Foremost Life Ins. Co. v. Department of Ins., 1-179A12

• Decision Date: 27 September 1979
• Docket Number: No. 1-179A12,1-179A12
• Parties: FOREMOST LIFE INSURANCE COMPANY, Petitioner Creditor-Appellant, v. DEPARTMENT OF INSURANCE, State of Indiana, Liquidator of Keystone Life Insurance Company, Respondent Liquidator-Appellee.
• Court: Indiana Appellate Court

Page 418

395 N.E.2d 418

FOREMOST LIFE INSURANCE COMPANY, Petitioner Creditor-Appellant, v. DEPARTMENT OF INSURANCE, State of Indiana, Liquidator of Keystone Life Insurance Company, Respondent Liquidator-Appellee.

No. 1-179A12.

Court of Appeals of Indiana, First District.

Sept. 27, 1979.

C. Wendell Martin, Bredell, Martin, McTurnan & Meyer, Indianapolis, for petitioner creditor-appellant.

Karl J. Stipher and Charles T. Richardson, Baker & Daniels, Indianapolis, for respondent liquidator-appellee.

ROBERTSON, Judge.

Foremost Life Insurance Company (Foremost) brings this interlocutory appeal from an adverse order denying it the status of a class three creditor under Ind. Code 27-1-4-15 in the statutory liquidation of Keystone Life Insurance Company (Keystone). See IC 27-1-4-1 Et seq. ¹ Foremost contends that by virtue of a certain "Life and Disability Reinsurance Treaty" (Treaty) entered into with Keystone, Foremost acquired an insurance interest that the legislature intended to be preferred over general creditors. The priority statute in issue provides:

Claims against a company declared to be insolvent under the provisions of this chapter shall be satisfied in the following order of priority:

(1) Expenses of administration.

(2) All wages actually owing to its employees for services rendered with three (3) months prior to the commencement of such proceeding, not exceeding three hundred dollars ($300) to each employee, which shall be paid prior to the payment of any other debt or claim, and subject to the direction of the court, shall be paid as soon as possible after liquidation has been commenced.

(3) Claims by policyholders, beneficiaries, and insureds arising from and within the coverage of and not in excess of the applicable limits of insurance policies and contracts issued by the company, and liability claims against insureds which claims are within the coverage of and not in excess of the applicable limits of insurance policies and insurance contracts issued by the company and claims of the Indiana Insurance Guaranty Association established under IC 27-6-8 and any similar organization in another state.

(4) All other claims.

At the outset, we do not hesitate in the conclusion that the legislature intended to protect the typical insurance consumer by using the terms "policyholders, beneficiaries, and insureds." Prior to the enactment of the statute in issue, the ordinary consumer was not given a preference upon the insolvency of a carrier, and it was generally recognized that a preference could only be created by express legislative action. See Cummings Wholesale Electric Company, Inc. v. Home Owners Insurance Company, 492 F.2d 268 (7th Cir. 1974) Cert. denied, Delphi Community School Building Corp. v. Northeastern Insurance Company of Hartford, 419 U.S. 883, 95 S.Ct. 149, 42 L.Ed.2d 123.

In Indiana, a carrier's insolvency constitutes a material breach of outstanding policies and contracts of insurance thereby entitling the ordinary consumer to a return of unearned premiums. Bushnell, Receiver etc. v. Krafft et al., (1962) 133 Ind.App. 474, 183 N.E.2d 340. ² Such claimants could be either an "insured" or a "policyholder" within the meaning of the priority statute. For example, if an individual carried his own life insurance, upon insolvency of the insurer, he would be entitled as an "insured" or a "policyholder" to a return of unearned premiums. If the policy was funded by an employer, the employee would be insured but the employer would be the policyholder entitled to a return of unearned premiums. Of course if the insured died prior to insolvency, the beneficiary would have a preferred status in recovering the proceeds due under the original policy or contract of insurance.

Similarly, we are impressed by the protection accorded third parties who, like named beneficiaries, would be entitled to proceeds under original policies or contracts of liability insurance. Again, this protection buttresses the proposition that the ordinary consumer, whether entitled to proceeds or unearned premiums, was clearly within the legislature's intent.

With the foregoing in mind, we are faced, superficially, with the issue of whether Foremost was intended to be included in the class of ordinary consumers. The more fundamental issue, to which we now turn, is the nature of the Treaty between Foremost and Keystone.

