Federalism and government regulation: the case of the Canadian insurance industry 1927-34

Abstract. Federalism poses special problems for the regulatory activities of the state. In Canada, federal and provincial governments have frequently disagreed over which could best exercise such controls, keeping in mind not only the public interest but also the needs of the private parties involved. The business of insurance is a case in point. The decisions of the Judicial Committee of the Privy Council confirmed that the provinces had important powers to regulate the writing of insurance. Yet Ottawa argued that protection of policyholders and considerations of economy and efficiency required uniform national standards. The provinces pointed instead to the greater simplicity and responsiveness of local control as well as to the steadily diminishing sphere of constitutional authority possessed by the central government. This conflict came to a head between 19.27 and 1934 when the Insurance Superintendents of Ontario and Quebec led the resistance to the activities of the federal Insurance Department. Support for the provincial bureaucrats came from reciprocal and mutual insurers, while the joint-stock life insurance companies backed Ottawa. Indeed, these private interests used the federal-provincial conflict to seek special favours from the regulatory agencies. The dispute ended because politicians concluded that little was to be gained from the continuation of bureaucratic competition.

Somrnaire. Le fkd6ralisme pose des problkmes particuliers pour les activitks de contrdle de I’Etat. Au Canada, les gouvernements fkdkral et provinciaux se sont souvent trouvks en dksaccord au sujet de la question de savoir B qui il ktait pr6fCrable de c o d e r I’exercice de ces contrbles, gardant B I’esprit non seulement I’intkrCt public, mais aussi les besoins des intkrets prives en cause. Le secteur des assurances constitute un exeniple particulikrement bien choisi. Les dkcisions du Comiti. judiciaire du Conseil privi. ont confirm6 que les provinces disposaient de pouvoirs importants pour rkglementer I’ktablissement des contrats d’assur- ance. Ottawa a cependant fait valoir que la protection des dktenteurs de polices ainsi que des consid6rations d6conomie et defficacitk nkcessitent I’application de normes uniforrnes B I’kchelle nationale. Les provinces ont, de leur cat&, attire Pattention sur la simplicit6 accrue et la rapiditk dapplication des mesures de contrble local, ainsi que sur les pouvoirs constitutionnels de plus en plus restreints dont dispose le gouvemement central. Ce conflit a atteint son point culminant entire 1927 et 1934, lorsque les Surintendants des assurances de I’Ontario et du QuCbec ont pris la tCte d u n mouvement de rksistance aux activitks du ministkre fkdkral des assurances. Les compagnies qui offraient des assurances rkciproques et mutuelles ont appuyk les bureaucrates provinciaux, tandis que les compagnies d’assurance-vie par actions ont soutenu Ottawa. En fait, ces intkrets prives ont exploit6 Ie conflit fkdkral-provincial pour essayer dobtenir un traitement de faveur de la part des organismes de contrble. Le

Christopher Armstrong is associate professor of history at York University

FEDERALISM AND GOVERNMENT REGULATION

diffbrend a pris fin le jour oh les hommes politiques ont conch que I’on n’avait rien 21 gaper de la poursuite des drontements bureaucratiques.

Federalism aims at the diffusion of power and responsibility throughout society, but, as students of government well know, the unintended result can sometimes be confusion and conflict over the division of authority between levels of government. Clashes between the federal government and the provinces in Canada have been studied from a legal and constitu- tional standpoint, but less attention has been paid to the administrative history of federal-provincial relations, especially during the period before the second world war. The conflict which occurred between Ottawa and the provinces of Quebec and Ontario over the regulation of the insurance industry from 1927 to 1934 provides an interesting case study.l It suggests two conclusions. First, private interest groups play a much larger role in federal-provincial conflict than is usually recognized, particularly where regulatory agencies are concerned. Secondly, civil servants may be even more militant than their political masters in defending bureaucratic tem- tory against assault, sometimes in their wars enlisting the aid of the very interests they are charged with regulating. Viewed thus, administrative history is no dust-dry dispute over abstract principles; it is a contest for personal authority and economic power.

An understanding of the issues in dispute in the fight over insurance regulation requires some constitutional background.2 The federal govern- ment in Canada possesses the power to regulate ‘trade and commerce’ under the British North America Act, but the provinces retain control of ‘property and civil rights.’ Both levels of government have the power to incorporate, and hence regulate, companies. By the late nineteenth cen- tury the business of insurance was developing rapidly in Canada, and in 1875 the federal Department of Insurance was created. With the excep- tion of some loan and trust companies, insurers were the only financial institutions not entirely under federal control, and the provinces, Ontario

