R. Vickery, Jr.: That's right.
But in some -- but the dislikes I think are not aimed that the problem in this are not aimed that the problems in this case which I will go into in a minute.
Todd, the respondent operates to Texas ship -- shipyard.
Now, this is an important point.
Todd does operate a Texas shipyard.
It does do a -- a business in Texas.
Now, these cases that involve the -- the jurisdictional boundaries between the State's right to tax and where it may not rightfully tax, come up here to this Court in two basic postures.
And it's important to make this distinction.
The State in this case has personal jurisdiction over Todd Shipyards.
Todd Shipyards is doing business in the State at which is clearly admitted.
They are now trying to extend the state's taxing powers to the State of New York against an admitted company.
By reason of transact -- by reason of its personal presence in the State, they're trying to reach an extraterritorial or another state transaction.
Now, the case has come up here in another way.
They come up where the company like Lloyds is not in the State.
Clearly not doing business in the State and the State seeks to reach that company on the grounds of transactions within the State.
If suit were brought against Lloyds, they would be trying to reach Lloyds through a Texas transaction.
In this case, they admit the case reached Lloyds.
They admit Lloyds don't have a Texas transaction.
They're not trying to project their power to Lloyds.
They're trying to take the personal jurisdiction that they have over this foreign corporation and project it to an extraterritorial transaction.
And -- and those are two different postures in which the case has come up here and sometimes, the rules are not altogether harmonious unless that distinction is made between projecting from personal jurisdiction to an out of state transaction and trying to get the jurisdiction to a transaction in the state.
Justice John M. Harlan: If Lloyds is in Texas, could they impose this tax on Lloyd?
Mr. Charles R. Vickery, Jr.: If Lloyd was doing business in the state, they would be subject to the states admitted insurance tax on business done in the state, yes sir.
Justice John M. Harlan: Well, how could the State since they can't get Lloyd in their hands on Lloyds, can they make the -- can they make the insurer a collection agent form?
Mr. Charles R. Vickery, Jr.: The insurer -- you mean the insured?
Justice John M. Harlan: The insured, I beg your pardon.
Mr. Charles R. Vickery, Jr.: They could if it was a Texas transaction, if it were -- if the transaction is within Texas.
If they were taxing a transaction in a taxable within Texas, you're thinking of the Scripto on similar cases.
Now, this transact -- the Scripto case is -- is in the second posture.
The Florida was reaching Scripto by reason of Scripto's activities in the state.Scripto was unfair and they were reaching out to get him by reason of transactions.
It's also patently clear in this case that when the State admits that they can't reach Lloyds, they -- they virtually admit Texas has no jurisdiction of this transaction.
If Tex -- if this was a Texas insurance contract, if Texas has this vital interest that the state suggest then Lloyd would be amenable to Texas regulation and they could reach out under the Scripto in similar cases and reach Lloyds.
They take an inconsistent position when they say they -- when they admit they cannot reach Lloyds and when they say but at the same time, we can tax what you do with Lloyd in New York.
If these were a Texas transaction, if Texas had this jurisdictional nexus, if they have the jurisdictional connection, they could bring Lloyds under the regulatory authority of the State of Texas.
The position of the State on their point is really inconsistent.
Now, I would like now to discuss if I may in the factual analysis the nature of the insurance and this point is vital.
This tax is laid and this tax is levied without regard to whether this insurance is available and Texas is not.
Some of this insurance, there's nothing in the record on this factual point but some of this insurance is not available in Texas and cannot be purchased in Texas because no admitted company was right.
Justice John M. Harlan: That's true, a lot of Lloyd's policy that's why they're so successful.
Mr. Charles R. Vickery, Jr.: Yes sir, that's true.
They're willing to take risk and nobody else will tell you.
Chief Justice Earl Warren: We'll recess now Mr. --
Mr. Charles R. Vickery, Jr.: Thank you.
Argument of Charles R. Vickery, Jr.
Chief Justice Earl Warren: -- you may continue your argument.
Mr. Charles R. Vickery, Jr.: May it please the Court.
I shall proceed, sir.
In connection, readdressing ourselves to the nature of the insurance policies, the tax is levied without regard to whether the policies are available in Texas or not, and the fact that the Tex -- the taxes rendered without regard to availability, renders absolutely sterile as state's arguments that it's for regulation.
To the extent that the insurance is unavailable in Texas, any discouragement of course is -- is without any force at all.
Certainly, the respondent is better off with insurance in an unadmitted insurer than none.
It is better off with insurance in a corporation unadmitted in Texas than it would be with no insurance.
They can't regulate what they don't offer.
If the insurance is not offered in Texas, Texas couldn't be regulating it or trying to force it into a regulated market.
The regulation argument is absolutely dependent upon Texas availability.
Justice John M. Harlan: Is that -- is what you're arguing now, does that have a basis in the record?
I thought you said, it was --
Mr. Charles R. Vickery, Jr.: As to the actual facts, there is no record as to availability in the market.
The statute makes it quite clear that they reach available and unavailable insurance.
There's one section in this same statute which says that before a licensed agent can obtain or purchase unadmitted insurance, he must make an affidavit that admitted insurance is not available.
So the statute clearly contemplates to tax it whether it's available or not.
It was not thought material in the trial court under St. Louis Compress, Tabacos, Connecticut General and Allgeyer to offer that proof and there was none offered.
Now, the -- the State in picturing the type of coverage here has not accurately presented the coverage picture.
This insurance coverage and all of the policies at least by types are printed in the record.
This coverage does cover comprehensive coverage on certain personal property, principally dry docks and certain perhaps real property, principally palings and wards.
But the State argues this case as though the only insurance in the case was a property insurance but that is not quite true.
The insurance also covers liability for negligence, collision liability and products liability risks which are not property in Texas but risks in connection with Texas work.
For example on the products liability coverage, if Todd repaired a tanker say for one of the major international oil companies and it had a liability under the products coverage, the liability could arise in Hong Kong, Shanghai or any port of call in the world.
And certainly on that insurance, the likelihood of loss in Texas does not even exist.
This -- this case does not involve only Texas property.
It involves products liability risk, it involves risk for negligence or willful damage by vessels that are on the dry docks, it also involves protection against a collision hazard from the dry dock.
The policies also cover insurance in five or six different states.
Now, the stipulation also includes this critical crucial fact and that is that the respondent has paid all taxes.
The respondent has paid all taxes for the privilege of doing business in Texas.
The State admits in the stipulation that this tax cannot be justified as the tax for the privilege of doing business in Texas.
And now we come to the taxes, what -- what is the only factual connection with Texas that Texas insist extends its taxing on to a New York contract and that is the Texas risk.
The Texas risk consists of the personal property, the real estate, the product work that was done in Texas and might go anywhere and collision risk and negligence risk on the dry docks to other people's property.
In a nutshell, the only Texas -- the only Texas nexus -- the only Texas connection if you please is the Texas risk.
Now, what does the statute provide?
Those we think are the controlling facts.
What is the nature of this -- of this statute?
What does the statute provide?
This -- this is a tax on a premium payment.
The tax is not due unless there is a premium payment.
A payment is a condition preceded to the tax.
Therefore, we think that the taxable event, the operating incidence of the tax clearly falls on the premium payment.
If there is a critic sale, if there is a critic purchase of insurance and the -- the premium is never paid, there is no tax.
The premium payment is a cynically none of the type.
