Curiale v. DR Ins. Co.

• Decision Date: 23 December 1992
• Citation: 159 Misc.2d 208,593 N.Y.S.2d 157
• Parties: Salvatore R. CURIALE, Superintendent of Insurance of the State of New York, as Liquidator of Ideal Mutual Insurance Company, Plaintiff, v. DR INSURANCE COMPANY, Defendant. Salvatore R. CURIALE, Superintendent of Insurance of the State of New York, as Liquidator of American Fidelity Fire Insurance Company and American Consumer Insurance Company, Plaintiff, v. DR INSURANCE COMPANY, Defendant. .A.S. Part 8
• Court: New York Supreme Court

Page 157

593 N.Y.S.2d 157

159 Misc.2d 208

Salvatore R. CURIALE, Superintendent of Insurance of the

State of New York, as Liquidator of Ideal Mutual

Insurance Company, Plaintiff, v.DR INSURANCE COMPANY, Defendant.

Salvatore R. CURIALE, Superintendent of Insurance of the

State of New York, as Liquidator of American

Fidelity Fire Insurance Company and

American Consumer Insurance

Company, Plaintiff, v.DR INSURANCE COMPANY, Defendant.

Supreme Court, New York County I.A.S. Part 8.

Dec. 23, 1992.

William F. Costigan and Daniel Hargraves, Costigan & Berns, New York City, for Superintendent of Ins.

Alan J. Sorkowitz, Breed Abbott & Morgan, New York City, for DR Ins. Co.

DIANE A. LEBEDEFF, Justice.

In these two cases involving reinsurance policies, motions for summary judgment seek a determination regarding the parties' rights under reinsurance arrangements made through the Society of Lloyd's of London ("Lloyd's").In each case, the court must decide whether the defendant's predecessor was a "fronter" for a reinsurance syndicate, which would render defendant wholly responsible for the payment of the claims in the same manner as if it were the sole reinsurer and, if defendant is wholly responsible, whether the reinsurance arrangements are void and unenforceable under English law in the event that English law is applicable.The motions are consolidated solely for the purpose of this decision.

Before embarking on the contradictory and complex paths laid out by able counsel which wend through issues involving Lloyd's practices, possible international conflict of laws, and other murky but inviting areas, the court has found consistent comfort in the concept that reinsurance is insurance between consenting adults.

Background and Facts

In both actions, the defendant is DR Insurance Company("DR"), the current successor of Elkhorn Re Insurance Co.("Elkhorn"), and the plaintiff is the Superintendent of Insurance, suing as liquidator of the original reinsureds.In the first case, involving a marine reinsurance policy issued to American Fidelity Fire Insurance Company and American Consumer Insurance Company(the "marine policy"), plaintiff requests $980,114.93.In the second case, involving five reinsurance aviation policies issued to Ideal Mutual Insurance Co.("Ideal"), plaintiff seeks $766,558.03.Both amounts are exclusive of interest and are based upon the claim that defendant must pay all amounts due from the syndicate.

Elkhorn was an insurance and reinsurance company incorporated in Kentucky with offices in New York.In the early 1970's, Elkhorn became interested in the London reinsurance market conducted by Lloyd's.In this connection, Elkhorn sought the services of Stetzel, Thompson & Co. ("Stetzel Thompson"), an English broker and member of Lloyd's, which acted as an underwriter in seeking reinsurance opportunities for Elkhorn.Reinsurers are often international reinsurance syndicates composed of a dozen or so companies, so Elkhorn joined several Stetzel Thompson reinsurer syndicates.

In relation to all these arrangements, plaintiff contends that Elkhorn was a "fronter," and, in that role, Elkhorn's successor is required to pay all claims of the reinsureds "up front" and then recover payments made above and beyond Elkhorn's share of the syndicate from the other syndicate members.The word "fronter" does not appear in the underlying documents, but the role comes into play by following a procedure understood in the English reinsurance industry.Defendant concedes it is responsible for a percentage share of the claims equal to its percentage participation in the relevant syndicate and argues that it has no larger responsibility.

Generally, as happened here, a broker in London presents a proposal for reinsurance on behalf of its clients to an underwriter at Lloyd's.The broker identifies the key points of the desired reinsurance sought on a card called a "placing slip."Such a slip briefly identifies the reinsured, the details of the risk, and a few other essential terms.Underwriters who desire to participate in the reinsurance write a percentage of the total risk which they might assume, initial the slip, and affix a stamp.The placing slip is essentially the contract arrangement until an actual policy, called a "wording," is prepared.Policy preparation is often done at Lloyd's signing office and quite frequently occurs several years later.