1 DONALD v. SMILEY, ‘Public administration and Canadian federalism,’ CANADIAN PUBLIC ADMINISTRATION, 7, 1964, pp. 371, 374; the conflict over the regulation of insurance was discussed by J.A. CORRY in his study pre ared for the Royal Commission on Dominion-Provincial Relations, Difficulties of Ditded Jurisdiction, Ottawa, King’s Printer, 1939, pp. 21-2. Corry noted that ‘Wide differences in the views of higher of- ficials connected with the administration of insurance legislation contributed to the failure [to settle federal-provincial differences]. It has not been possible to secure a first-hand account of their differences.’ Since Professor Corry wrote, the release of departmental records and the private papers of politicians has altered that situation. 2 The constitutional background is briefly sketched out in the Report of the Royal Commission on Dominion-Prouincial Relations, Book 2, Ottawa, King’s Printer, 1940, pp. 59-60. Extracts from the key legal decisions may be found in annex 3 of SENATE OF CANADA, SESSION OF 1939, Report Pursuant to Resolution of the Senate to the Hon- ourable the Speaker by the Parliamentary Counsel relating to the enuctment of the British North America Act, 1867, any lack of consonance between its tenns and judicial construction of them and cognate matters, Ottawa, Queen’s Printer, 1961, [hereafter termed OConnor Report].

89 ADMINISTRATION PUBLIQ- W CANADA

CHRISMPI-IER ARMSTRONG

in particular, were not disposed to allow Ottawa to monopolize insurance regulation. Thus in 1879 the first Ontario inspector of insurance was appointed. In 1881 the Judicial Committee of the Privy Council reinforced provincial claims to authority by deciding that ‘trade and commerce’ did not include ‘the power to regulate ... the contracts of a particular business or trade, such as the business of fire insurance in a single provin~e.’~ This made it clear that the provinces could exercise some control over insurers, but the exact division of jurisdiction was vague. Three questions remained unanswered. To what extent could the provinces regulate companies chartered by the federal government? To what extent could Ottawa regu- late provincially chartered insurance companies if they ventured to operate outside their home provinces? Uliich level of government should control foreign insurers doing business in Canada?

In 1907 the Supreme Court of Canada decided that a provincially incor- porated company could insure property in any part of Canada, not just in its home province. To control such companies the government of Sir Wilfrid Laurier introduced amendments to the Insurance Act in 1910 to require them to obtain federal licences and make security deposits with the superintendent of insurance; he was empowered to make annual inspec- tions and report upon their solvency. But almost at once the key sections of this Act were declared unconstitutional by a Montreal magistrate. In an effort to settle the matter once and for all, Laurier and his justice minister, A.B. Aylesworth, decided to refer a series of constitutional questions to the Supreme Court. In the Insurance Reference case heard in October 1912, Ontario, with the backing of the other provinces, argued that provincial companies required no federal licences to do business in other parts of Canada, and that a11 insurers operating in Ontario were subject to regula- tion by the provincial Inspector of Insurance. The case was appealed to the Privy Council, and the decision. not received until 1916, was most gatifying to the province, one of whose officials summed it up as ‘a win for ... the Province’s contention, a complete recognition of the rights of Provincial Companies to do business outside the Province and recognition of the right of the Provinces to tax Dominion and other Companies, and with regard to Insurance the declaration that the disputed clauses in the [1910] Insurance Act were ultra vires.’4

Despite this setback the federal government refused to withdraw from

3 Citizens Insurance Co. v Parsons ( 1881 ), OConnor Report, Annex 3, Case no 5 4 Canadian Annual Reuiew, 1907, Toronto, Annual Review Publishing Co., 1908, p. 497; Memorandum from Edward Bayly, n.d., Records of the Attorney General of Ontario, Public Archives of Ontario, [hereafter ACO Records, PAO], 1916, # 415a; A.-G. for Canada u A.-G. for Alberta [ 1916), OConnor Report, Annex 3, Case no. 36. In 1915-16 the Judicial Committee rendered two other important decisions concern- ing inco oration and regulation of companies which Bayly refers to, Jolzn Deere Plow

which extracts may be found in the O’Connor Report, Annex 3, Cases no, 34, 37. The quotation comes from Bayly’s memorandum,

Co. v W ’R arton (1915) and Bonanza Creek Gold Mining Co. u the King (1916), of

90 CANADIAN PUBLIC ADMINISTRATION

FEDERALISM AND GOVERNMENT REGULATION

the regulation of insurance. Excluded from control over provincially chartered companies, the Insurance Department set about drafting new legislation to control Canadian and foreign insurers. The 1917 Insurance Act made it a criminal offence for foreign insurers not to obtain federal licences, a provision justified by jurisdiction over ‘aliens’ and ‘immigra- tion.‘ This rather tortuous construction had been devised by the deputy minister of justice, who was later alleged to have told the cabinet ‘this was the only way it could be done, if it could be done at all.”J