And we therefore feel that the premium payment is a taxable event, the taxable event under the stipulation and as a fact, occurs and occurs only in the City of New York in the State of New York.
Now, the -- the statute levies the tax whether or not there is a local transaction or not.
The statute is not dependent upon any local transaction.
A Congolese could purchase that -- the insurance in the Congo on a Texas risk and the Texas tax would've -- would purport to cover it.
He of course, might have some jurisdictional problems in collecting it.
But the tax is in no way limited to residence, it's not limited to people doing business in the state, it is limited to -- it is defined only -- delimited only by a person purchasing insurance anywhere from any unadmitted insurer on a Texas risk.
The only two taxable events -- not events but the two prerequisites are the purchase from an unadmitted insurer and the purchase on a Texas risk.
The taxes are levied on persons, on individual persons, as well as it is lev -- as on corporations.
It is levied on partnerships, it is levied on associations.
There is nothing that the statute is indiscriminant.
It le -- levies it on every purchaser.
This fact also negatives any possible argument that this tax was levied for the corporate privilege of doing business in the State because it's levied on individuals and because it's levied without regard to whether you're a corporation or admitted or not.
The only two requirements are the -- are the purchase from an unadmitted insurer on the Texas property.
Now, we come to the discriminatory nature of the tax.
Is the tax discriminatory?
Now the State or the petitioner has blown both hot and cold in its brief.
The petitioner in one position has argued that the tax is discriminatory that it is purposely discriminatory in order to accomplish what the State or the petitioner describes as a re -- as a regulatory effect.
In other words, by the higher tax, they accomplish regulation by discouraging the purchase.
In another place in its brief, the State argues that this tax is to equalize the tax burden.
If it is to merely equalize the tax burden, then of course the State loses its regulatory effect.
The truth of course is that while the State has taken both positions in its brief that it -- to equalize taxes and put them on an equal basis and in another -- in another place in its brief, it is discriminatory to discourage the -- to discourage the purpose, the truth is that it is discriminatory.
The rate on unadmitted purchases from unadmitted insurers is at the rate of 5% of the premium pay, 5% of the premium paid while the taxes to unad -- to admitted insurers, domesticated insurers if you pleasem, varies from a minimum rate of 1.1%.
That's a difference of over 400% and almost 500% to a maximum rate.
The maximum rate on any admitted insurer is 3.85%.
The graduated scale or the scale from 1.1% to 3.85% is determined -- is determined by a formula in the statute that varies dependent upon the admitted insurers' investment in Texas property.
The tax, not only is discriminatory in that regard, admitted insurers are granted in the same statue, a sweeping tax immunity from any tax immunity from any tax agent by any other political subdivision of the State.
The respondent is granted no such broad tax immunity.
In other words, the admitted insurers in return for the premium tax on their premiums are admitted, are given immunity from insurance occupation taxes on -- from other political subdivisions of the State which is a privilege the respondent does not enjoy.
The taxes for the discriminatory in that, domestic insurers, if a policy is cancelled and a -- and a return premium is paid are permitted to credit a return premium against the tax whereas an unadmitted insurer is not given the same credit.
So, I think it is quite clear that the tax is patent -- that the tax is patently discriminatory.
Now, as we move into the legal issues involved in this case, there are four --
Justice Hugo L. Black: What do you say with reference to the discriminatory feature?
Mr. Charles R. Vickery, Jr.: I say it is discrimina --
Justice Hugo L. Black: With reference to the statement made by Mr. Justice Holmes in his dissent explaining --
Mr. Charles R. Vickery, Jr.: Mr. Just -- (Voice Overlap) Mr. Justice Holmes in the Tabacos case?
Justice Hugo L. Black: Yes, in the Philippine case where he said the result uphold -- holding the Government's action is just when a tax -- taxes domestic insurance, if reasonable, may endeavor not to let the foreign insurance escape.
Mr. Charles R. Vickery, Jr.: What Judge Holmes has said there on the grounds that the Compress opinion was based on discrimination.
Justice Hugo L. Black: Based on the penalty you said?
Mr. Charles R. Vickery, Jr.: A penalty into a -- in the nature of a discriminatory tax.
The penalty was in the nature in St. Louis Compress of a discriminatory tax.
Justice Hugo L. Black: Is this a penalty?
Mr. Charles R. Vickery, Jr.: Yes, sir.
It's a penalty in the sense that it is discriminatory.
Justice Hugo L. Black: Discriminatory in what respect?
Mr. Charles R. Vickery, Jr.: In that you pay more than you -- if you bought from an admitted insurer.
Justice Hugo L. Black: Yes, but the insurer, admitted insurer, the one that's admitted in the State has to pay various taxes.
Mr. Charles R. Vickery, Jr.: He -- he pays at the rate of 1.1% up to 3.85% as against 5%.
That's the same thing that you had in the St. Louis Compress case.
The majority in the Philippines case into which Your Honor refers held that the discriminatase -- the discrimination was immaterial.
Justice Hugo L. Black: Yes, they stuck to the opinion with that -- the Holmes' opinion with that interpretation.
Mr. Charles R. Vickery, Jr.: Yes, sir.
Justice Hugo L. Black: Mr. Justice Holmes who had written the Compress case would not agree to that and later on, quite a number of statements have been made about the Allgeyer and the Compress case which fit more nearly into Mr. Justice Holmes' dissent, have they not?
Mr. Charles R. Vickery, Jr.: Are you referring to the labor cases?
The -- the St. Louis Compress case has never really been criticized.
Your Honor wrote an opinion in the Hoopeston case in which you said that the Allgeyer case has been occasionally doubted and in that -- and -- and in making that statement that it had been occasionally doubted.
Your Honor had reference I'm sure to the labor case.
And I'd be glad to discuss the Allgeyer decision with you for a moment.
The All -- in the Allgeyer decision, Louisiana levied a tax on unadmitted insurers.
But the -- in the Allgeyer case, the tax was levied only, only and only if there was an act in the State of Louisiana leading to the insurance if there was an act in the State of -- of Louisiana.
Nevertheless, in the Allgeyer case, they held that tax unconstitutional even though there was a step in the contract, even though there was a formulation of the contract inside the State of Louisiana.
Now, the -- the reason that Your Honor was able to say in the Hoopeston case that Allgeyer had been doubted was because in the yellow-dog labor contract cases and in the right to work cases, the Court had said and said through you a time or two that a -- that in the Allgeyer case, there was -- that that in fact was a Louisiana contract.
That in effect, one of the essential steps in Allgeyer was a Louisiana contract and Allgeyer really involved the regulation of a Louisiana contract.
Now, that's where the doubt has come about as to whether or not Allgeyer regulated a Louisiana contract or not.
If that was a New York contract, the argument with Allgeyer is not about whether you can tax a New York contract or not.
The argument in Allgeyer is whether it was really a New York contract or whether it was a Louisiana contract.
This Court has never questioned the proposition that if a transaction is wholly made in the State of New York, then another state cannot -- cannot tax it, cannot tax that transaction.
Now, it is quite another thing to say that the Allge -- that -- that is a -- that is the basic Allgeyer principle and it has never been doubted.
It has never been questioned.
The thing that has been questioned is whether or not the mailing of the notice of the cotton to be insured, a necessary step in the formulation of the contract in Louisiana was not a Louisiana contract and if the Court didn't go haywire in holding at a New York contract tax by Louisiana rather than a Louisiana contract.
