July 23, 1969
AMELIA AND INWOOD COLLINS, FLORENTINE CASTILLO, THOMAS BOYD, LEON NIECIKOWSKI, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS,
JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF MULTI-STATE INTER-INSURANCE EXCHANGE, AND CHARLES J. HOFFMAN, JR., DEFENDANTS. ALBERT GARY, JULION GIRON, JOHN H. MCCULLOUGH, LORRAINE SHAW, AND PIERCE THOMAS, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE, STATE OF ILLINOIS, AS LIQUIDATOR OF BLACKHAWK MUTUAL INSURANCE COMPANY, DEFENDANT. WILLIE BAXTER, WILLIAM BILLUPS, BENJAMIN BROWN, RAUL CHAVEZ, CARLOS DELGADO, FLORENTINO CASTILLO, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF BELL MUTUAL CASUALTY COMPANY, AND PHILLIP KITZER, SR., DEFENDANTS. CHARLES BALLENGER, THOMAS BERRY, ARVELIO CABRERA, ERNESTO GARCIAS, CHARLES HAMPTON AND FLORENTINO CASTILLO, ON BEHALF OF THEMSELVES AND OTHERS SIMILARLY SITUATED, PLAINTIFFS, V. JAMES BAYLOR, DIRECTOR OF DEPARTMENT OF INSURANCE OF STATE OF ILLINOIS, AS LIQUIDATOR OF ADAMS MUTUAL INSURANCE COMPANY, AND NORMAN J. SCHLOSSBERG, DEFENDANTS.
The opinion of the court was delivered by: Napoli, District Judge.
These four cases are predicated entirely on the Securities
Exchange Act of 1934. They are brought by certain policyholders
of four defunct automobile insurance companies on behalf of all
others similarly situated. The plaintiffs seek the rescission of
their policies and an injunction against the State Director of
Insurance to prevent the collection of assessments under the
contingent liability provisions of their policies.
All of the defendants, except Phillip Kitzer, Sr., who has been
ordered in default, have moved to dismiss these suits because the
plaintiffs have not stated a claim upon which relief can be
granted. The defendants contend that the insurance policies in
question are not securities in any sense and certainly not within
the meaning of the Securities Exchange Act and the rules
promulgated thereunder and, moreover, that they are specifically
exempted from coverage by the Act and its scheme of regulation.
Defendants contend that whatever relief may be available to the
plaintiffs must be pursued through the claim provisions of the
Illinois Insurance Code.
As additional grounds for dismissal, various defendants have
proposed that these suits are not proper class actions, that they
are barred by the statute of limitations and laches, that the
policies are not described in the complaint nor were they sold in
commerce or through the U.S. mails and that the entire matter is
The central and dispositive issue in these cases is whether the
insurance policies can be characterized as securities within the
meaning of the Securities Exchange Act of 1934. The argument of
the defendants is that as insurance these policies are implicitly
and specifically excluded from the operation of the Act. The
reply of the plaintiffs is that these policies represent not
merely insurance, which they agree would not ordinarily be
covered by the Act, but also membership in a reciprocal or mutual
company, an ownership interest, a share in the profits and
losses, a security.
The legislation both state and federal and the case law support
Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b)
No Act of Congress shall be construed to invalidate,
impair, or supersede any law enacted by any State for
the purpose of regulating the business of insurance *
A "security" is defined in the Securities Exchange Act of 1934,
Section 3(a) (10) as follows:
The term of "security" means any note, stock,
treasury stock, bond, debenture, certificate of
interest or participation in any profit-sharing
agreement * * * or in general any instrument commonly
known as "security" * * *
The above definition of the 1934 Act is substantially the same as
that used in the 1933 Act. The 1933 Act also contained a specific
exemption from registration of insurance policies and annuities
regulated by appropriate state officials. 15 U.S.C. § 77c (a)
(8). The legislative history of that exemption is quite clear as
to the purport of the Act and the intention of Congress:
Paragraph (8) makes clear what is already implied in
the act, namely, that insurance policies are not to
be regarded as securities subject to the provisions
of the act. The insurance policy and like contracts
are not regarded in the commercial world as
investment securities offered to the public for
investment purposes. The entire tenor of the act
would lead, even without this specific exemption, to
the exclusion of insurance policies from the
provisions of the act, but the specific exemption is
included to make misinterpretation impossible. H.R.
Rep. No. 85, p. 15, 73rd Congress, 1st Sess. 1933.
The Supreme Court in Tcherepnin v. Knight, 389 U.S. 332, 88 S.Ct.
548, 19 L.Ed.2d 564 (1967), in construing for the first time the
1934 Act's definition of "security", ...
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