In the court below, the parties stipulated ³ to the following relevant facts. Foremost is a Michigan stock insurance company that holds certificates of authority to write insurance in every state with the exception of New York and Hawaii. As part of its business, Foremost sells credit life and disability insurance. Keystone is a domestic stock insurance company that has no authority to conduct insurance business beyond Indiana borders. From approximately June of 1973 to April, 1978, Keystone sold group credit life and disability insurance directly to Indiana consumers. These "direct" policyholders of Keystone are not parties to this appeal.

In September of 1972, Central State Agency, Inc. (CSA), a Michigan corporation doing business as a general insurance agent, ⁴ entered into an Agent's Agreement with Foremost whereby CSA agreed to sell Foremost insurance products in states other than Indiana. CSA specialized in credit life and disability insurance.

On July 1, 1973, Foremost entered into the Treaty with Keystone, the gist of which is revealed by the following stipulations:

8. Under Article I of the Treaty, Foremost "ceded" (transferred) to Keystone credit insurance business originally generated by CSA for Foremost outside Indiana under the Agent's Agreement between CSA and Foremost. Keystone "accepted" as reinsurance Foremost's liability under such credit insurance. In other words, Keystone undertook financial and administrative obligations which Foremost had under its outstanding credit insurance certificates to the policyholders (consumers-debtors) of Foremost outside Indiana. Initially, Foremost collected the premiums paid by the policyholders (less CSA's agent's commission), kept for itself as a fee 2% Of the net written premiums, and paid the remainder to Keystone. With that money, Keystone was to set up reserves, pay claims and litigation costs, and take care of administrative expenses. Later, CSA collected the premiums for Foremost, deducted CSA's agent's commission, paid Foremost the 2% Fee, and paid the remainder to Keystone.

9. Foremost's policyholders were not formally informed of the Treaty or of Keystone's obligations to Foremost under the Treaty. Foremost remained legally liable to its policyholders under the credit insurance in the event Keystone failed to perform its obligations to Foremost under the Treaty. There is no privity of contract between Keystone and the Foremost policyholders.

Moreover, by the terms of the Treaty the liability of Keystone was to be identical with Foremost's liability on the original policies. Indeed, as characterized in Foremost's brief, "Keystone was to step into the shoes of Foremost, administer the policies, and pay the claims due under them." App.Br. 24. It also appears that CSA and Keystone were controlled by the same individual(s). ⁵ The above scenario was principally designed, therefore, to enable Keystone to conduct insurance business in states other than Indiana. ⁶

On April 24, 1978, the Department of Insurance of the State of Indiana (Department) filed an application for the rehabilitation of Keystone and, on the following day, the Department was awarded a court order to take over the assets of Keystone. When Keystone became unable to perform under the Treaty, Foremost began administering the policies and paying claims with their own funds. On October 31, 1978, an order of liquidation was entered. Thereafter, the court below determined that Foremost's damages due to Keystone's breach of the Treaty amounted to.$2.5 million. These damages include claims and refunds already discharged by Foremost, actuarial claims that Foremost will presumably discharge in the future, administration expenses, premium taxes, and other miscellaneous items.

Reinsurance is a malleable concept that has proved troublesome for the courts since various distinct undertakings may come within the general meaning of the term. ⁷ For this reason, it is of paramount importance that a reinsurance agreement be stripped of the term "reinsurance" so that the true nature of the arrangement can be discerned. See 19 Couch on Insurance 2d § 80:46 (1968).

The peculiar attribute of the Treaty involved herein is that Keystone stepped into the shoes of Foremost by agreeing to indemnify Foremost 100 percent against liability and to assume all administrative responsibilities on the Foremost policies sold by CSA. It is widely recognized that where a reinsurer (Keystone) assumes responsibilities directly to the original consumers of the reinsured, such consumers may proceed directly against the reinsurer as third party beneficiaries. See 13A Appleman Insurance Law and Practice S 7694 (1976); O'Hare v. Pursell, 329 S.W.2d 614 (Mo.1959); Federal Life Insurance Company v. Barnett, Admx., (1919) 71 Ind.App. 613, 125 N.E. 522. Of course, Foremost remained liable as a joint obligor since it could not be relieved of its contractual duties to its insureds absent a novation. See Appleman, supra § 7755; Couch, supra § 80:61. Otherwise stated, from the point of view of the Foremost insureds, Keystone and Foremost were jointly liable. See Vance, Handbook on the Law of Insurance S 207, pp. 1071-2 (1951).

As between Keystone and Foremost, however, a quasi-suretyship arrangement was created whereby Keystone was ultimately liable to discharge the claims of policyholders and Foremost acquired the status of a Surety. This result obtains by analogy to those cases wherein a grantee assumes the mortgage indebtedness of the grantor/mortgagor to the mortgagee. Without the assent of the mortgagee, the assuming...