Justice Hugo L. Black: I suppose you agreed that Louisiana or Texas could regulate the types of contract that should be made on property in Louisiana or Texas.
Mr. Charles R. Vickery, Jr.: To regulate the types?
Justice Hugo L. Black: The types of contract of insurance that can be made and be effective in that state on Louisiana and Texas property.
Mr. Charles R. Vickery, Jr.: So -- so long as it was business done in the State or by admitted insurers, yes.
Justice Hugo L. Black: You say that they couldn't regulate in any other way?
Mr. Charles R. Vickery, Jr.: Yes, sir.
I say that if Lloyd's of London issues a --
Justice Hugo L. Black: What about the Claxton case?
Mr. Charles R. Vickery, Jr.: I beg your pardon?
Justice Hugo L. Black: What about the Claxton case?
Does that have any bearing on this?
Mr. Charles R. Vickery, Jr.: I'm not familiar with the Claxton case.
Justice Hugo L. Black: Texas policy on the light that was held -- Texas had a policy against letting non-relatives by insurer be the beneficiaries of insurance to pay for it.
Mr. Charles R. Vickery, Jr.: There -- there -- there are some cases involving whether they had insurable interest or not?
Justice Hugo L. Black: Yes.
Mr. Charles R. Vickery, Jr.: Yes, sir.
In -- in those cases went off on one point and that was that if you tried that case in a Texas forum and that it was a Texas public policy not to enforce them, applying conflicts laws not constitutional law that Texas could apply its conflict law in its forums without violating the Constitution but that's a four or five in this case.
Justice Hugo L. Black: But the effects -- effect of it was whether you call it conflict or constitutional that they refuse to let a contract be enforced that has been made that would be valid at another place, didn't it?
Mr. Charles R. Vickery, Jr.: Yes, but -- but -- but that case holds this and nothing more that Texas --
Justice Hugo L. Black: I don't mean to say it's controlling here but I think it has (Voice Overlap) --
Mr. Charles R. Vickery, Jr.: It's -- its one -- it's one of the more but -- but here, you have -- you have a lawsuit in the Texas Court and Texas -- the Texas Rules of Civil Procedures certainly could apply to a Texas court.
And the Texas conflict -- Texas conflict rules could apply to a trial in that forum.
Justice Hugo L. Black: Where did this case --
Mr. Charles R. Vickery, Jr.: And that -- all that case held that they could regulate the rules of law to applying a Texas forum.
Justice Hugo L. Black: Where did this case come from?
Mr. Charles R. Vickery, Jr.: I beg your pardon?
Justice Hugo L. Black: Where did this case come from?
Mr. Charles R. Vickery, Jr.: This came from Texas but we're not dealing with a complex rule of procedure or of evidence.
Here, we're dealing with a tax on New York contract.
You also -- I beg your pardon?
Now, you also have a New York Life Insurance case versus Head which is near to this case than that one.
And New York Life Insurance versus Head said that that where a contract was laid out -- insurance contract laid outside of Texas, Texas can change it.
I -- I will say in all candid that in cases which have involved questions of -- of procedure in the forums of the State that this -- this Court has given them more latitude.
That's your Watson case, your direct action statutes that this -- that they have a right to prescribe the rules of procedure and the rules of law to be applied in those courts.
Justice Felix Frankfurter: In your --
Mr. Charles R. Vickery, Jr.: That's probably one thing but to say that they can tax a contract in another state is quite another thing.
Justice Felix Frankfurter: In your view, could Texas make fire insurance compulsory on Texas property?
Mr. Charles R. Vickery, Jr.: On Texas real estate?
Justice Felix Frankfurter: Yes.
Mr. Charles R. Vickery, Jr.: Yes, I would think they probably could.
Justice Felix Frankfurter: If they -- if they could do that, couldn't they also provide that the kind of assurance that insurance should afford? In other words, couldn't they provide that insurance must be by some responsible companies?
Mr. Charles R. Vickery, Jr.: Well, I -- I don't think these courts ever passed on those two propositions.
Justice Felix Frankfurter: Let's speculate a little bit.
Let's speculate a little bit.
Mr. Charles R. Vickery, Jr.: I'm an advocate and not a prophet.
Justice Felix Frankfurter: Well, but it's relevant to this case.
Justice Hugo L. Black: Sometimes you have to cut it and mix it up.
Mr. Charles R. Vickery, Jr.: Yes, yes.
You know, I -- I have -- I have to go by what the law is and know what it will be.
Justice Felix Frankfurter: Yes.
Mr. Charles R. Vickery, Jr.: And the law in this case is already permanently declared in at least five or six cases.
Justice Felix Frankfurter: I know but it is suggested that when we reconsider the wisdom of our predecessors otherwise it may have been, what do you think?
Do you think --
Mr. Charles R. Vickery, Jr.: The -- there are --
Justice Felix Frankfurter: Do you think that Texas could provide insurance should be taking out fire insurance on all Texas realties?
Mr. Charles R. Vickery, Jr.: They do have a driver's responsibility law.
I really haven't briefed that.
And I don't like to fly by the sea to my pants with these hypothetical questions.
I mean it's a very dangerous thing --
Justice Felix Frankfurter: Would it make a difference if I suggest that the questions I'm asking leading -- lead up to a question that might have helped you?
Mr. Charles R. Vickery, Jr.: Well, that's -- that's what I --
Justice Hugo L. Black: That changes the aspect of it.
Mr. Charles R. Vickery, Jr.: And I would -- I would -- if I knew where you were going.
I'm a little fearful of the Socratic Method of -- and not without reason.
Be that -- be that -- be that as it may in getting back to the question at hand, we think that there are four pivotal distinctions that must be made in deciding the validity of this type of tax.
And -- and the first of those is whether or not the tax can be justified as a tax on the doing of business in the state that is whether the tax can be justified as on the granted privilege and that's our distinction of Mr. Justice Black that was made in the Philippine case, the distinction between this kind of a tax on unadmitted insurer and this kind of a tax on unadmitt -- on an admitted insurer.
That distinction can be -- that distinction can be critical.
The next is whether the tax can be justified as tax -- as a tax done on business within the state or whether it is bu -- on a type of tax on business done without the state and in the next question -- the next distinction whether it's a tax on a transaction within on a transaction without the state and whether or not it's a tax on a Texas contract or a tax on a New York contract.
Now, the State has already admitted that St. Louis Compress is indistinguishable and this Court must first meet or face the problem of whether it should be overruled or not.
The Tabacos case or the Philippines case -- the Philippines case reaffirmed the St. Louis Compress case under the sale -- same attacks that are made by the State here in an opinion, I think, of our Chief Justice Taft that -- that the Philippines case draws a very narrow boundary.
It draws a very narrow boundary and said the same tax applied to an admitted company is good or as if applied to an admi -- unadmitted company it is bad.
Now, that's a narrow boundary.
I would be the first to say that it is a narrow boundary.
But I would also be quick to say that we're on the right side of a very narrow boundary.
And if I'm not play dry from Mr. Justice Frankfurter, a boundary is nonetheless the worst for being narrow if you're on the right side of it at any rate.
The next case we rely on is the Connecticut General case which was decided in this Court and I believe, the year 1938 at least in that era.
In the Connecticut General, the State of California before they can levy a tax, Connecticut General purported to levy a tax upon -- California purported to levy the tax on Connecticut General on reinsurance contracts made in the State of Connecticut based on the premiums or measured on the premiums paid in the State of Connecticut.
