American Cast Iron Pipe Co. v. Statesman Insurance Co.

Decision Date12 June 1972
Docket NumberNo. 4-71 Civ. 463.,4-71 Civ. 463.
PartiesAMERICAN CAST IRON PIPE COMPANY, a Georgia corporation, Plaintiff, v. STATESMAN INSURANCE COMPANY, an Iowa corporation, et al., Defendants.
CourtU.S. District Court — District of Minnesota

Culhane & Culhane by Michael L. Culhane, Minneapolis, Minn., for plaintiff.

Briggs & Morgan by James W. Bowers, St. Paul, Minn., for defendants.

NEVILLE, District Judge.

The question presented here is: May a materialman who supplied pipe to a now bankrupt general contractor, and whose surety on its contractor's bond, i. e., Home Owners Insurance Company of Illinois, also is insolvent and the subject of a receivership in the state court of Illinois, prosecute its claim for $146,166.26 directly against three reinsurance companies, each of whom under a reinsurance treaty and contract reinsured a portion of the face amount of the contractor's bond issued by Home Owners Insurance Company. This court holds that such an action against the reinsurers will not lie.

Plaintiff incorporated in Georgia and has its principal place of business in states other than Iowa, Illinois and Ohio. Defendants Statesman Insurance Company, Allstate Insurance Company and Nationwide Mutual Insurance Company are corporations organized and having their principal places of businesses in the States of Iowa, Illinois and Ohio respectively.

Defendants have moved the court to dismiss plaintiff's complaint for want of subject matter jurisdiction over the res in this court, and for failure to join an out-of-state indispensable party as to whom this court has no power to order or compel service of process.

Plaintiff seeks to satisfy its claim by suit directly against the defendant reinsurers to recover a res it alleges never passed into the hands of the liquidator of Home Owners, duly appointed April 8, 1971 by the Circuit Court of Sangomon County, Illinois. The defendants contend that such a suit can be commenced, if at all, only against the liquidator of the insolvent Home Owners, since the assets in question belong to the insolvent company and thus are in the possession and control of the liquidator. There are two questions presented. First, whether the rights of Home Owners against the defendant reinsurers are owned by the duly appointed liquidator, and second, if the Illinois court has taken in rem jurisdiction over the res, i. e., the assets of Home Owners, whether this court may ignore such and contest with that court for jurisdiction in the premises, particularly without making the liquidator a party to the suit.

The Illinois Liquidation Court on April 8, 1971 issued an injunction in aid of its in rem jurisdiction applying to "HOME OWNERS INSURANCE COMPANY, its officers, directors, agents, employees, including policyholders and all reinsurers of HOME OWNERS COMPANY." The injunction stated inter alia:

"(b) That the Liquidator has the right, title and interest in all funds recoverable under treaties and agreements of reinsurance heretofore entered into by HOME OWNERS INSURANCE COMPANY as the ceding insurer and all reinsurance companies involved with HOME OWNERS INSURANCE COMPANY be and are hereby restrained from making any settlements with any claimant other than the Liquidator.
. . . . . .
(f) That . . . all persons asserting claims against such policyholders be and are hereby restrained and enjoined from instituting or pursuing any action or proceeding in any court . . . of any other State or of the United States, which seeks in any way, directly or indirectly to contest or interfere with the Liquidator's exclusive right, . . . to funds recoverable under treaties and agreements of reinsurance . . ..
. . . . . .
(k) That this Honorable Court shall retain jurisdiction of this cause for the purpose of granting such other and further relief as the policyholders and creditors may require."

All of the defendants' reinsurance contracts are identical, except for the dates and names of parties. The court will thus only quote the pertinent sections of the Allstate contract, and the General Reinsurance agreement which latter applies as to all reinsurers:

"ARTICLE XIV
INSOLVENCY CLAUSE:
In the event of the insolvency of the Company, the Reinsurance under this Agreement shall be payable by the Reinsurer to the Company, or to its liquidator, receiver or statutory successor on the basis of the liability of the company under the policy or policies reinsured without diminution because of the insolvency of the Company."

The plaintiff contends first that there is no res in the possession of or under the control of the Liquidator because under Article 9 of the General Reinsurance Agreement,1 between Home Owners and the reinsurers, the provision for claims against the reinsurers is predicated on the filing of a claim with the liquidator. Therefore, because in the instant case no fund has been paid to the liquidator, and plaintiff has not filed a claim with the liquidator, there is no res in Illinois, and hence no in rem jurisdiction in the Illinois court.

