IX

REMOVAL PROCEEDINGS AND COMPLAINTS

Proceedings for the Removal of the Superintendent of Insurance

Charges were laid before the Governor on August 12, 1907.

APPOINTMENT OF COMMISSIONER.

Matthew C. Fleming, of New York city, was appointed a commissioner on August 20, 1907, under chapter 539 of the Laws of 1907, to investigate the Insurance Department. He made his report to the Governor on January 30, 1908, recommending the removal of the Superintendent.

In August last charges were filed against the Superintendent of Insurance which related to his administration of that department. I appointed Mr. Matthew C. Fleming of the New York Bar, under section 7 of the Executive Law, to investigate those charges and generally to examine into the affairs of the department. I transmit to you herewith his report, together with the testimony taken by him.

The Department of Insurance and the office of Superintendent of Insurance were created by the Legislature. The Superintendent is appointed by the Governor by and with the advice and consent of the Senate, and holds his office for three years subject to removal by the Senate upon the recommendation of the Governor. The power to remove is not dependent upon

the presentation of charges as in the case of officers removable by the Governor pursuant to the Constitution, or as in the case of elected State officers removable by the Senate.

This is the case of an appointed head of a department where the Legislature has provided an absolute power of removal. The only question is whether the removal of the officer is in the interest of the service of the State.

I am not unmindful of the labors of the department, of the multiplicity of details with which it is concerned, of the volume of its correspondence, of the many questions submitted to it for decision and its required action upon a great variety of matters under the statute. Although to some extent recently increased, these duties have existeď and a vast amount of work has been performed for many years. Yet side by side with these departmental activities there grew up wasteful and corrupt methods which scandalized the country and brought the supervision of the department with regard to the important interests of the holders of life insurance policies into contempt.

It became obvious that a department might exist with a large staff apparently busily employed; that its labors might be represented in volumes of reports; that it might make recommendations for legislation and pass upon a multitude of questions in the course of department routine without taking measures of first importance within its powers for the prevention of abuses and the protection of the policyholders. There was probably no time prior to the insurance investigation of 1905 when the Insurance Department could not have made an imposing report of the difficulties which it had to encounter, the burdens it was required to bear, and the incessant labors which it performed.

But in that investigation it also appeared that if its energy had been well directed and the department had been efficient in the true sense most of the scandals which were revealed could not have existed.

I also appreciate the fact that the present Superintendent on taking office confronted unusual conditions. But he had conspicuous advantages. He took office with abuses ascer

tained; with the derelictions of the department known; and with clearly defined obligations which were not left for him. to discover, but which were writ large in the minds of all the people of the State. He was also equipped with additional powers.

I am mindful of the important reforms which through the pressure of public opinion and necessary legislation have been made in life insurance management; of the economies which have been effected; and of the improper practices which have been abandoned. But it is the business of the State to assure policyholders that old conditions shall not be permitted to return, and that every needed reform shall be carried out. Legislation must be supplemented by vigorous departmental action. It is essential that the Superintendent should be fully alive to the exigency and should make suitable use of his power.

Mr. Kelsey took office on May 16, 1906, and has now served more than one-half his term. At the time Mr. Fleming began the taking of testimony, he had served for a year and five months. He had had full opportunity to show whether he was equal to his important duties.

But the facts submitted establish beyond cavil that the present Superintendent has not measured up to the standard which the State must maintain and upon which, in deference to the vast interests involved, it is my duty, so far as my power goes, to insist.

Superintendent Kelsey has failed properly to reorganize the department and thus to meet an obvious obligation. The work of the department had been a travesty on State supervision. Had it been a branch of the life insurance companies themselves it could hardly have been less effective in enforcing the rights of those for whose protection it was supposed to exist. It must have been clear to any one competent to be its chief and to establish it upon a proper basis, that a thorough overhauling was necessary. No amount of routine work or of assiduity in other directions can avail to obscure this paramount duty.

The Superintendent has had a free hand, as it appears that only three of his subordinates were veterans. He has had abundant time. But the house has not been cleaned.

Mr. Vanderpoel and Mr. Hunter, whose detention despite the disclosures of the insurance investigation, was made the subject of criticism last year, resigned and left the department at the end of January and February last respectively. The examining force has been strengthened by the appointment of new men. But in other respects very little has been done to improve the efficiency and trustworthiness of the organization. Those whose neglect facilitated the disclosed abuses still retain their places.

There has been no appropriate effort to fix responsibility for the past derelictions of the department and to determine by suitable inquiry upon whom reliance could be placed. The Superintendent has also failed to give specific instructions in order to guard against repetition of neglect.

In these circumstances such repetitions are likely to occur and have occurred. Thus in the annual statements filed last year, as of December 31, 1906, transactions appeared which under the ruling of the Superintendent were illegal, but they passed unnoticed until Mr. Fleming's examination. If, as now stated, the reports themselves are erroneous in these particulars this fact may absolve the company, but it does not save the departmental work from the discredit of failure to discover the transactions which on the face of the reports as filed were contrary to law. So also, the omission of particulars required by the statute to be made in the annual statement, and other matters which were set forth and which plainly demanded inquiry, escaped attention.

In the insurance investigation it was urged that the department was one of audit only; that its business was to attest the solvency of the companies and not to supervise their management.

In testifying before the judiciary committee of the Senate last March with regard to this important matter of audit the Superintendent thus described the work of his statistical bureau (Proceedings, ed. 1907, page 43; ed. 1908, pages 95-96):

"The financial statements are turned over to the statistician and he audits them and makes the abstracts and tabulations that appear in the annual report. * **