This Court held with one dissent by Mr. Justice Black that the Connecticut contracts and the Connecticut premium payments were not amenable and not within the taxes -- taxing jurisdiction of the State of California.
Now, the -- the petitioners in the course of this long litigation involved some 10 or 12 briefs and they have never met the Connecticut General case at any way.
They have never answered to Connecticut General case.
They have never tried to meet it.
In fact, this case is stronger than Connecticut General.
Connecticut General says if you have a contract in Connecticut and a premium payment in Connecticut and that's in 303 U.S. that if you have a Connecticut contract, if you have a Connecticut premium payment even though the -- the insurance policies are on the lives of California residents, the State of Connecticut -- the State of California has no jurisdiction to tax and they have transgressed a well-established constitutional boundary and the tax must fall.
That distinction runs throughout the cases.
If the transaction is a Connecticut transaction, California can't tax it.
If it's a New York transaction as in this case, the State of Texas can't tax it based on property or lives within the State.
Now, the dissent in that case was based -- we are stronger than -- and Connecticut General has pointed out in the dissent because Connecticut General had a permit in the taxing state and was doing business in the taxing state and the State of California tried to justify as a tax on the privilege of doing business.
Now, although -- although I primarily rely is on St. Louis Compress and -- and Connecticut General and on what I call the Philippine or Tabacos case and although we're much near Connecticut General than we're on Allgeyer, the State levies it the entire force of its arguments in Allgeyer.
In other words, the State has lost its own clay pigeon to shoot down.
We -- the Allgeyer case could be overruled.
The Allgeyer case could be overruled on the basis that it was a Louisiana and not a New York contract without affecting this case one or the other.
We are in a much stronger position in the Allgeyer case, very much stronger position.
The -- and that you could over -- if a proper case came out, you can overrule Allgeyer and still affirm or reaffirm St. Louis Compress.
Now, that is mildly a financial provisions, Judge Holmes pointed that out himself in the St.Louis Compress opinion in which he said, the St. Louis Compress is a stronger case than Allgeyer for this very reason that in Allgeyer, you had a step or part of the contract in the taxing jurisdiction.
Now, I -- I should like if I might to then pass to the -- to the authorities relied on by the State.
The State says at the beginning with Osborn versus Ozlin that a -- a brave new world of constitutional law was opened up.
That due process underwent a metamorphose.
That due process underwent some revolutionary change.
Respondent does not believe that that is a fact.
Osborn versus Ozlin -- Ozlin is in a traditional due process group.
There's nothing in Osborn versus Ozlin that is revolutionary nor is there anything in Osborn versus Ozlin that affects this case.
Now, Osborn versus Ozlin holds one thing and only one thing and that is that -- and that is this simple thing that the State of Virginia could regulate insurance business inside the State of Virginia within the State of Virginia and that as a part of that right, they could regulate the employment contract between an insurance agent in Virginia and a domesticated Virginia company.
They could regulate the business and contracts within.
And then we come to what is also -- that has nothing to do with their power to regulate without the State.
We make the distinction between regulating what goes on within and without the State.
Now, I -- I think that there can be nothing clearer than that Osborn versus Ozlin is limited to regulating the insurance business within the State of Virginia.
And to remove all doubt about it and to remove all doubt about it and to firmly establish in that opinion the difference between regulation within and regulation without the State at the close of that opinion, Mr. Justice Frankfurter pointed out that Osborn is different from the Tafoya case, T-A-F-O-Y-A, it's reported in 275 U.S. which was an opinion by Judge Holmes.
And it's follows in the St. Louis Compress vein and consistent with it and it was distinguished in Osborn versus Ozlin.
In the Tafoya case, the State of New Mexico had undertaken to say that the insurance company could pay no compensation to any agent or any broker for insuring New Mexico risk.
They prohibited the payment of compensation to any insurance agent for the procuring of an insurance policy on a New Mexico risk.
It was pointed out in the Osborn case that that was an attempt to regulate what the insurance company did outside the State.
What -- what -- what New Mexico tried to do in Texas or Oklahoma was prohibited.
They could not -- they could not regulate insurance agents' compensation outside the State.
Osborn versus Ozlin is merely the other side of the same coin and said -- which holds that in Tafoya, the compensation was outside the State and was the same done outside the State and was invalid.
Following Osborn versus Ozlin, they were -- they were regulating or they were fixing a compensation agreement for activity within the State of Virginia.
Osborn versus Ozlin is even broader than that or narrower depending upon your point of view.
It holds that the State of Virginia could establish an agency system for doing the insurance business in the State of Virginia.
And as a part of that system, they could provide for the compensation -- compensation of agents.
It was limited to insurance business in Virginia and the method of doing that insurance bu -- business in Virginia.
Now, the Hoopeston case relied on by the State -- the Hoopeston case relied on by the State is entirely wider the more and not within orbital range of this case.
In Hoopeston, there was a simple -- there was a simple problem.
The Hoopeston -- the -- the Hoopeston insurance which was a reciprocal association of insurer, these insurers wanted a permit to do business in the State of New York.
They wanted them to seek permit to do business in the State of New York.
Based upon the fact that the insu -- now listen to this, the insurers and the insured were both in the State of New York.
The insurers' contracts were in the State of New York.
They solicited insurance in the State of New York.
They paid claims and investigated claims in the State of New York and they will claim an immunity from New York regulation based upon the obvious doing business.
Here, the problem Hoopeston is the second projection.
In Hoopeston, New York was reaching out to -- to make a company that was doing business qualifying the State based on New York transactions.
And it was -- it was clear that they were doing business in the State.
And what was clear in the Hoopeston case, that the insurer was doing business in the State is admitted not to exist in this case.
The insurer is not doing business under the stipulation in this case.
And the State is very proud of that fact.
The Hoopeston case is -- is nothing more no less than a finding that Hoopeston -- the insurer was doing business in the State and therefore subject to internal regulation.
There was no attempt to project the taxing power or the regulatory power outside the State of New York and it is completely inappropriate here.
Travelers Health -- Health Association is the same kind of a doing business case.
Here, we're not looking to see if Lloyds is doing business because it is admitted they are not.
The stated -- the State concedes they are not doing business in the State.
Now, the -- the State suggests that St. Louis Compress should be overruled because it's stayed all authority.
St. Louis Compress, Allgeyer and Connecticut General were all cited by this Court as late as March in 1960.
In -- in the Federal Trade Commission versus Travelers Health in an opinion by Mr. Justice Whittaker holding nothing really on the point in issue -- holding nothing on the point in issue but recognizing that authority now -- not withstand -- not with the authority in support of the respondent's position is clear and unequivocal.
Now, we turn to should it be overruled.
Dissent -- and I say that as the Toolson Rule should be invoked in this case.
The Toolson Rule was a New York Yankee case where an attempt was made to bring him within -- bring them within the State, within the scope of the antitrust laws and this Court said that a long time ago we let baseball develop believing that it once subject to the antitrust laws and we therefore will not reexamine it because the business has been left for a long time to develop on that proposition.
The insurance business here has been left to develop for 65 years in reliance and based on the Allgeyer, Saint Louis Compress, Tabacos, Tafoya, Connecticut General cases.
Now, (Inaudible) will immediately say that Toolson is statutory and you are involving constitutional principle.
And I say that is a distinction but it is no difference.
