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State v. Northwestern Mut. Ins. Co.

Supreme Court of Arizona

June 4, 1959

STATE of Arizona et al., Appellants,
NORTHWESTERN MUTUAL INSURANCE COMPANY, a corporation, et al., Appellees.

[86 Ariz. 51] Robert Morrison, former Atty. Gen., Newman W. White and Ed W. Hughes, Asst. Attys. Gen., on the briefs, for the State and others.

Jennings, Strouss, Salmon & Trask, Phoenix, for W. W. Dick and Phil A. Isley.

Stockton & Karam, Phoenix, John S. Hamilton, Jr., Chicago, Ill., Garl Watkins, Seattle, Wash., and Nicholas S. Kiefer, Chicago, Ill., for appellees.

John W. Corbin, Glendale, amicus curiae, for Housing Authority, City of Glendale, and Housing Authority for City of Phoenix; Orme & Orme, Phoenix, of counsel.


This is an action brought by the Northwestern Mutual Insurance Company (hereinafter[86 Ariz. 52] referred to as 'plaintiff') for a declaratory judgment that a fire insurance policy it had issued to School District No. 14 of Maricopa County was validly contracted by the School District. The Treasurer and School Superintendent of Maricopa County, proceeding separately from the other defendants, obtained an order permitting the joinder of three other mutual fire insurance companies as cross-defendants, and counterclaimed against plaintiff and all other mutual fire insurance companies as a class for a declaration that all such policies were, or would be, invalid.

Page 201

The position taken by the School Superintendent of Maricopa County in refusing to authorize payment of the premium due was, and the position of all appellants here is, that a contract with a mutual insurance company is prohibited by our State Constitution and that, accordingly, the statute authorizing such a contract, A.R.S. § 20-715(B), providing that 'Any * * * government or governmental agency, state or political subdivision thereof, * * * may be a member of a domestic, foreign or alien mutual insurer,' is invalid. The constitutional provision relied on, section 7 of Article IX, A.R.S., is that:

'Neither the State, nor any county, city, town, municipality, or other subdivision of the State shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the State by operation or provision of law.'

After receipt of evidence concerning the nature of plaintiff and other mutual insurance companies doing business in Arizona, the court below rendered judgment in favor of plaintiff and against the county officials' counterclaim, ruling generally that 'the insurance of public property in Arizona under nonassessable policies or contracts of insurance by * * * mutual fire insurance companies admitted to do business and write insurance in Arizona, is authorized by the statutory law of the State of Arizona, and that such statutory law offends no provision of the Arizona Constitution.' With that judgment and ruling we agree

It is first in order that we view section 7 of Article IX of our Constitution in its historical setting, mindful of the circumstances which augured its birth, in order to comprehend as precisely as we can the significance of the written words. The court has previously described this history, reflected in constitutional inhibitions enacted in some forty-three states, in the words of the Supreme Court of Montana (from which state's constitution, Art. 13, section 1, it has been noted, we adopted [86 Ariz. 53] our own constitutional provision [see handwritten note of Mr. Homer R. Wood in his collected propositions introduced at the Constitutional Convention, Substitute Proposition No. 106, Nov. 16, 1910, p. 4, now on file in the State Library]) in Thaanum v. Bynum Irr. Dist., 72 Mont. 221, 227, 232 P. 528, 530, as follows:

'It represents the reaction of public opinion to the orgies of extravagant dissipation of public funds by counties, townships, cities, and towns in aid of the construction of railways, canals, and other like undertakings during the half century preceding 1880, and it was designed primarily to prevent the use of public funds raised by general taxation in aid of enterprises apparently devoted to quasi public purposes, but actually engaged in private business.'

See Day v. Buckeye Water Conservation & Drainage Dist., 28 Ariz. 466, 473, 237 P. 636, 638; Valley National Bank of Phoenix v. First National Bank of Holbrook, 83 Ariz. 286, 294, 320 P.2d 689, 694. See also Pleasant Township v. Aetna Life Ins. Co., 138 U.S. 67, 69, 74, 11 S.Ct. 215, 34 L.Ed. 864; Commonwealth v. Walton, 182 Pa. 373, 376, 38 A. 790, 791.

Thus described, the evil to be avoided was the depletion of the public treasury or inflation of public debt by engagement in non-public enterprises. But it was never thought that the state and local governments should be prohibited from dealing with private enterprises, as, for instance, in acquiring goods and services required to furnish and sustain governmental functions. It is not now suggested that the School District is forbidden to contract and pay for fire insurance on its buildings. Nor is it suggested that, in contracting with plaintiff, the School District had in mind any purpose other than obtaining fire insurance protection; and, despite some argument concerning contingent liability,

Page 202

discussed infra, there was no serious showing of any dire consequence with respect to the public treasury or debt which might result from the contested contract. Instead, appellants' major contention is that, regardless of the legitimate purpose of the transaction and the lack of proscribed effect resulting from it, insurance cannot be acquired from a mutual insurance company because, merely by acquiring the insurance, the involvement of the purchaser necessarily is greater, in a technical sense, than that which the Constitution permits.

Although we recognize that technicalities often may reveal hidden realities, a proper approach to such a case is indicated by this court's recent decision, involving the same constitutional provision, in Valley National Bank of Phoenix v. First National Bank of Holbrook, supra. There the court considered the constitutionality of time deposits by the state or local governments for the accrual of interest in favor[86 Ariz. 54] of the depositors, with the necessary effect, nevertheless, of monies being made available to the banks for their use. Citing Almond v. Day, 197 Va. 782, 91 S.E.2d 660, for the proposition that the 'underlying and activating' purpose of a transaction is 'the vital and controlling factor by which its validity or invalidity shall be determined', it was held that time deposits were not prohibited by the 'extension of credit inhibition' contained in section 7 of Article IX of our Constitution. [83 Ariz. 286, 320 P.2d 695.] Cf. Udall v. State Loan Board, 35 Ariz. 1, 273 P. 721. We are instructed, then, at least to strive for a panoptic view of the constitutional facts of a particular transaction and to consider the significance of incidental features according to their appearance in proper perspective.

Second, we think it noteworthy that the highest courts of eleven states have considered the instant problem in relation to constitutional provisions like, or with a similar design to, our own. Ten, including Montana, have concluded that no constitutional prohibition was violated. Louisville Bd. of Ins. Agents v. Jefferson County, Ky.,309 S.W.2d 40; McMahon v. Cooney,95 Mont. 138, 25 P.2d 131; Clifton v. School Dist. No. 14,192 Ark. 140, 90 S.W.2d 508; Miller v. Johnson,4 Cal.2d 265, 48 P.2d 956; Fuller v. Lockhart,209 N.C. 61, 182 S.E. 733; Burton v. School Dist. No. 19,47 Wyo. 462, 38 P.2d 610; City of Macon v. Benson,175 Ga. 502, 166 S.E. 26; Downing v. School Dist. of City of Erie,297 Pa. 474, 147 A. 239; Johnson v. School Dist. No. 1 of Multnomah County,128 Or. 9, 270 P. 764, rehearing denied 128 Or. 18, 273 P. 386; French v. Mayor, etc., of City of Millville,66 N.J.L. 392, 49 A. 465, affirmed 1902, 67 N.J.L. 349, 51 A. 1109. Contra: Lewis v. Independent School Dist. v. City of Austin,139 Tex. 83, 161 S.W.2d 450. One other state supreme court has ruled on the question ...

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