Great Atlantic Life Ins. Co. v. Harris
| Decision Date | 14 January 1987 |
| Docket Number | No. 14519,14519 |
| Citation | 723 S.W.2d 329 |
| Parties | GREAT ATLANTIC LIFE INSURANCE COMPANY, Appellant, v. Anthony G. HARRIS, Receiver for United Bankers Life Insurance Company, et al., Appellees. |
| Court | Texas Court of Appeals |
Mary Joe Carroll, David C. Duggins, Clark, Thomas, Winters & Newton, Austin, for appellant.
James T. Odiorne, Successor Receiver to Anthony G. Harris, Austin, Receiver for United Bankers Life Ins. Co.
Mauro L. Reyna, III, Austin, for Receiver.
Stuart M. Reynolds, Jr., Mark David, Moore & Peterson, Dallas, for Southern Nat. Life Ins. Co.
Before SHANNON, C.J., and GAMMAGE and CARROLL, JJ.
ON MOTION FOR REHEARING
The prior opinion and judgment of this Court, dated November 5, 1986, are withdrawn, and the following is substituted therefor.
Great Atlantic Life Insurance Company (GAL) appeals from a take-nothing judgment rendered by the district court. We will reverse the judgment of the district court and render judgment in favor of appellant.
This case arises from the sale on January 22, 1981 of GAL to Roger Dean Enterprises, Inc. (Dean), owner of various automobile dealerships. Prior to the sale, GAL was owned 95.1% by Southern Educators Life Insurance Company and 4.9% by Southern National Life Insurance Company (SNL), an appellee. The principal spokesman in negotiating the sale for the sellers was Tom Kalim, executive vice president of SNL and an officer of GAL at that time. The principal spokesman for Dean was Warren White, certified public accountant and financial advisor to Dean.
Dean's automobile dealerships, in connection with automobile financing, had been selling credit life and disability insurance for many years through insurance companies not owned by Dean. Dean wished to purchase a small insurance company (GAL) in order to capitalize on this "captive business." As part of the negotiations for the sale of GAL to Dean, representatives of SNL told Dean that a reinsurance agreement was necessary so that GAL would have the financial capacity to underwrite all of the anticipated business generated by Dean's automobile dealerships. "Reinsurance", in simple terms, is a means whereby a company that issues an insurance policy can allocate all or a portion of the risk it bears on that policy to another insurance company in return for a portion of the premium. It has been defined as:
the ceding by one insurance company to another of all or a portion of its risks for a stipulated portion of the premium, in which the liability of the reinsurer is solely to the reinsured, which is the ceding company, and in which contract the ceding company retains all contact with the original insured, and handles all matters prior to and subsequent to loss. The true reinsurer is merely an insurance company or underwriter which deals only with other insurance companies as its policyholders....
Appleman, Insurance Law and Practice § 7681, at 480 (1976).
On the day before the sale of GAL to Dean, two reinsurance agreements were executed. One agreement was between GAL and United Bankers Life Insurance Company (UBL). The other was between UBL and SNL. Two agreements were necessary because GAL is a Florida corporation and SNL is a Texas corporation not licensed to reinsure in Florida. UBL is licensed by both Texas and Florida and was used as an intermediary, or pass-through company, in order to accommodate the transaction. Both agreements were drafted by Kalim, who repeatedly testified at trial that they were mirror agreements intended to accomplish one objective--reinsurance of GAL policies by SNL. At trial, Kalim explained the transaction as follows:
A. They [Dean and White] were rather neophytes in the insurance business, and did not understand all the ramifications of reserves and reinsurance. And in order to assure them that it was a sound buy, we sat down and showed them that we would reinsure the business at Southern National, thereby relieving their liability and the risk....
* * *
* * * Q. Can you, in a little more detail, tell the jurors what you said in regard to [what] we would reinsure at Southern National? What you mean by that.
A. We, at Southern National, would reinsure [GAL] so that they would not have a negative cash flow. It would allow them the advantage of having an insurance company without having to post all of the reserves, give them a positive cash flow on the front side of the deal, and allow them to get a return on their investment until such time as they got their surplus built up.