Stability is as much a merit in the one area as the other and that the Toolson Rule should be applied to this case and that St. Louis Compress and its progeny should not be reexamined but that they should be reaffirmed because not only has the shipyard business but the insurance business has been left to develop for 65 years in reliance upon it.
Justice John M. Harlan: There's a big difference though is there between Toolson --
Mr. Charles R. Vickery, Jr.: There is a big difference between a congressional statute and a constitution.
The only policy argument that you (Voice Overlap) --
Justice John M. Harlan: How are you going to suggest another difference?
Toos -- Toolson is baseball.
Mr. Charles R. Vickery, Jr.: Well, this -- this Court had now put a position to admit the case is still going, making that line entitled to preferential treatment.
The -- the real distinction that you can make if you want to -- is to say that it's more cumbersome to change the Constitution than it is to change the statute.
And I don't know if the President will agree with you or not but it's -- it -- it can be difficult to do either one.
This is not -- this -- this is not a -- this is -- this is not a civil rights case.
We're not dealing with -- with personal -- personalities.
We're not dealing with the rights of persons.
Here, we're dealing with property rights where there's certainly less compelling reason to overrule long establish our constitutional precedent.
Justice Felix Frankfurter: Can I ask you -- can I ask you -- is it your situation on this aspect of your argument more likely other insurance case that this Court had about at least an insurance --
Mr. Charles R. Vickery, Jr.: Well, it --
Justice Felix Frankfurter: -- where we get some overruling at least (Voice Overlap) --
Mr. Charles R. Vickery, Jr.: Yes sir.
I -- I'm not unmindful of the fact that this Court has not been reluctant at times to overrule.
But in the Toolson case for some reason, it was reluctant.
And I'm saying that the same factors of, again, Toolson case are present here.
Here, you have a shipyard that goes in, it spends a lot of money, it gets into the shipyard business, it's been since 1934, it's carried these policies, this is not something that we did -- done to get into this lawsuit or to attack the statute.
We were there for 23 years before the statute existed.
Justice Felix Frankfurter: And I take if you -- you argue that the earlier -- the Allgeyer decision and the Compress case are as a matter of, what we lawyers call, as a matter of principal right.
Mr. Charles R. Vickery, Jr.: I (Voice Overlap) --
Justice Felix Frankfurter: Not merely that they own their right, you think?
Mr. Charles R. Vickery, Jr.: I think they are not only old but they are right.
And that has been a long time since they have been questioned on this fact.
That if -- the -- I -- I think that -- that there had been many advocates and they've been over aggressively trying to extend them beyond the scope that could be taken.
And you've distinguished them time and time again.
But when you distinguish a case, you don't impinge upon its authority.
Justice Felix Frankfurter: But there was a lot of tall talk in the Allgeyer opinion.
Mr. Charles R. Vickery, Jr.: There's a lot of tall talk and -- and most of the tall talk is -- and most of the thing -- the two things that are bad about Allgeyer and to differentiate it and the thing that got it in trouble was that it was possible to make a strong argument.
There was the Louisiana contract because -- because it would -- the statue only reached Louisiana transaction.
Justice Felix Frankfurter: I wasn't referring to that.
I was referring to the generality of language.
Mr. Charles R. Vickery, Jr.: Yes, sir.
Justice Felix Frankfurter: There's lots of general language.
Mr. Charles R. Vickery, Jr.: There's a lot of general language in Allgeyer.
There's not in St. Louis Compress.
St. Louis Compress --
Justice Felix Frankfurter: Different hands wrote the difference of the two opinions, two different people --
Mr. Charles R. Vickery, Jr.: Two different hands.
Justice Felix Frankfurter: Yes.
Mr. Charles R. Vickery, Jr.: The one is pungent thrust, quick, clear --
Unknown Speaker: And short?
Mr. Charles R. Vickery, Jr.: -- and unequivocal, short and unequivocal.
But nonetheless, right.
An opinion doesn't have to be long to be right.
I've -- I don't suppose anybody --
Justice Felix Frankfurter: The fact that it's long doesn't make it right.
Mr. Charles R. Vickery, Jr.: I beg your pardon?
Justice Felix Frankfurter: The fact that it's long doesn't make it right.
Mr. Charles R. Vickery, Jr.: No, sir.
But the corollary of that is also true of the fact that it's long doesn't make it wrong.
Justice Felix Frankfurter: Here we are.
Mr. Charles R. Vickery, Jr.: Here we are.
Now, we would -- we -- we have used a lot of words to prove nothing.
But I only -- I only have a few minutes left and I want to get down to the -- to the -- to the real meat of this case and the authority behind it.
But the State is asking you to -- what the State is besieging these courts to do is one simple thing, one simple thing.
They say that we want you to say that if there is a Texas risk, insurance on Texas property or insurance on a job in Texas are on a Texas risk, we want you to take that bare fact, Texas risk in saying that that gives us regulatory dominion and that that gives us taxing dominion over the transaction.
Now, this Court has re -- has rejected as a jurisdictional nexus the Texas risk argument six times, six times.
The jurisdictional nexus based on the taxes or a local state risk has been rejected.
And it -- it was rejected for the first time in the Allgeyer case in 165 U.S. then in St. Louis Compress in 260, in Tafoya in 270, in the Philippine case in 275, in Connecticut General in 303 U.S. and it was rejected again in Provident Savings versus Kentucky in 239 U.S. 103.
But by so far, 65 years of constitutional history in six different cases where the issue was squarely presented, this Court has seen that a bare Texas risk is an insufficient jurisdictional nexus.
Now, the next argument that the State makes -- a basic argument is that some economic catastrophe may befall, the shipyard in which they have a grave interest.
This -- this economic interest depends upon several ifs, its two if-if on which to base constitutional policy, if you have a loss, if law had escape payment, if the respondent can't rebuild the shipyard, then you have this dire economic consequences.
That is three -- that's three ifs.
And that -- that argument is also squarely met in the Connecticut General case when it was said by the Chief Justice Stone that the jurisdiction to tax does not depend, the jurisdiction to tax does not depend upon the ultimate thrust of the economic benefits and burdens of the transaction.
I say -- I say that you cannot base a states jurisdiction to tax upon possibilities, upon visions of dire economic consequences, it may never happen.
We've had this insurance now for 28 years and it's never happened.
It's not a long time in geologic time but it's a pretty substantial for the history in human life, 28 years.
I say that -- that if this Court accepts as a jurisdictional nexus, the ultimate economic thrust of the benefits and burdens of possible acts of God or war or chance that that is too thin, too thin a basis upon which to base jurisdiction.
Now, this tax cannot be justified as the State suggested as a tax on the privilege of doing business in the State because it's levied without regard to whether you do business or not and for even the stronger reason they have admitted that we've paid all the taxes.
In conclusion, I would like to sum up by simply saying that St. Louis Compress was right and should be reaffirmed that the Texas Court should be affirmed and that this tax cannot be justified as a tax on property.
It cannot be justified as a tax on business done in the State of Texas because it was business done in the State of Texas.
It cannot be justified as a transaction within the State of Texas because it was a transaction within the State of New York.
It cannot be justified as a tax for the privilege of doing business in the State.
And the State -- even if the State of Texas has the temerity to suggest that it maybe ought to be sustained because the State of Texas gave to the respondent the opportunity to insure which also comes from Judge Holmes in which he said that the opportunity to insure was a great thing or privilege.
But the opportunity to insure that was given here was given by the State of New York.
