Excess and Cas. Reinsurance Ass'n v. Insurance Com'r of State of Cal.

Decision Date14 September 1981
Docket Number79-3321,Nos. 79-3315,s. 79-3315
Citation656 F.2d 491
PartiesEXCESS AND CASUALTY REINSURANCE ASSOCIATION, Plaintiff-Appellee, v. INSURANCE COMMISSIONER OF the STATE OF CALIFORNIA, as liquidator of Signal Insurance Company and Imperial Insurance Company, Defendant-Appellee, and Insurance Department of the State of Florida, as ancillary receiver of Signal Insurance Company and Imperial Insurance Company; Florida Insurance Guaranty Association, Incorporated, Defendants-Appellants.
CourtU.S. Court of Appeals — Ninth Circuit

Klinger & Leevan, Los Angeles, Cal., for defendants-appellants.

Mark E. Field, Los Angeles, Cal., for plaintiff-appellee.

Edmond B. Mamer, Dep. Atty. Gen., Los Angeles, Cal., for Insurance Commissioner of California.

John M. McNatt, Jr., and Paul S. Leevan, Mathews, Osborne, Enrlich, McNatt, Gobleman & Cobb, Jacksonville, Fla., for Florida Insurance Guaranty.

Charles W. Havens, III, Washington, D.C., for Reinsurance Assn. of America.

Peter M. Appleton, Tyre & Kamins, Los Angeles, Cal., for the State of Florida.

Wayne D. Wilson, Wilson, Elser, Edelman & Dicker, Los Angeles, Cal., for Dep. Atty. Gen. for State of Nevada.

Kenneth W. Clausen, Los Angeles, Cal., for Calif. Insurance Guaranty Assn.

Appeal from the United States District Court for the Central District of California.

Before TUTTLE, * CHOY and KENNEDY, Circuit Judges.

CHOY, Circuit Judge:

This case, which is one of first impression in this circuit, calls upon us to determine who should receive reinsurance proceeds upon the insolvency of a reinsured company. We affirm the judgment below, which found that the statutory receiver was the appropriate recipient of such proceeds.

I. Introduction

Reinsurance 1 is a special form of insurance obtained by insurance companies to help spread the burden of indemnification. A reinsurance company typically contracts with an insurance company to cover a specified portion of the insurance company's obligation to indemnify a policyholder in the event of a valid claim. This excess insurance, as it is called, enables the insurance companies to write more policies than their reserves would otherwise sustain since its guarantees the ability to pay a part of all claims. The reinsurance contract is not with the insured/policyholder. When a valid claim is made, the insurance company pays the first level insured, and the reinsurance company pays the insurance company. The reinsurance company's obligation is to the insurance company, and the insurance company vis-a-vis the reinsurer is thus the insured, or more appropriately the "reinsured."

Insurance guaranty associations provide insolvency insurance for insurance companies. Their role is somewhat analogous to that of the Federal Deposit Insurance Corporation in the banking industry. While the rules of the various associations vary, generally they are authorized by state statute and funded by the insurance companies doing business in that state. 2 The guaranty associations assume the obligations of an insolvent insurance company, generally providing defense and indemnification for policyholders. A guaranty association's rules may provide for a deductible amount which it will not cover. The function of the guaranty association is to protect insureds in the extraordinary event of insurance company insolvency. Reinsurance payments, on the other hand, are received in the ordinary course of insurance company operations.

State insurance commissioners or departments are charged with regulation of the insurance industry within the state. If an insurance company becomes insolvent, the state insurance commissioner is typically designated by statute as receiver or trustee to distribute the remaining funds of the company according to statutory priority. Thus while a guaranty association guarantees payment only to policyholders, the insurance commissioner liquidates the assets of the insolvent insurance company and distributes funds to all creditors, in order of priority.

II. Facts

Having introduced these general concepts, we now outline the facts in this case. Signal Insurance Company (hereinafter "Signal"), a domiciliary of California, issued medical malpractice insurance policies, some of which covered Florida residents. In 1972, Signal entered into reinsurance contracts with Excess and Casualty Reinsurance Association ("Excess") to cover excess losses on its policies. Under one such policy, Signal was called upon to defend and indemnify a Florida physician in a malpractice action. Signal defended this claim until January 10, 1978, when it was adjudicated insolvent. The Florida Insurance Guaranty Association ("FIGA") then assumed Signal's obligations to defend. FIGA settled and paid the claim and notified Excess that it expected to receive reinsurance proceeds related to the policy under which FIGA had assumed Signal's obligations.