Some parts of this act were invalidated by the Privy Council in 1924, and in 1926 the Ontario Court of Appeal held the key licensing provisions unconstitutional. At an Interprovincial Conference in the summer of that year the attorney general of Ontario, W.F. Nickle, introduced a resolution calling upon the federal authorities to recognize ‘the binding character’ of these legal decisions and to withdraw altogether from this field. This motion was seconded by the premier of Quebec and supported by all the other first ministers, but the government of Mackenzie King was unmoved. The federal superintendent of insurance, George D. Finlayson, a crusty Nova Scotian who had entered the Department in 1907 and become superinten- dent in 1914, had no intention of presiding over the elimination of his own job. Instead, he set about drafting new legislation to be presented to Parliament in 1927 which still required all foreign insurers operating in Canada to be licenced. Such intransigence led the deputy attorney general of Ontario to write angrily, ‘The Provinces have won almost steadily in the Courts, but the Dominion Departments have to a great extent dis- regarded the law.”

The province’s superintendent of insurance, R. Leighton Foster, was particularly annoyed by one new provision in the legislation. Foreign- based companies were now required to deposit $100,000 worth of securities with Finlayson to obtain licences, double the previous amount. The change was enthusiastically endorsed by the joint-stock insurance com- panies chartered by Ottawa, who regarded it as a stiff protective tariff to exclude low-cost foreign competition which had recently increased greatly, particularly from American mutual insurers. Mindful of the potential loss of licence fees for the provinces, and angered by what he considered favouritism to the joint-stock insurers on Finlayson’s part, Foster persuaded a meeting of the Association of Provincial Insurance 5 Statutes of C a d a , 1917, c. 29; E.L. Newcombe was quoted in F.W. Weganast to Mackenzie King, 3 July 1924, Personal, W.L.M. King Papers, Public Archives of Can- ada, [hereafter King Pa ers, PAC], 94256-65. 6 Some provisions of &e 1917 Act were declared unconstitutional by the Privy Coun- cil in A.-G. for Ontario v Reciprocal Insurers (1924), OConnor Report, Annex 3, Case no. 45; ‘Proceedings of the Interprovincial Conference held at Ottawa, June 1926,’ in Dominion Provincial and Interprovincial Conferences from 1887 to 1926 / Confkrences F6ddrales-ProuinciaLs et Confkrences lnterprouinciales d . ~ 1887 d 1926, Ottawa, King’s Printer, 1951, p. 112; Memorandum from Edward Bayly to W.H. Price, 28 Feb. 1927, AGO Records, PAO, 1927, #527.

91 ADMINISTRATION PUBLXQUE DU CANADA

CHIUSTOPHER ARMSTRONG

Superintendents to condemn the new Act at their annual meeting in 1927. Moreover, he induced Ontario’s premier, Howard Ferguson, to challenge the new legislation directly. Ontario and Quebec agreed to issue provincial licences to some twenty New England fire insurance mutuals which had refused to put up federal deposits. These companies were promised legal support if charged with failing to obtain a federal licence. Finlayson, on the other hand, insisted that both common sense and actuarial experience required that foreign companies should make deposits in order to secure the rights of their Canadian policyholders. ‘It is safe to say,’ he wrote, ‘that the officials of the province are aware of the unsoundness of the system they have proposed, and that the action has been taken merely for the pur- pose of again throwing insurance legislation into the chaos of litigation in the hope that, in the outcome, some support may be obtained for provincial claims to juri~diction.’~

An agreement endorsed by the Dominion-Provincial Conference to be held in November 1927 seemed to be the only way out of this impasse except a further protracted legal battle. Despite the pessimism of officials on both sides the politicians were hopeful that something could be hammered out. The matter was raised at the Conference by the new attorney general of Ontario, M7.H. Price, and Prime Minister King promptly suggested the creation of a subcommittee chaired by the solicitor general, Lucien Cannon, to thrash the matter out. But discussion was dominated by Foster and Finlayson. As soon as the committee met, the latter took the offensive with a forty-five minute harangue in which he denounced provincial pretensions and alleged that Ontario ‘had at times shown a disposition to go out of its way to negative everything the Dominion has done. This has not been to the benefit of the public, but has, on the other hand, involved expense which ultimateIy falls on the com- panies and thus on the insuring public.’ He was frequently interrupted by Edward Bayly, Ontario’s deputy attorney general, who reminded the superintendent that he was not a lawyer and severely criticized his ‘ridiculous’ interpretation of the constitution. When Finlayson finally finished, Foster took the floor to suggest that the best thing his federal counterpart could do would be to shut up shop altogether. Finlayson’s response, recorded Foster, was to laugh, wave his hand, and make ‘a dirty remark about my looking for another job ... [saying] by inference that there was no use talking to me.’ With the competing bureaucrats trading insults like fishwives there was little likelihood of any agreement emerging