If anybody's going to make that argument here, it ought to be the State of New York.
Texas then gave the respondent the opportunity to insure the -- the State of -- of New York didn't.
Texas cannot -- cannot claim the right to tax the respondent for a privilege not granted.
That is the privilege to make a contract in New York, the privilege to insure in New York and the privilege to negotiate and do business in New York.
Texas is claiming the right to tax a privilege granted not by it but granted by the State of New York.
Now, it is also possible that St. Louis Compress has overruled that New York certainly has jurisdiction to this contract.
New York certainly has jurisdiction.
It was made in the State of New York.
Where do we like, if we use the Socratic -- the Socratic Method and become prophetic for a minute, where do we like, if you permit the State of Texas and the State of New York to both have jurisdiction of this policy and they've -- and they have conflicting policy provisions which is not improbable.
The New York Life Insurance Company versus Head brought up that problem years ago.
If New York has got that -- if transaction was in New York, the agreement is in New York, the business was done in New York and they certainly have jurisdiction.
What if their reserved requirements, their capital requirements, their policy requirements get in direct conflict with Texas?
That has to be resolved and can only be resolved by this Court.
We are not seeking to escape all insurance taxation or regulatory taxation.
All we're asking this Court to do a -- and we do it with the conviction of the St. Louis Compress case is to keep the Texas taxing power in Texas and the New York taxing power in New York and we are willing to submit and are submitting to the -- to the New York jurisdiction.
It's mentioned in the policies that service can be held on the Commissioner of insurance in New York.
We therefore submit that the Texas court should be affirmed and this -- and the long line of authority supporting our position should not be overruled.
Chief Justice Earl Warren: Mr. Werkenthin.
Argument of Fred B. Werkenthin
Mr. Fred B. Werkenthin: Mr. Chief Justice, may it please the Court.
Replying to the last argument advanced by the respondent to the effect that only New York has jurisdiction over this matter and that to affirm the position or to take the position of the petitioners in this particular case would lead to conflict among the various states.
And this is not a new problem with this Court, conflict of regulation between the various states.
It's not a new problem in the field of insurance regulation as witnessed the Watson case decided by this Court in 1954.
There, the State of Connecticut or Massachusetts issued or had a law that provided that contracts issued there should not have a provision allowing direct action.
The policy was entered into in New York or in Connecticut, I -- I believe it was entered into Connecticut.
In the State where the law was that the contract could not provide for a direct action.
What did Louisiana do in that case?
Louisiana was allowed to apply its own direct action law in that case, obviously, a conflict of regulation, conflict of policy between the State of Connecticut on the one hand and the policy of the State of Louisiana on the other.
Obviously, the Claxton case mentioned by Mr. Justice Douglas and Mr. Justice Black a moment ago has that same conflicting policy regulation involved.
The similar case dealing with -- in the field of insurance is the case of State Farm versus Duel in which the State of Wisconsin was allowed to apply its requirements as to reserves not only on policies written in Wisconsin but all over the United States.
Certainly, that conflicted or could have conflicted with regulations from other states.
So it's not enough to say that -- that perhaps there might be conflict with other states policies in the field of insurance.
It's not enough to -- to speculate on that field.
Further, it might be added that there's no showing in this case that any possible conflict does exist.
Mr. Vickery, the counsel for respondent also castigated the petitioners for bringing up certain economic possibilities that we rely upon in this case.
He said it's not certain that those circumstances will occur.
But we submit that the same was true in the Watson case in the economic circumstances which the Court dwelt upon in that case.
Certainly, they were not certain to occur.
But it was taught in that case that the state policy was sufficient and that the fact that they might occur was sufficient to allow the state policy to control.
Now, should the Allgeyer line of decisions be overruled?
But first of all, I think it's quite clear that it's not necessary to overrule the specific case of -- of the specific Allgeyer case in this decision.
The facts were not on -- on all force.
There, the Louisiana Court was dealing with a transaction, a risk that was only momentarily within the State.
In fact, the -- the opinion reflects that actually, the insurance did not take effect in that case until it became a marine risk.
Therefore, suggesting that -- that no time was the insurance -- their insurance policy there involved insurance on a Louisiana risk as such.
Should the doctrine of the Allgeyer case as developed in that case and developed by the St. Louis case and by the Philippine case, should it be overruled?
We say, yes, if it has not already in effect then overruled by this Court.
We point out to the fact that in the 20 years since the Osborn case was decided, not a single instance has occurred in which this Court has applied the doctrine of the Osborn case, the -- the Allgeyer case or the St. Louis case or the other authorities based upon Allgeyer.
In fact, each and every time that it has had an opportunity to apply that doctrine are those or the doctrine of the cases following it, it has -- it has ruled in favor of the state regulation using either -- either construing the case as being on different facts or in several instances not only in the field of labor relations but in several other instances, it has overruled the President based upon Allgeyer.
Justice Felix Frankfurter: What -- would you mind stating what you conceived to be the -- what you call the Allgeyer doctrine as against the decision in that case?
Mr. Fred B. Werkenthin: Yes, sir.
Justice Felix Frankfurter: What do you conceive to be the doctrine?
Mr. Fred B. Werkenthin: Well, the Allgeyer decision, if I can answer that question first.
Justice Felix Frankfurter: I thought you said a minute ago that you need an overruling decision?
Mr. Fred B. Werkenthin: That's correct.
Alright, the Allgeyer decision said that the State could not prevent an individual within that State from insuring -- insuring his property or -- or entering into a contract where the risk was outside of the State.
That was a situation in that -- in that particular case.
Justice Felix Frankfurter: But the risk was outside the State?
Mr. Fred B. Werkenthin: Yes, sir.
That's -- that's the distinction that I was -- was making in that particular situation.
Justice Felix Frankfurter: That's because of a fleeting character of the brief?
Mr. Fred B. Werkenthin: That's right.
I think that's -- that's the way I understand the case.
Justice Felix Frankfurter: What's the doctrine?
Mr. Fred B. Werkenthin: Now, the doctrine has developed in the St. Louis and -- and Philippines case.
As I understand it, is that the -- a state can neither interfere with nor burden an insurance transaction if the formalities of the contract or if the contract is performed out to be -- performed outside of the state.
Now, that's the extension that I believe to have been made by those two latter cases in which has become, in my mind at least, the Allgeyer doctrine that is that you cannot burden this transaction that has -- where the formalities of the contract have occurred outside of the State irrespective of the interest that the State might otherwise have in that insurance transaction.
Justice Felix Frankfurter: Isn't it the other way around, not what formalities takes place outside the state but what transpires within the state?
Mr. Fred B. Werkenthin: Well, I wouldn't agree with that statement Mr. Justice because I believe the focus in those early cases of -- was what on what occurred outside of the state and -- and not upon the interest within the state.
Justice Felix Frankfurter: Well, the fact that something occurs outside the state doesn't preclude or ex -- preclude the state from exclusion.
It's from dealing with something that it is -- its legitimate concern.
I know the (Voice Overlap) --
Mr. Fred B. Werkenthin: That's correct.
Justice Felix Frankfurter: -- question adequate there.
Mr. Fred B. Werkenthin: Yes, sir.
Justice Felix Frankfurter: So that you can't just say if its -- if formalities are outside Fresno, the state -- the internal state has no authority.
Mr. Fred B. Werkenthin: That's correct.