Signal was the subject of insolvency proceedings in California, and of ancillary proceedings in Florida. The Insurance Commissioner of the State of California ("California Commissioner"), California statutory liquidator and receiver of the insolvent companies, demanded that all reinsurance proceeds be paid to it. The Insurance Department of the State of Florida ("Florida Department"), which was appointed ancillary receiver of Signal by a Florida court, also demanded direct payment from Excess.

Faced with these competing claims, and anticipating additional claimants, Excess instituted interpleader proceedings in the district court to relieve it of its obligations under its reinsurance contract with Signal. Excess deposited $29,668.22 in reinsurance proceeds arising from the Florida claim with the court.

The district court refused to allow discovery, and on the basis of memoranda and exhibits submitted by the parties, it awarded the fund deposited by Excess to the California Commissioner. The district court based its order on the reinsurance contract, on California law, and on the ground that the California Commissioner as receiver could most efficiently distribute the reinsurance proceeds to the respective claimants. The court noted that the various claimants were free to approach the receiver in distribution proceedings with any claims against the insolvent companies. Excess was awarded fees from the deposited fund, and the remaining sum was ordered paid to the California Commissioner. Excess was then discharged from the action. The claims of the other defendants FIGA, the California Insurance Guarantee Association ("CIGA"), and the Florida Department were denied. While the defendants were not enjoined from bringing further action against Excess, the court noted that "the parties have fully litigated the issue of entitlement to the proceeds, and that all claimants therefore are subject to the res judicata effects of the Court's decision."

The various parties are concerned with different aspects of this appeal. FIGA and the Florida Department are the appellants. FIGA claims that reinsurance proceeds attributable to the Florida policy should be paid directly to it, since it assumed the Florida obligations of Signal. FIGA's position is supported by the State of Nevada as amicus curiae.

Excess is the plaintiff-appellee. Its sole interest in this appeal is in upholding the validity of the judgment below insofar as it affects the Florida Insurance Department, which claims that the interpleader action against it was improper under the eleventh amendment. Excess is not concerned with the question of who should receive reinsurance proceeds.

The California Commissioner, defendant-appellee, claims that all reinsurance proceeds should go to it for distribution rather than to either FIGA or CIGA directly. The Reinsurance Association of America, as amicus, supports the position of the California Commissioner.

CIGA, defendant-amicus, claims that it should receive directly any reinsurance proceeds arising from California claims. CIGA was dismissed as a party below because it made no claim to the deposited fund. CIGA's position is relevant, however, because FIGA argues that if CIGA receives a direct payment, then FIGA should also receive a direct payment.

III. Issues

The following issues are presented on appeal:

A. Entitlement to the Reinsurance Proceeds

Whether the district court was correct in its determination that the California Commissioner was the only entity entitled to direct receipt of the reinsurance proceeds.

B. Equal Protection

Whether payment to the California Insurance Commissioner is consistent with equal protection.

1. Whether the California statutory distribution scheme would result in greater proportionate payments to CIGA than to other states' guaranty associations.

2. Whether any such unequal payments would violate equal protection.

C. Procedural Questions

Whether the district court properly disallowed discovery and, if the judgment below is treated as a summary judgment, whether genuine issues of material fact were unresolved at the time of judgment.

D. Eleventh Amendment

Whether the judgment below is binding against the Florida Insurance Department, or whether the Department as part of the executive branch of the Florida state government is immune from federal interpleader action under the eleventh amendment.

IV. Discussion
A. Entitlement to Reinsurance Proceeds

The district court awarded the reinsurance proceeds to the California Commissioner on the basis of the reinsurance contract and California law. The reinsurance contract provided that in the event of insolvency, payments would be made "directly to the Company or to its liquidator, receiver, or statutory successor...." This clause is followed by exceptions which are not relevant here. The district court thus set out to determine the "liquidator, receiver, or statutory successor" of Signal. It found that under California law, the California Insurance Commissioner was that entity.

FIGA opposes ...

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