7 Memorandum, Inter-Provincial Conference, November 1927, Ottawa, Re Insurance, Re Loan and Trust Companies by R.L. Foster, 18 Oct. 1927, AGO Records, PAO, 1927, #2981; O~TARIO SUPERINTENDENT OF ISSUXANCE, Annual Report, 1927, p. XI; Memo- randum from G.D. Finlayson to Finance Minister J.A. Robb, 10 Oct. 1927, King Papers, PAC, ~69144-9

% CANADIAN PUBLIC ADMINISTRATION

FEDERALISM AND GOVERNMENT REGULATION

from the committee. Attorney General Price advised the solicitor general that ‘If we are to make any progress the Ministers will have to meet without the Deputies and decide what can be done.’ If such a meeting was ever held it proved no more fruitful, and in the end the committee could only report to the Conference that the matter required further study.s

Failure to come to terms apparently convinced Premier Ferguson that the courts would have to be resorted to once more. A Conservative, he did not hesitate to seek assistance from his Liberal counterpart in Quebec, A.L. Taschereau, and they agreed that the Quebec government would refer the 1927 Insurance Act to the Court of Kings Bench for an opinion on its constitutionality. The case was heard in November 1929. Counsel for the provinces charged that the legislation invaded provincial rights, ‘because, apparently, the officials of the [federal] Insurance Department are more pugnacious and grasping than the others - with regard to juris- diction, of course.’ The Quebec court split, but an appeal to the Privy Council produced a firm declaration that federal efforts to license foreign insurers constituted ‘intermeddling in the business of insurance. The federal licence was dismissed as ‘an idle piece of paper.’D

A lesser man might have given up at this point in the face of such a string of legal reverses, but George Finlayson refused to concede defeat. He promptly set about devising legislation to control foreign insurers through federal jurisdiction over bankruptcy and insolvency. When Attorney General Price learned of this in February 1932 he was outraged. Why, he demanded of fellow-Conservative R.B. Bennett, would Ottawa not give up? Ninety per cent of all Canadian insurance companies had their head offices in either Ontario or Quebec. Those provinces ‘could not, if they would, sidestep and avoid the responsibility for the regulation of the business of insurance within their jurisdiction.’ Bennett, however, was well aware not only of bureaucratic pressure from Finlayson but also of the fact that Canadian life insurance companies did not wish the federal government to withdraw from regulation. They found certificates of solvency which carried the imprimatur of the government of Canada

8 ‘Precis of Discussion, Dominion-Provincial Conference, November 3 to 10, 1927,’ in Dominion-Prouincial Conferences, November 3-10, 1927, December 9-1 3, 1935, January 14-15, 1941 / Conferences F~~rales-Prouinc~ales, Du 3 au 10 nouembre 1927, Du 9 au 13 dkcembre, 1935, Les 14 et 15 janukr 1941, Ottawa, King’s Printer, 1951, pp. 13,37; Draft Minutes of Sub-committee Meeting of Deputies of Committee of Dominion-Provincial Conference on Companies, 7 Nov. 1927 by R.L. Floster], AGO Records, PAO, 1927, #2981; Finlayson’s criticisms of Ontario are contained in his memorandum of 10 Oct. 1927, cited above in n. 7; Price’s note to Cannon is attached to the draft minutes. 9 R.L. Foster to Aim6 Geoffrion, 8 Feb. 1929, AGO Records, PAO, 1929, #307; Oral Argument of Counsel in Quebec Insurance Reference, 16 Nov. 1929, tbid., #1387; In re Insurance Act of Canada ( 1932), O’Connor Report, Annex 3, Case no. 58

93 ADMINISTRATION PUBLIQUE DU CANADA

CHRISTOPHER ARMSTRONG

valuable in doing business abroad, a business of growing importance. These companies preferred a compromise which would satisfy the provinces without ending federal jurisdiction altogether.1°

The Canadian Life Insurance Officers Association retained Newton Rowell as their counsel and instructed him to try to work out such a com- promise. The minister in charge of the new legislation, Senator Arthur Meighen, had served with Rowell in the Borden government and raised no objection. The Iawyer set to work with the assistance of Justice Depart- ment officials to draft a set of provisions which would be constitutionally impeccable.” Only Finlayson seems to have recognized any impropriety in permitting regulatory legislation to be drafted by the very interests it was supposed to control. An experienced bureaucratic infighter, the super- intendent struggled to regain the initiative from Rowell and Meighen. In an effort to bolster his authority he persuaded his direct superior, Finance Minister Edgar N. Rhodes, to. include in his 1932 budget a prohibitory 10 per cent tax on insurance premiums paid to foreign insurers lacking federal licences, which would , in effect, have compelled them to submit to regulation by Ottawa in order to avoid the tax. This was denounced not only by Price of Ontario, who called it an ‘invasion of provincial rights,’ but also by Meighen himself. The senator complained to the prime minister that the new taxes were ‘in my judgement patently and defiantly unconstitutional, and besides are wholly out of harmony with the insur- ance legislation that I am sponsoring for the government in the Senate.’ To Rhodes, Meighen wrote confidentially attacking Finlayson’s efforts to undermine agreements already reached with the insurance companies on the terms of the new legislation. He predicted that if the superintendent were not kept on a very short leash he would try to have the Insurance Act amended in the House of Commons to restore his regulatory powers. However dedicated a public servant he might be, warned Meighen, Fin- layson took each adverse decision by the Privy Council simply as an invi- tation to try another strategem.12