Justice Felix Frankfurter: You've got to look both who takes out or takes place inside of a taxing or a governing state as well as what relation that has to what goes on outside.
So the crucial question is what takes place inside on which they file a confession.
Now, do you --
Mr. Fred B. Werkenthin: Well, I -- I'm not so sure that I would agree that it's what takes place within the State.
Justice Felix Frankfurter: Whatever word you use --
Mr. Fred B. Werkenthin: If that's to be related to the formalities by which the contract is executed, I think that you have to look at -- at the -- for -- for example if the fact that the state has interest in the property within the state is -- is -- is nothing that takes place within the State, it's something that its there.
Justice Felix Frankfurter: Anyhow, an event if you please --
Mr. Fred B. Werkenthin: That's right.
Justice Felix Frankfurter: -- or a phenomenon within the state --
Mr. Fred B. Werkenthin: Yes, sir.
That's -- that's the way I understand the --
Justice Felix Frankfurter: But the mere fact that you've got -- the piece of property in the State doesn't mean that the State can do anything in relation to it.
Mr. Fred B. Werkenthin: Maybe not that it can do anything in relation to that property but I think --
Justice Felix Frankfurter: But the question is what --
Mr. Fred B. Werkenthin: -- that it can enforce for example, its policies on arson with respect to that.
Justice Felix Frankfurter: Yes.
Mr. Fred B. Werkenthin: It's -- it's in the insurable interest con -- provisions of a contract relate to the policy of arson.
I think it can enforce that policy on it.
And many -- many other policies irrespective of where the contract is -- is executed to where the individual resides.
Justice Felix Frankfurter: But I thought you were cutting it a little short to say that all that follows Allgeyer was that the mere fact that there were formalities outside taxing or regulating state exclude that state from regulating or taxing.
That would be too easy.
The mere fact that some formality in relation to --
Mr. Fred B. Werkenthin: Well --
Justice Felix Frankfurter: --the Government or taxing events can take place --
Mr. Fred B. Werkenthin: Perhaps that was a bit narrow and perhaps I should have stated it as the place of making or the place of performance of the contract where the phenomena with which the Allgeyer line of decision were most concerned.
I -- I believe that would be a -- a -- a more accurate description of the case.
Justice Felix Frankfurter: But the real -- all your argument, all the State's argument are drawn from the fact that this is realty situate within Texas, is that right?
Mr. Fred B. Werkenthin: That it is realty situated within the State of Texas and that we have the respondent within the State of Texas.
And it -- it is the interest that the State has arriving from those two matters that gives us the -- the --
Justice Felix Frankfurter: Not to say what kind of insurance or whether you should take insurance but the tax because you take insurance from -- from one company rather than another.
Mr. Fred B. Werkenthin: That's -- that's the taxable --
Justice Felix Frankfurter: Or to --
Mr. Fred B. Werkenthin: -- criteria.
Justice Felix Frankfurter: That's the levy because you don't take insurance from a local company.
Mr. Fred B. Werkenthin: That's the effect of --
Justice Felix Frankfurter: That's what the State says.
Mr. Fred B. Werkenthin: -- that's the effect -- that's the effect of the tax.
If I might, I should like to --
Justice Felix Frankfurter: I don't see how that -- how that in -- suppose, the Todd ship building -- shipyard burns down, I don't see the fact that you've collected last year's taxes, helps to see to it that the Todd Shipyard doesn't go up in a fluke.
Mr. Fred B. Werkenthin: Well now, we -- we are not -- we're not limiting ourselves simply to the regulatory effect.
We say that Todd is also required to play -- to pay its share of the burden of regulation in this particular field.
And that, certainly, a fire on its property has a vital effect to Texas and Texas has lots of regulations that pertain to that type of a catastrophe.
Justice Felix Frankfurter: Well, I think you can therefore tax them the way you tax everybody else or if you had a state insurance, suppose Texas goes in for a state -- for a state owned or a state conducted fire insurance system or health insurance system or whatnot, I suppose you have hail in Texas, do you?
Mr. Fred B. Werkenthin: Quite a bit of it.
Justice Felix Frankfurter: You do?
Mr. Fred B. Werkenthin: Quite a bit.
In West Texas in particular.
Justice Felix Frankfurter: What ignorance sprouts from New York and Boston?
I suppose you could tax -- tax them to contribute to the maintenance of an insurance system.
Mr. Fred B. Werkenthin: Yes, sir.
Justice Felix Frankfurter: But I don't know what you're doing here.
You say you tax them because they don't insure in a Texas company.
Mr. Fred B. Werkenthin: I think -- I think that's incorrect, Mr. Justice --
Justice Felix Frankfurter: Isn't that true?
Mr. Fred B. Werkenthin: The way -- but prior -- for prior to the time that 2138 was originally passed, there was no tax at all paid either by an insurance company or by the insurer or by the agent when the insurance was placed with an unregulated carrier.
There were taxes which were the ultimate burden of the individuals insuring with regulated carriers.
Now, we've had some conflict as to the amount of that -- of that insurance.
Counsel for the respondents suggests that it was a maximum of 3.85% but that's not the case.
The maximum tax when you take into consideration the maintenance taxes that are involved will move from something above 4% or something over 5% depending upon the type of -- of insurance that is available or that is written upon.
Now, of course, there were the additional burdens and cost which -- which ultimately passed on to the insured and -- in regulated type of insurance.
So the first step that the legislature took in this field was to pass 2138 providing that this type of insurance, unregulated insurance could be written through licensed agents in the State of Texas and partially to pay for the cost of this particular regulation and I must admit partially for the economic sanction that's involved, place the tax of 5% on those types of transactions which the agent was required to collect.
Now, this left a tremendous loophole and had an -- very adverse effect upon Texas regulation.
The -- the obvious intent of the legislation to begin with -- with was to encourage resort to these agents in the -- in the sale of -- of unregulated insurance if it was to be sold.
But now that there was a premium tax placed upon that particular type of transaction and non-placed where the individual himself placed the insurer, where quite naturally, the individual tended to avoid use of the agent.
And it was to stop up this particular loophole that the tax was levied.
And it was also to make these people pay their fair share of this regulatory burden that the 2138 was amended to include the 5% tax on the exact situation that we have here.
Chief Justice Earl Warren: Well, if it's a tax in that sense, what do you do with Connecticut General?
Mr. Fred B. Werkenthin: Connecticut General -- I think the first thing that you have to do with Connecticut General is compare it to Tabaco or the Philippine Case and see just exactly what the Court was dealing with there.
Those two cases are in the ex -- same exact posture that is the part of the -- of the Philippine case in which the tax was affirmed.
There you had two foreign companies that were doing business in the Philippines.
The insurance was on the risk within the -- within the Philippines.
That was the -- the case of the -- of the London company that was insuring the risk.
The court there held that the tax was alright.
The tax was permissible.
Alright in -- in the Connecticut General case, what is the situation?
You had two companies that were doing business within California.
The first California company not Connecticut General, was insuring the lives in California and was transferring this risk on to Connecticut General.
Well, I think it could be said to some -- to some extent the risk of insurance that Connecticut General was in -- in California but not to the same degree as the risk was within the Philippines.
I think that what the Court was simply doing there was saying well, the interest that California has where it's merely reinsurance of these lives and these people have no right to perceive directly against this insurance.
The -- the interest of California is not sufficient.
So I think that you would have to say that in the -- in -- in that particular case, the risk was less within California than it was say, for example, in the Compania case or in the Osborn case or any of the other decisions that follow it.
