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O'Gorman & Young, Inc. v. Hartford Fire Insurance Co.

Supreme Court of the United States · 1931 · Constitutional Law

Constitutional LawDue ProcessPolice PowerInsurance RegulationFourteenth Amendmentdue processpolice powerinsurance

Facts

A New Jersey statute made it unlawful for a licensed fire insurer to pay a local agent more than a reasonable commission or more than it paid any one of its local agents on the same class of risks in the state. O'Gorman & Young, Inc., a licensed insurance broker, sued fire insurance companies to recover additional compensation for services as a local agent after the statute took effect. In one case the preexisting contract provided for a 25% commission, and in the other the post-enactment contract provided for whatever the services were reasonably worth, alleged to be 25% of premiums. The insurers admitted the contracts and payments but alleged that they paid other local agents only 20% on the same class of business, making higher payment unlawful under the statute.

Issue

Whether the New Jersey statutory provision limiting fire-insurance agents' commissions violates the Due Process Clause of the Fourteenth Amendment. More specifically, the question was whether this method of regulating commissions in order to keep fire-insurance rates reasonable was so unreasonable as to be unconstitutional.

Rule

Because the business of insurance is affected with a public interest, a state may regulate insurance rates and the relations of those engaged in the business under its police power. When the constitutionality of such economic legislation depends on underlying facts, the statute is presumed constitutional unless the record supplies a factual foundation showing that the measure is unreasonable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nevada enacts a statute providing that, to keep wildfire-property insurance rates reasonable, an insurer may not pay any neighborhood sales agent a commission higher than the amount it pays any other neighborhood sales agent for the same class of risks in the state. A Reno agency sues for an extra 6% commission under its contract, alleging only that the statute interferes with private contracting and pleading no facts about market conditions or the statute’s practical effects.

How should a court rule on the agency’s Fourteenth Amendment due process challenge?

Explanation. The majority treated insurance as a business affected with a public interest, allowing the state to regulate not only rates but also related business relations when those relations directly bear on rates. Where constitutionality depends on underlying facts, the statute is presumed constitutional unless the record contains a factual foundation showing unreasonableness. Here, the agency pleaded only abstract interference with contract, so the presumption controls.