But Finlayson got his way despite the opposition of Meighen, Rowell, and the officials in the Justice Department, whether because of his long

10 ‘Memorandum on the Constitutionality of the Accompanying Bill entitled “A Bill respecting the Status and Powers of Dominion Insurance Companies,” ’ unsigned, [G.D. Finlayson?], n.d. Edgar N. Rhodes Papers, Provincial Archives of Nova Scotia, [hereafter Rhodes Papers, PANS], ltem 75320; W.H. Price to Bennett, 18 Jan. 1932, AGO Records, PAO, 1932, #161; A N . Mitchell to Arthur Meighen, 10 Feb. 1932, Arthur Meighen Papers, Public Archives of Canada, [hereafter Meighen Papers, PAC], 102081-3 11 G.C. Moore, president of the Canadian Life Insurance Officers’ Association, to G.D. Finlayson, 25 Feb. 1932; N.W. Rowell to W.H. Price, 18 March 1932; Meighen Papers, PAC, 102101,102162-3 12 Finlayson to Meighen, 24 March 1932; A.H. Hinds to R.B. Bennett, 7 April 1932; hleighen to Rhodes, 23 April 1932, Personal and Confidential; Meighen Papers, PAC, 102180, 102193, 102254-6. Hinds was Bennett’s secretary who received a telephone message from Meighen.

94 CANADIAN PUBLIC ADMINISTRATION

FEDERALISM AND GOVERNMENT REGULATION

tenure in office or because of his ability to persuade his minister, Rhodes, to support him. The premium tax was retained, and foreign insurers were required to take out licences under federal power to control aliens, bank- ruptcy, and insolvency. The superintendent even succeeded in inserting a provision requiring foreign companies to show on the face of their poli- cies in red ink the amount of funds held in Canada. Rowel1 and the Justice Department officials thought this a clear interference with the form of the insurance contract, certain to be struck down by the Privy Council if an opportunity arose. But for the moment at least, Finlayson seemed to have triumphed over his opponents both within and without the federal gov- ernment.ls

The victory did not endure. Price and Taschereau soon convened a meeting to co-ordinate tactics and agreed upon another direct challenge to federal authority. Ontario and Quebec would license Lloyd’s of London even though it lacked a federal permit. Arthur Meighen, seeking to avert this confrontation, tried to arrange a compromise with the two provinces but was rebuffed by Price:

The rights of the province must be preserved. Nonetheless, if the Dominion will recognize these rights and cease the assertion of rights it does not possess, I be- lieve we could develop a plan of co-operation which would endure. But no such plan can ever be made so long as the Dominion claims the right to regulate the business of insurance under the guise of regulation relating to bankruptcy and insolvency or otherwise. Admit that the sde responsibility for the regulation of insurance is a matter of exclusive provincial responsibility ... The only alterna- tive appears to be another contest in the courts.

The bitterness of Meighen’s reply gave evidence of his frustration at the refusal of the provinces to submit to his will:

Apparently ... the attitude of your government is to insist on the farthest possible interpretation of provincial rights ... You ... intimate that only on the basis of acceding to the provinces’ views ... could any compromise be amved at ... If it is the right attitude on the part of the provinces - and for myself I don’t think such an attitude really prevails anywhere outside the provinces of Ontario and Quebec - to fight to their limit regardless of all claims of economy or the gen- eral public good, and to feel that a great victory is gained if these claims are acknowledged in the courts, then surely it would have been better if there had been no Confederation at all. Without Confederation there would be one hun- dred per cent provincial rights in everything, and if the attitude of the Province of Ontario ... is correct one hundred per cent provincial rights would be a constitutional paradise.14

Such bluster left Price undismayed, At a meeting with Taschereau in Montreal on 11 October 1932 it was agreed that the Ontario attorney

13 Memorandum from R.L. Foster to Edward Bayly, 17 June 1932, AGO Records, PAO, 1932, #539; N.W. Rowell to J.A. Mann, 8 Feb. 1934, Meighen Papers, PAC,