Stetzel Thompson, Elkhorn's underwriter, participated in this placing slip procedure.In some instances, it would add to its stamp a syndicate name and then a two letter code utilized to refer to Elkhorn, which plaintiff claims obligated Elkhorn as a "fronter."Stetzel Thompson would advise the syndicate members of the general details of each particular reinsurance arrangement, using a distinct notification and approval procedure for any "fronter," and, eventually, the reinsurance contract would follow.

The marine policy placing slip was signed by Stetzel Thompson on December 1, 1980, and the final policy was signed by Elkhorn on May 21, 1983.The aviation policies sprang from placing slips signed between October 1, 1979 and April 1, 1981, with all the contracts signed in November of 1983.The pattern follows the process of Lloyd's contract formation as described in Sumitomo Marine & Fire Ins. Co., Ltd. v. Cologne Reinsurance Co., 75 N.Y.2d 295, 552 N.Y.S.2d 891, 552 N.E.2d 139(1990).

The participants did not fare well thereafter.Elkhorn's corporate ownership changed several times, at least once in a less than seemly fashion (see, Delta Holdings, Inc. v. National Distillers and Chemical Corp., n.o.r., 1990 WL 49709[S.D.N.Y.1990, Keenan, J.].Once, in 1985, Elkhorn was placed in liquidation in Kentucky.As described in American Special Risk Ins. Co. v. Delta America Re Ins. Co., 634 F.Supp. 112(S.D.N.Y.1986, Leval, J.), which involved a similar reinsurance arrangement, DR, as Elkhorn's successor, was deemed a holding company for identified disputes such as these.The three reinsureds involved in the two cases before this court are in liquidation, which is the reason any arbitration clause has not been brought into play (see, Corcoran v. Ardra Ins. Co., 77 N.Y.2d 225, 566 N.Y.S.2d 575, 567 N.E.2d 969[1990].Stetzel Thompson, the English representative of Elkhorn for reinsurance syndication purposes, is under bankruptcy protection, which the court assumes is a rare event given the solvency requirements in the British insurance industry.

To avoid the linguistic complications that would otherwise arise, this decision will use the term "reinsurance arrangement" when referring to events prior to physical issuance of a reinsurance policy and the term "policy" rather than treaty when referring to the final reinsurance document.

The Marine Reinsurance

Because of the plethora of issues to be examined in relation to the marine policy, the obvious must be stressed at the outset.The marine policy was issued solely in the name of Elkhorn, was signed by Elkhorn in New York City, and names as the reinsureds two insurance companies domiciled in New York State.The insurance portfolio reinsured was American.The policy requires arbitration in New York before the American Arbitration Association.As a result, the court concludes that the marine policy is a New York policy to be enforced consistent with its terms in the same manner as any New York insurance policy.

Elkhorn's name on the policy as reinsurer is entirely consistent with Elkhorn's position as a fronter.The marine syndicate documents and the process followed by Elkhorn's underwriter lead to the inescapable conclusion that Elkhorn was a fronter and was so bound shortly after the commencement of this reinsurance arrangement.Elkhorn authorized Stetzel Thompson to "reserve business" in its name by Article Three of the syndicate agreement.All syndicate members agreed that "surplus liability" above a syndicate member's percentage participation ("designated share") would be reapportioned among the other syndicate members, thus rendering them reinsurers for any fronter.Article 7 of the agreement, entitled "Bordereaux," requires that syndicate members be advised of offers to reinsure and an acknowledgment of such offers made within ten (10) days of receipt.An affidavit of an Elkhorn officer states that if Elkhorn were a fronter, it would receive a slip termed a bordereaux or provisional bordereaux with Elkhorn's name in the box headed "retrocession of."Typically, if Elkhorn were a fronter, Elkhorn would later receive a signing schedule, which is a signature page.Where, as here, Elkhorn's name appears in the retrocession box and the policy names Elkhorn rather than the syndicate as the reinsurer, an argument that Elkhorn was not the fronter is insupportable.

Accordingly, both the New York insurance policy and the combination of Lloyd's and Stetzel Thompson practices lead to the same conclusion.While Elkhorn's successor may pursue its reinsurance rights against other syndicate members because those members stood as Elkhorn's reinsurers, Elkhorn's successor must be held to be entirely liable on this policy.This record is sufficient for summary judgment (see, Sillman v. Twentieth Century-Fox Film Corp., 3 N.Y.2d 395, 404, 165 N.Y.S.2d 498, 144 N.E.2d 387[1957].

Defendant's single exculpatory argument urges that the Lloyd's marine arrangement was void because Elkhorn was not authorized to carry on insurance business in the United Kingdom.To the extent that this court and counsel can determine, this particular issue has not previously been posed to a court in the United States.There is no short description of this impediment, which arises out of the system of insurance company regulation utilized in the United Kingdom.To set a broad perspective, the current regulatory scheme was addressed--in the context of a forum non conveniens determination--in In Re Insurance Antitrust Litigation, 723 F.Supp. 464,...