Second, plaintiff contends defendants are estopped. The present action was first commenced in the State court on August 18, 1971, over four months after the Illinois Court issued its injunctive order. It was removed to this court on September 10, 1971. Plaintiff asserts that an earlier action was commenced by the same plaintiff in the State Court against Home Owners and others (but not these present reinsuring defendants) prior to the appointment of the liquidator of Home Owners, and that the present defendants assumed the defense of that action; therefore the liquidator is prevented from claiming a right to the res because the reinsurers are estopped from denying liability. Schmidt v. National Auto. & Cas. Ins. Co., 207 F.2d 301 (8th Cir. 1953).

Finally, plaintiff contends that it has a direct cause of action against the reinsurers in any event. Homan v. Employers Reinsurance Corp., 345 Mo. 650, 136 S.W.2d 289 (1939); First National Bank of Kansas City v. Higgins, Mo., 357 S.W.2d 139 (1962).

The court is not persuaded by plaintiff's arguments.

First, effective as of January 1, 1968 there was a written and signed contract between Home Owners and All-state and all other reinsurers which specifically states that "In the event of insolvency of the company, the reinsurance under this Agreement shall be payable by the Reinsurer to the . . . liquidator." This court holds that the contract is controlling regarding insolvency proceedings, and the plaintiff is not a third-party beneficiary, but is at best an incidental beneficiary of the reinsurers' contracts to Home Owners. While it may be true that property rights not owned by Home Owners at the time of its liquidation do not pass to the liquidator, the contracts negate plaintiff's contention that before the liquidator was appointed, plaintiff had a prior right to the fund so that such never became a part of the receivership or liquidation proceedings. See also paragraph 11 of the General Reinsurance Contract quoted in footnote 1 above, which states that "The Reinsurer's share of all loss, interest, costs and expenses shall be paid to the Reinsured. . . . Emphasis added.

In this diversity case, Minnesota law applies. Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). Illinois and Minnesota are "reciprocal" states in connection with liquidation of insurance companies, and have statutes establishing a joint policy that creditors from both states shall share equally in the insolvent insuror's general assets in both states. (Minn.Stats. 60B.03, Subd. 10; 60B.60 Subd. 1; Smith-Hurd, Ill.Stats.Ann., Ch. 73, § 833.1(1), § 833.10). Under the statutes of both states, therefore, the amount and priority of claims is governed by the order of the domiciliary state. Minn.Stat. 60B.60(1), Minn.Stat. 60B.57, 60B.58. Minnesota would therefore look to the law of Illinois to determine the relative rights to Home Owner's assets as between plaintiff and Home Owner's other creditors.

On appeal by a policyholder from an adverse ruling in the liquidation court, an Illinois Court dealing with an insolvency clause almost identical to the provisions in the case at bar, held that the reinsurance proceeds belonged to the creditors rather than the policyholder, and cited the Higgins, supra, dissent as controlling:

"In other jurisdictions a similar article and insolvency clause has been held to mean just what it says, that in the event of insolvency the amount due under the policy shall be paid to the liquidator. Melco System v. Receivers of Trans-America Ins. Co., 268 Ala. 152, 105 So.2d 43, 46; Stickel v. Excess Ins. Co. of America, 136 Ohio St. 49, 23 N.E.2d 839, 841; Greenman v. General Reinsurance Corp., 237 App.Div. 648, 262 N.Y.S. 569, 570, aff'd 262 N.Y. 701, 188 N.E. 128."

See People ex rel. Hersey v. Cosmopolitan Ins. Co., 89 Ill.App.2d 225, 233 N.E. 2d 90, 92, 93 (1967). Furthermore, at page 93 that court made a statement in which this court concurs:

"This contract appears to us to be clear and unambiguous. It needs no construction. It is an agreement whereby an insurance company reinsured risks that it had previously underwritten. The object and purpose in ceding part of these risks was to protect itself. By this contract an insurance company purchased insurance. A loss payable to it in the event of insolvency became payable to the liquidator. The language of the policy on this point could not be more clear nor concise."

In answer to plaintiff's second contention, namely estoppel, Schmidt, supra, 207 F.2d at page 304 merely stands for the proposition that when an insuror, obligated to provide its policyholder a defense, without reservation of rights does defend, it will be estopped from denying coverage after adverse judgment where the policyholder relying on the defense was prejudiced. In the instant case, however, as to the previously filed suit in state court plaintiff was not a...

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