14 Price to Meighen, 28 Sept. 1932; Meighen to Price, 3 Oct. 1932; Rhodes Papers, PANS, Items 49016,49017

103066-71

95 ADMINISTRATION PUSLIQUE DU CANADA

CHRISTOPHER ARMSTRONG

general should seek a meeting with Meighen and offer to support the creation of a federal Insurance Inspection Bureau, but only on condition that all existing federal insurance legislation was repealed. This Bureau, as conceived by the provincial authorities, would be able to inspect com- pany books, hold deposits, and issue certificates of solvency, but the actual licensing of companies would remain clearly in provincial hands. The meeting between Meighen and Price took place in Toronto on 7 Novem- ber. The attorney general warned Meighen that if this offer was not promptly accepted the two provinces intended to move towards the American system, where the jurisdiction in which the head office was located handled ail regulatory activities. If the other seven provinces were persuaded to accept this idea it would mean the end of federal regulation altogether. Predictably, federal officials denounced this as ‘a plain demand for complete abdication of the field.’ Subsequently the cabinet discussed the dispute and decided to refer it to the Dominion-Provincial Conference scheduled in January 1933. Despite Price’s insistence that there was ‘noth- ing to be gained,’ ‘no good purpose ... to be served‘ by further negotiations, Meighen was hopeful that the other provinces might be rallied against Ontario and Quebec where the insurance industry was so ovenvhelm- ingly concentrated.’6

The first ministers devoted almost an entire day to the discussion of insurance, leaving aside for the moment such pressing concerns as the relief of unemployment. The familiar arguments were reiterated, Meighen challenging the provinces to show their commitment to a genuine federal- ism by co-operating with Ottawa, Price for Ontario insisting that it would be quite improper for the province to acquiesce in clearly unconstitutional legislation. But, as Meighen had anticipated, all the provinces except British Columbia, Quebec, and Ontario expressed support for a continued federal role. Premier Brownlee of Alberta suggested the other provinces should require companies operating within their borders to be federally licensed so that Quebec and Ontario would not acquire a stranglehold over the industry. When the six premiers from the Maritimes and the prairies expressed support for this idea, Prime Minister Bennett seized the occasion to warn that they might join together with Ottawa and apply direct to Britain for a constitutional amendment over the heads of the dissenting provinces.la

15 Minutes of Proceedings, Ontario-Quebec Conference, Ritz-Carlton Hotel, Tues- day 11 Oct. 1932; Meighen to Price, 12 Nov. 1932; Price to Meighen, 21 Nov. 1932; AGO Records, PAO, 1932, #539. Meighen also promised the Canadian Life Insurance Officers’ Association a chance to be heard before any final decision was taken on alter- ing the legislation; see Meighen to Rhodes, 2 Dec. 1932, Rhodes Papers, PANS, Item 49110. lG Minutes of the Dominion-Provincial Conference, 17-19 Jan. 1933, R.B. Bennett Papers, Public Archives of Canada, 346894-955, pp. 35-40,56-9

96 CANADIAN PUBLIC ADMINISTRATION

FEDERALISM AM) GOVERNMENT REGULATION

Well aware that Bennett was quite capable of just such high-handed dealings with the provinces, Premier George Henry of Ontario bluntly warned a delegation of insurance executives in February that if efforts were made by other provincial governments to force Ontario companies to take out federal licences he would not hesitate to enact retaliatory legis- lation. In the meantime, Ontario joined with Quebec and British Columbia in a successful effort to hammer out uniform insurance legislation for the three jurisdictions. As a result the insurance industry became increasingly wary of the dangers posed by federal-provincial conflict. Much effort was directed towards ensuring that no action was taken by the federal govern- ment to deal with this challenge in the hope that some compromise could be worked out. By the autumn of 1933, however, the life insurers suffered a change of heart and once again concluded that changes were needed in federal insurance 1egi~lation.l~

The reasons for this sudden shift are interesting for they throw a good deal of light upon the efforts of private interest groups to exploit the federal-provincial conflict and shape regulatory policy in their own inte- rests. Under the 1932 Act, companies were required to complete the so- called Schedule F, listing all payments made to officers and directors. In September 1933 Newton Rowell wrote to the prime minister on behalf of the life insurance companies to question the constitutionality of this pro- vision. Rowell noted that while his clients supported the continuation of federal regulation, they were much concerned about the vulnerability of such legislation to challenges in the courts. Superintendent Finlayson ex- plained these sudden qualms to his minister: two of the companies wanted to conceal the enormous salaries being paid to their chief executives at a time when many Canadians were struggling to make ends meet. In 1932 Canada Life had paid its president a total of $97,796.34 or $86,000.00 after income tax, while Sun Life’s president had received $96,W.67. ‘I take this to mean,’ wrote Finlayson, ‘that if our position on Schedule F is maintained some of the companies for whom Mr Rowell speaks will have further doubts as to the constitutionality of the 1932 Insurance Acts and will recommend further revised legislation, ostensibly for the purpose of removing unconstitutional features, but incidentally making it clear that the Minister shall not have the power to call for a schedule such as Sched- ule F.’18