Q. Did you tell them--did you tell Mr. Dean or Mr. White who would post the reserves if Great Atlantic didn't have to?
A. The reinsurer.
Q. Okay. And was that Southern National?
A. At that time it was Southern National. And in order to put that into place we needed an intermediate or if you will, in the vernacular of the trade, a pastor [pass-through], which a pastor [pass-through] is a company that has a passive action. They assume no risk. Their reserves go up and come down automatically. They are to receive a small pass-through fee for doing a passive agreement which makes the deal a legal transaction. And it's done everyday in the insurance day. The risk is maintained by the ultimate reinsurer. And, as we explained to Great Atlantic, the ultimate reinsurer was going to be Southern National. However, Southern National's size at the time was not any bigger to me than Great Atlantic's, and Southern National had a treaty with a larger company called Agripinna. And we had specimens of irrejectable letters of credit, irrevocable letters of credit backing up Southern National, which gave Great Atlantic a comfort factor. There were reserves there to pay any claim should anything ever go wrong if the losses exceeded the reserves.
* * *
* * *
A. We had to draft two agreements; one between Great Atlantic and UBL, and one between UBL and Southern National. And the reason for the drafting of that type is these two documents had to track each other so that the money flowed, would flow the same on both treaties. One track the other one.
Q. What was the purpose of having the money flow the same? Was [sic] there any funds to be left at United Bankers?
A. Yes. As I recall, there was a half a point to be left, half a point of the premium was to be left at United Bankers. And at this point I am not really sure whether or not that half a point was on cash flow or was on the net written premium. I believe it was the cash flow.
Q. What was the half a point compensation for? What was United Bankers supposed to do to earn that compensation.
A. Accommodate a transaction between Great Atlantic Life and Southern National. They were merely accommodating....
Administrative duties connected with the reinsurance were performed at the SNL office by SNL employees. UBL performed virtually no administrative functions and UBL bore no risk in the transaction. A representative of UBL signed the agreements, but it appears that no representative of UBL was present during the negotiations between Dean and GAL/SNL. 1
All three companies operated pursuant to the agreement from approximately January 1981 to October 1981 when UBL was placed in receivership by the State of Texas. GAL then terminated its reinsurance agreement with UBL/SNL. UBL and SNL, however, were still bound to honor the reinsurance agreement with regard to policies in force before the agreement was terminated. This is known in the insurance industry as "run-off business." As GAL paid claims on reinsured policies or refunded premiums on cancelled policies, GAL requested reimbursement from UBL/SNL pursuant to the reinsurance agreement. Most of these claims, however, were not paid.
Consequently, GAL brought suit against both UBL and SNL. UBL's receiver filed a general denial and cross-claim against SNL for the value of the "run-off" business. SNL originally brought a counterclaim and cross-claim in interpleader, but obtained a nonsuit on the interpleader before trial. SNL's amended answer denied liability on various grounds. The district court entered judgment, based on the jury's responses to special issues, that GAL take nothing and that the receiver for UBL receive from SNL the sum of $265,639.94, the amount of the run-off obligation.
GAL asserts in its first point of error that the trial court erred in refusing to hold as a matter of law that the two reinsurance contracts, when read together, were intended to pass through all reinsured liability and risk from GAL to SNL, with UBL acting only as a "front," and that the run-off obligation was owed to GAL and not to the receiver of UBL. We agree.
Reinsurance agreements are subject to the general law of contracts. Cunningham v. Republic Insurance Company, 127 Tex. 499, 94 S.W.2d 140, 142 (Tex.Comm.App.1936, jdgmt. adopted); Stradley v. Southwestern Life Insurance Company, 341 S.W.2d 195, 198 (Tex.Civ.App.1960, writ ref'd n.r.e.); Prudential Insurance Company v. Associated Employers Lloyds, 250 S.W.2d 477, 480 (Tex.Civ.App.1952, no writ).
Appellees argue that there is no contract between SNL and GAL, that SNL's only contractual obligation is to UBL, and that obligation has been fulfilled. Appellees further argue that GAL is bound by the jury finding that GAL was not the intended beneficiary of the UBL-SNL contract. In support of their position, appellees cite McFarling v. Mayfield, 510 S.W.2d 108 (Tex.Civ.App.1974, writ ref'd n.r.e.). In McFarling, the court held that the holder of an insurance policy issued by an insolvent insurer was not entitled to direct payment of the proceeds by the reinsurer where the reinsurance agreement contained no specific language establishing direct liability of the reinsurer to the original insured. In other words, in the absence of express contractual language to the contrary, the original insured (policy holder) is not an intended third-party beneficiary to a contract between the original insurer and its reinsurer.
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