That's the only way that I can -- can understand its distinction there.
Secondly, it was purely a revenue measure.
The -- no -- no effort was -- made to sustain it as a regulatory -- as having any regulatory effect as we do in this case.
And I -- I think those are the bases on which it can be distinguished.
Justice Felix Frankfurter: Well, the regulatory aspect of this statute is that as your colleagues indicated that it would exert pressure to take out local insurance to avoid this exception.
Mr. Fred B. Werkenthin: Yes, sir
Justice Felix Frankfurter: That's the -- that's the regulatory aspect of it.
Mr. Fred B. Werkenthin: That's pa -- part of it.
But it also -- it also -- it also has the effect of encouraging those companies that are now in the State of Texas and who are writing as regulated companies not to plea the State of Texas and -- and right under circumstances in which the -- in which the -- they could do so much cheaper.
It's -- it's an effort to preserve the Texas regulatory system.
It's not necessarily to coerce these people into buying -- first place, but let me point out this distinction from the Allgeyer case.
This is not an effort to prevent the purchase of that kind of insurance.
It's quite obvious.
And it is distinguished from the Allgeyer on that basis.
Chief Justice Earl Warren: But you say that there was no such interest on the part of California in the Connecticut General case?
Mr. Fred B. Werkenthin: I think there could have been but I don't believe that it was raised as a -- as a reason for sustaining the tax in that particular case.
There was no regulatory effect or no economic effect cited as -- as coming to California because of the tax levied upon -- on these particular transactions.
But I -- I say that -- that the main distinction with that case is that -- that it did not appear, that the risk was within California in the same sense as it was and say the Compania case or in this case.
Justice Felix Frankfurter: Are -- are you suggesting that there's a new thought that had been drawn on into the offer?
You're suggesting that by making -- by exacting a tax on -- writing on the -- taking out insurance of a foreign or a non-Texas company, you -- you discourage Texas insurance people from -- from leaving the State, you don't encourage them to stay there because --
Mr. Fred B. Werkenthin: That's right.
Justice Felix Frankfurter: -- these outsiders were not subject to the regulatory system of Texas allowed profitably to take the right insurance in Texas then the Texas people will all flee Texas including New York and Connecticut and elsewhere.
Mr. Fred B. Werkenthin: Well, of course, there are numerous -- numerous advantages aside from the -- the disadvantage of the tax inequality that accrued to being regulated and operated with -- operating within the regulated framework.
Justice Felix Frankfurter: That's what I thought is but it never occurred to me that this is a is a pretty -- a pretty -- what shall I say?
Fancible argument --
Mr. Fred B. Werkenthin: I know, sir.
I -- I --
Justice Felix Frankfurter: That -- these people or insurance companies are in Texas or -- or come to Texas or otherwise working.
Mr. Fred B. Werkenthin: Your Honor, it's -- it is a substantial problem in the insurance industry today.
All of the -- the various states have -- have been dealing with this problem not in the exact way that Texas has -- has done but surplus insurance legislation is that particular line is called is brought up in all of the legislatures.
The problem is that large insurers of the nature of Todd and of -- of other nationwide insurers, more and more because they -- they have the ability to -- to judge these things more than the smaller individual.
These people are more and more going to the unregulated market and less and less of -- of these -- of these risks are coming -- staying within the framework of -- of the Texas regulation.
Justice Felix Frankfurter: Who is the primary insurer here?
Mr. Fred B. Werkenthin: The primary insurers are two English companies.
One of them is Lloyds and Lloyds Institute, I believe.
Justice Felix Frankfurter: Any reinsurers?
Mr. Fred B. Werkenthin: None that I -- that I'm aware of.
Justice Felix Frankfurter: You mean they fully -- flee the United States altogether?
If this -- your argument is valid and -- and --
Mr. Fred B. Werkenthin: Well, they would write it -- they would write it on -- on an unregulated basis as the -- I don't know when they would flee the United States but they write it on unregulated basis as the two companies involved in the amici brief due today.
Justice Felix Frankfurter: That's why to myself I can well understand a State, making certain requirements for insurability, of realty within its confines but that isn't in this case.
Mr. Fred B. Werkenthin: Well, I -- I think that -- that if the -- if the State could say to the property owners within its state that they had to resort to particular types of insurance companies within the State that -- if that particular point is valid, that there's nothing unconstitutional about a tax levied that -- that merely aims to encourage.
Justice Felix Frankfurter: To me they're very different things.
Mr. Fred B. Werkenthin: I believe I've used up my time.
Chief Justice Earl Warren: No, it is not --
Mr. Fred B. Werkenthin: What sir?
Chief Justice Earl Warren: -- you have more.
Mr. Fred B. Werkenthin: Yes, I -- I do have.
Chief Justice Earl Warren: If you have not finished your -- it's alright.
I think you have a little more time.
You have five minutes from that white light that sets what's going on.
Mr. Fred B. Werkenthin: Now, one point that hasn't been discussed except in the briefs at -- at any length is the burden that's a problem related to the questions that were just asked.
The burdens on companies such as the Church Insurance Company and the Catholic Insurance Company that are amici in this case, they have said that well they do business on an unauthorized or unregulated basis by a virtue of being able to do business as unregulated carriers.
They are able to -- to affect the substantial saving to the policy holders.
And they say that if this type of regulation is affirmed, why this saving will disappear.
That may well be but the same type of argument was advanced in the Hoopeston case.
And the Court in reply to that said, however, pers -- persuasive.
Such arguments might be introduced to the state legislature.
This presents no constitutional banner -- barrier which prevents New York from enforcing these regulations if it chooses to do so.
Now, certain reference has been made to the Federal Trade Commission case versus Travelers Health Association.
Now, actually that case can have no relation at all to the issues in this case.
The only way that reference to the case is justified at all by respondent is that he wants to argue that somehow Congress is resurrecting the doctrine of the Allgeyer decision or is pronouncing its decision that has never been overruled.
Well of course, Congress -- obviously a matter beyond Congre -- the congressional jurisdiction.
All that Congress did was to recite in -- in part of the history to that particular bill that they thought that these particular cases were still alive.
But in any event, the citation or the -- or the authority relied upon are quoted in that case shows that the Congress -- merely that Congress was unaware of the Osborn decision and the other decisions that followed it.
In closing, I want to -- to get back to what we think is the fundamental error of respondent's position in this case.
Time and time again, respondent's counsel recited that states cannot regulate a transaction if the transaction occurred outside of the state.
He recited many, many cases to that effect.
But we believe that the Osborn case is the lead of showing that that position is no longer correct.
The Osborn case simple sets aside the statement from the St. Louis Compress case that you can't burden or interfere with what the State does -- what a company does outside of the State.
In fact, the very first -- the very first portion of the -- that opinion, the Court very carefully stated, the question is not whether what Virginia has done will restrict appellant's freedom of action outside of Virginia by subjecting the exercise of such freedom to financial burdens.
The Court went on to stay -- say that the right of Virginia to regulate in that particular instance, the right in any instance is measured by the interest that it has in the transaction.
It is not correct to suggest as respondent has that Virginia did not touch transactions that occurred outside of the State.
For if anything is clear, it is clear that the Virginia regulation saying that you have to go through Virginia agents, that you have to pay Virginia agents a commission prepared, applied to all insurance transactions whether they were executed inside the State of Virginia or whether they were executed in New York.