17 R.L. Foster to the Saskatchewan superintendent of insurance, A.E. Fisher, 11 Feb. 1933; Rowell to Meighen, 11 Feb. 1933, Personal; Meighen Papers, PAC, 103354b, 10267-9; Memorandum, Quebec-Ontario Insurance Conference, Toronto, 26 Oct. 1933, Re Uniform Regulations Respecting Licensing and Control of Insurance Companies, by R.L. Foster, 23 Oct. 1933, AGO Records, PAO, 1932, #539 18 Memorandum from Finlayson to Rhodes, 30 Sept. 1933; Rhodes to R.B. Bennett, 2 Oct. 1933; Rhodes Papers, PANS, Items 55926,55925

97 ADhUNISTRATZON PUBLIQUE DU CANADA

CHRISTOPHER ARMSTRONG

And indeed Rowell was soon hard at work drafting amendments to the federal Insurance Act with the help of Justice Department officials. C.P. Plaxton of Justice insisted that he and Rowell had nothing in mind beyond constitutional niceties as they worked and criticized Finlayson’s interpre- tation of the constitution, so often rejected by the courts in the past. But the superintendent was scornful about the stream of suggestions issuing from the lawyer for the Canadian Life Insurance Officers Association and approved by the law officers of the crown: ‘There does not appear to be any constitutional points [sic] involved in any of [the suggested changes]. There is, on the other hand, chiselling of the protection afforded by the act to the insuring public. Amendments which are necessary to be made in the interests of the insuring public, to which attention has already been drawn by this Department, have not been incl~ded.’’~

This internecine wrangling seems to have exhausted the patience of the prime minister. In January 1934 he wrote grumpily to the finance min- ister: ‘We might as well face the fact that [the federal Insurance Depart- ment] has no jurisdiction, and there is an enormous waste of money and time for stationery and other purposes. Is it not a suitable time to have the matter disposed of? The legislation introduced in the Senate a short time later provided that Canadian-based insurers could apply for certifi- cates of solvency, but foreign insurers would in future be licensed by Ottawa only at the request of the provinces. Of course Finlayson was bit- ter about changes which would denude him of all but a few vestiges of his former authority, and he carried on a relentless guerilla campaign against the new legislation. Of Meighen, he wrote to his minister:

These bills are ostensibly promoted with a view to strengthening the jurisdiction of Parliament and further strengthening the legislation from the constitutional standpoint, that it may better withstand an attack by the Provinces of Ontario and Quebec.

This being the avowed object of the legislation, it is remarkable that the Leader of the Senate in introducing the Bills in the House has furnished the strongest possible argument in favour of the provinces’ point of view, by putting forward as the Dominion’s view of the jurisdiction of Parliament the view which has been strongly expressed in recent years by Counsel representing the provinces.20

19 Memorandum from Finlayson to Rhodes, 23 Dec. 1933, Rhodes Papers, PANS, Item 56233; Memorandum from C.P. Plaxton to Justice Minister Hugh Guthrie, 25 Jan. 1934, Meighen Papers, PAC, 102725-44; Memorandum from Finlayson, 17 Jan. 1934, Rhodes Papers, PANS, Item 56179 20 Bennett to Rhodes, 31 Jan. 1934; Memorandum from Finlayson to Rhodes, I6 May 1934; Rhodes Papers, PANS, Items 56142, 66313-4. There were actually three separate bills, dealing with Canadian companies, over which jurisdiction was clear, forei n companies, which could be treated as ‘aliens,’ and British companies, which c o d I! not. For simplicity’s sake the bills are here dealt with as a single entity.

98 CANADIAN PUBLIC ADMINISTRATION

FEDERALISM AM) GOVERNMENT REGULATION

But Finlayson’s political masters were no longer prepared to accept his views. Newton Rowell, representing the life insurance companies, had succeeded in convincing Bennett and Meighen that changes had to be made. There was particular concern about how to treat the famous under- writing syndicate, Lloyd‘s of London. Rowell, in fact, had visited Britain as a semi-official emissary of the Canadian government to treat with Lloyd‘s, which had agreed to accept federal licensing provided that no security deposit were demanded of them. Finlay son, however, still wanted a deposit from Lloyd’s and was supported by the Canadian fire insurers who feared low-cost competition. But Rowell warned the government that if his understanding with Lloyd’s was not carried out, they would almost certainly join with Quebec and Ontario (where they were already doing business ) in another legal challenge to federal authority. Meighen was persuaded: ‘I think the Bill without the Lloyd’s provisions will be much more vulnerable before the Privy Council, and if we lose there again we are through.’21

