First American Ins. Co. v. Commonwealth General Ins. Co.
| Decision Date | 26 August 1997 |
| Docket Number | R,Nos. PXC-00892 and PXC-00893,No. WD,s. PXC-00892 and PXC-00893,WD |
| Parties | FIRST AMERICAN INSURANCE COMPANY, Appellant, Certain Underwriters at Lloyd's, London and London Market Companies, Plaintiffs, v. COMMONWEALTH GENERAL INSURANCE COMPANY and Certain Underwriters and Underwriting Syndicates Subscribing to Policyespondents. 52627. |
| Court | Missouri Court of Appeals |
Mark Andrew Thornhill, Kansas City, for appellant.
Bruce Edward Baty, Kansas City, for respondents.
This is an appeal from the trial court's grant of summary judgment in favor of the Director of the Missouri Department of Insurance, Acting as Receiver for Commonwealth General Insurance Company (Receiver). The controversy centers on the competing claims of the Receiver and First American Insurance Company (First American) for reinsurance proceeds. The appellant, First American, filed an action for declaratory relief naming as defendants "Certain Underwriters and Underwriting Syndicates Subscribing to Policy Nos. PXC-00892 and PXC-00893," which describe the two reinsurance treaties. "Certain Underwriters at Lloyd's London and London Market Companies", the reinsurer, was faced with conflicting claims and filed an interpleader action against First American and the Receiver. Because both the declaratory judgment and interpleader actions arose out of the same reinsurance policies, they were consolidated by the circuit court. In granting summary judgment in favor of the Receiver, the trial court held that the reinsurance proceeds due from the reinsurers constituted assets of the Commonwealth General Insurance Company (Commonwealth) estate. We hold that because the cover notes created a separate contract between the reinsurers and First American, which remained solvent and legally obligated to resolve the Hickson lawsuit, the reinsurance proceeds were due to First American.
The underlying facts are not disputed. Only the law and its interpretation is at issue. Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976).
Commonwealth is a Missouri insurer in liquidation, presently under the jurisdiction of the director of the Missouri Department of Insurance. Joe E. Williams, d/b/a Williams Trucking Service is a Georgia-based trucking company which operates throughout the south, including Texas. Commonwealth wrote insurance for Williams Trucking. Commonwealth was not licensed, however, to write in Texas. First American, a Missouri insurance company, is an insurer of motor carrier liability authorized to issue policies of insurance in, among other states, Texas. Accordingly, Commonwealth entered into an agreement with First American, which was licensed to write insurance business in Texas.
Pursuant to this agreement, First American filed a certificate of insurance, referred to as a Form E filing, with the Texas Railroad Commission on May 10, 1993 stating that First American had "issued to [Williams Trucking] a policy or policies of insurance effective from 11/19/92...." 1 This "fronting agreement" is not an uncommon insurance industry practice. Commonwealth paid First American $100 for every certificate of insurance it filed. Also, Commonwealth agreed to indemnify First American for any loss resulting from its issuance of the certificate of insurance. Subsequently, in accordance with their agreement, First American was added as a named insured under each of the two reinsurance treaties.
Commonwealth reinsured much of the business it wrote. If an insurer desires to distribute a part of the risk it underwrites on its insurance policies, it may "cede" a portion of the risk to another underwriter, a reinsurer. Christiania General Ins. Corp. of New York v. Great Am. Ins. Co., 979 F.2d 268, 271 (2d Cir.1992). When the "ceding insurer" transfers a portion of the risk for a group of underlying insurance policies, it is described as "treaty reinsurance." Matter of Midland Ins. Co., 79 N.Y.2d 253, 582 N.Y.S.2d 58, 590 N.E.2d 1186 (1992). With respect to the commercial auto policy out of which the Williams' claim arose, Commonwealth had ceded a portion of the risk, through its intermediary, to the Reinsurers, the underwriting syndicates mentioned above. The two reinsurance treaties named in the trial court below are described as follows:
First Excess Cession Reinsurance Agreement No. PXC-00892. This agreement provided reinsurance of $150,000 in excess of Commonwealth's retention of $50,000 per occurrence (later amended to $125,000 in excess of $75,000 retention), with a maximum annual aggregate liability to the reinsurers of 250% (later increased to 275%) of gross ceded premium.