After private discussions between Rowell, Bennett, and Meighen it was agreed that Lloyzs could be placated by dropping altogether the provisions requiring it to secure a federal license. This could be done during the debate in the House of Commons, and it was hoped that no- body would even ask for an explanation of the changes. The obdurate Finlayson, who would after all have to administer the legislation, was not privy to these discussions, nor was he informed of the arrangement. He noticed the alterations but thought them simply ‘inadvertent’ and pleaded with Meighen to have the clauses restored in the Senate. Gradually, how- ever, it must have dawned upon him that something was going on behind his back. The legislation proceeded smoothly through both houses, and on 3 July 1934 Rowell addressed to Meighen a personal letter expressing the entire satisfaction of the Canadian Life Insurance Operators’ Associa- tion with the outcome: companies could go abroad with certificates of solvency issued by Ottawa, but effective regulation of the business of insurance for all but Canadian-chartered companies now rested firmly with the provinces, secure from challenges in the courts.22

Whether this was in the public interest or not is perhaps more difficult to say. It might be argued that Foster and Finlayson represented com- peting bureaucracies, agreeing upon basic regulatory objectives but dif-

21 Rowell to Meighen, 25 April 1934, Personal; Rowell to Bennett, 4 June 1934, Personal and Confidential; Meighen to Rowell, 24 April 1934; Meighen Papers, PAC,

22 Rowell to Bennett, 4 June 1934, Personal and Confidential; Memorandum from Finlayson, 25 June 1934; Rowell to Meighen, 3 July 1934, Personal; Meighen Papers, PAC, 103225-9,103231-4, 103354~1-CJ

103151-3,103225-9, 103128

99 ADMINISTRATION PUBUQUE DU CANADA

CHRISTOPHER ARMSTRONG

fering on details; however, a reading of the documents suggests that per- haps the federal superintendent was inclined to be a bit more stringent and demanding in dealing with insurers. On the other hand, by requiring more paperwork and larger deposits, which the mutuals and reciprocals found difficulty in putting up, he provided assistance, unwitting, or other- wise, to the large joint-stock companies, which underwrote relatively ex- pensive insurance. Foster, in his eagerness to induce insurers to submit to provincial control, may sometimes have been less rigorous. But the dif- ficulties in assessing the kind of minimum safeguards necessary are so great that a more definite conclusion seems hardly possible. A t any rate, defaults by insurers in Canada seem to have been commendably few and far between.

As an incident in the history of federal-provincial relations the fight over insurance regulation seems to demonstrate two things. First, the complexity of the relationship between the two levels of government: this cannot simply be viewed as bipartite, because private interests have pri- vate objectives and an intergovernmental conflict may represent a heaven- sent opportunity to achieve them. Canadian life insurance companies, for instance, supported federal regulation of insurance because they found it advantageous in doing business abroad, not because of any innate re- spect for constitutional niceties or conviction regarding the virtues of centralized regulation. Had provincial control offered equivalent advan- tages, as it did to reciprocal and mutual insurers, then the weight of this pressure group might have been thrown into the other side of the balance. Students of government must try to be alert to such considerations, how- ever difficult it may sometimes be to ferret them out.

Secondly, bureaucrats ought not to be viewed as faceless automatons. They, too, have personal interests and ambitions. Faced with the virtual elimination of the job he had held for two decades, George Finlayson fought as hard as he knew how. He would have been less than human if his only concern had been for the well-being of insurance policy-holders. When he needed help he sometimes turned to the industry he was charged with regulating, as in 1927 when he doubled the size of the deposits re- quired of foreign insurers to reduce competition from them. Likewise, Leighton Foster thought it acceptable to induce the New England mutual insurers to break the same law and to promise to pay their legal costs if Finlayson prosecuted them. But such alliances between bureaucrats and interest groups could also prove tenuous. When the life insurance com- panies concluded in 1934 that Finlayson was an obstacle to the compro- mise they were seeking, they did not hesitate to jettison him and make a deal with his political masters behind his back. Administrative historians, then, should remember that it is not only politicians who believe ‘in con-

100 CANADIAN PUBLIC ADMINISTRATION

FEDEEULISM AND GOVERNMENT REGULATION

vartin’ public trusts to very private use’; even the most loyaI pubiic servant may sometimes say

I don’t believe in princerple, But 0, I du in interest.28

23 JAMES RUSSELL LOWELL, The Biglow Papers, First Series, No. 6, ‘The Pious Edi- tor’s Creed.’ Ironically, Foster, Finlayson’s chief antagonist, resigned in 1935 as On- tario superintendent to become eneral counsel of the Canadian Life Insurance Officers’ Association, one of Finlayson’s c a ‘ef props.

101 ADMINISTRATION PUBLIQUE DU CANADA