Second Excess Cession Reinsurance Agreement No. PXC-00893. This agreement provided reinsurance of $80,000 in excess of $200,000 per occurrence with a maximum annual aggregate liability to the reinsurers of 250% (later increased to 300%) of gross ceded premium. 2
On March 5, 1993, "cover notes" were issued by the Reinsurers. These cover notes were issued in accordance with First American's agreement with Commonwealth. Among other amendments, they named First American as an additional reinsured, effective as of July 1, 1992. Both reinsurance agreements provide that they "shall not be amended or modified without the written consent of the party against whom enforcement of the amendment or modification is sought...."
On August 17, 1993, one of Williams' trucks collided with a vehicle driven by Jimmy Hickson in Houston, Texas. Hickson and his wife filed suit in the Texas state court against Williams Trucking. Commonwealth defended Williams Trucking pursuant to its policy of insurance. On September 1, 1995, as a result of Director Angoff's petition in the Jackson County Circuit Court, the court declared Commonwealth insolvent. Commonwealth was placed in receivership, and Mr. Angoff was appointed receiver. In compliance with the trial court's order, the Receiver terminated Commonwealth's defense of Williams in the Hickson lawsuit (and every other action). The Receiver then transmitted the Commonwealth claim files to the appropriate insurance guaranty associations, existing in the various states, which assumed the defense. See, e.g., §§ 375.771, et seq. RSMo 1994. Proof of claim forms were sent to the Hicksons, Williams Trucking and, because of its agreement with Commonwealth, First American. In the present case, the Georgia Guaranty Association returned the Williams Trucking claim file to the Receiver after it learned that First American had filed certificates of insurance on behalf of Commonwealth. The Receiver, in turn, forwarded Williams Trucking's claim file to First American for handling according to its obligations under the certificate of insurance it had filed with the State of Texas. On December 12, 1995, First American negotiated a settlement of the Hickson claim, for the policy limits of one million dollars, the money in question here. 3
First American had previously notified the reinsurance underwriters that it claimed the right to all reinsurance proceeds pursuant to its reinsurance contracts. When the Receiver learned of the claim asserted by First American, it notified the reinsurers on October 30, 1995, that payment under the reinsurance agreements should be made to the Receiver only. The reinsurers filed their interpleader action on December 6, 1995. On December 20, 1995, First American filed its declaratory judgment action. The lawsuits were consolidated, and the court ruled on the cross-motions for summary judgment. The trial court held that on the date Commonwealth was declared insolvent, the reinsurance proceeds due as a result of the Williams' claim became an asset of the Commonwealth estate, which the Receiver was obligated to collect. The trial court further held that the underlying agreement upon which First American based its claim to the reinsurer's proceeds--Commonwealth's agreement to add First American to the reinsurance agreements--was ineffective against the Receiver either because it could possibly diminish or defeat the Receiver's interest in the estate's asset or because the Receiver was otherwise empowered by the Missouri insurance statutes to disaffirm that agreement.
The central issue on appeal is whether the circuit court's declaration of Commonwealth's insolvency in September of 1995, triggered the insolvency clauses in the reinsurance treaties, thereby altering the reinsurance company's obligation. The Receiver argues that at the time Commonwealth was declared insolvent, the reinsurance proceeds became assets of the Receiver's estate because what was originally a contract of indemnity was transformed into a contract of liability. This event established a fixed obligation of the reinsurer to pay the proceeds to Commonwealth's Receiver. The Receiver's argument continues that once the reinsurance proceeds became part of the Commonwealth estate, no subsequent action by First American (the settlement of the Hickson's lawsuit) could diminish or defeat the Director's right to that asset. See, § 375.1175.3, RSMo (1994).
The insolvency clause in the reinsurance agreements provides, in pertinent part:
In the event of the insolvency of the Company, reinsurance under this Agreement shall be payable by the Reinsurer (on the basis of the liability of the Company under contract or contracts reinsured without diminution because of the insolvency of the Company) to the Company or to its liquidator, receiver, or statutory successor, except as provided by the controlling state law. 4
Ordinary contracts of reinsurance operate solely between the reinsurer and the reinsured and are one of indemnity against loss. O'Hare v. Pursell, 329 S.W.2d 614, 620 (Mo.1959). Absent the insolvency language in the reinsurance policy, they are generally contracts between the reinsured and the reinsurer with no...
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