Massachusetts Motor Vehicle Reinsurance Facility v. Commissioner of Ins.

• Decision Date: 16 January 1980
• Citation: 379 Mass. 527,400 N.E.2d 221
• Parties: MASSACHUSETTS MOTOR VEHICLE REINSURANCE FACILITY et al. 1 v. COMMISSIONER OF INSURANCE et al. 2
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 221

400 N.E.2d 221

379 Mass. 527

MASSACHUSETTS MOTOR VEHICLE REINSURANCE FACILITY et al.¹ v. COMMISSIONER OF INSURANCE et al. ²

Supreme Judicial Court of Massachusetts, Suffolk.

Argued Sept. 14, 1979.

Decided Jan. 16, 1980.

Acheson H. Callaghan, Jr., Boston (Scott P. Lewis, Boston, with him), for plaintiffs.

Edward T. Dangel, III, and Michael K. Mattchen, Boston, for receiver.

Joseph C. Tanski, Boston, for Massachusetts Insurers Insolvency Fund.

Before HENNESSEY, C. J., and QUIRICO, BRAUCHER and LIACOS, JJ.

QUIRICO, Justice.

This case requires a determination of the respective rights of a State insurers' insolvency fund and the receiver of an insolvent insurance company to proceeds from a statutory reinsurance plan which are owed to the insolvent insurer by the plaintiff, Massachusetts Motor Vehicle Reinsurance Facility (Facility). The plaintiffs seek a judgment under G.L. c. 231A, declaring whether the proceeds which the Facility would pay to the Rockland Mutual Insurance Company (Rockland) if it were not insolvent should now be paid by the Facility to the Commissioner of Insurance (Receiver) as Receiver of Rockland, or to the Massachusetts Insurers Insolvency Fund (Fund). We must also decide whether the Facility, before paying anyone, is entitled to set off against the amount it owes, certain moneys due it from Rockland. The parties submitted the case upon a statement of agreed facts. The single justice reserved and reported the case without decision, for determination by the full court upon the pleadings and statement of agreed facts.

We summarize the agreed facts to the extent necessary for an understanding of the issues to be decided.

The Facility

The Legislature created the Facility in 1973 by an amendment to G.L. c. 175, § 113H (St.1973, c. 551, § 5), to provide a State structure for individual insurers to share the burden of providing automobile insurance to high-risk drivers. ³ On November 6, 1973, the Commissioner of Insurance approved a Facility Plan of Operation, pursuant to the statute. The Facility established its accounting and statistical procedures on December 7, 1973.

Under the Facility plan motor vehicle insurers were authorized to "cede" to the Facility their high-risk policies. The Facility maintains two separate accounts for each insurer on a cumulative quarterly basis, a "writing member" account and a "participating member" account. To each writing member account the Facility debits all premiums the insurer receives on those policies it has ceded to the Facility, and credits expenses and losses incurred on those same policies. These included, in the case of Rockland, such items as commission expense allowances, ceding expense allowances, claims expense allowances, and allowances for losses paid. To the insurer's participating member account the Facility debits the insurer's proportionate share of all expenses incurred and losses paid on all policies ceded by all members, determined by its "participation ratio," i. e., its proportionate share of the motor vehicle insurance market, in the Commonwealth for the year. It credits to that account the member's pro rata share of the premiums received on all policies ceded by all members. The Facility then determines periodically a cumulative net balance for each member, by combining the totals of the two accounts. For a given policy year, a company that incurs more losses on ceded policies than would be expected by reason of its participation ratio will have a net balance due to it from the Facility. A company with a better than expected record will have a net balance due to the Facility for that year. Thus, the basic effect is to shield each participating insurer from disproportionate liability on its high-risk policies. The statute authorizing the Facility makes no provision for insolvency of member insurers, nor does the Facility's Plan of Operation. ⁴ Rockland is the first member to become insolvent since the creation of the Facility.

The Fund

The Legislature created the Massachusetts Insurers Insolvency Fund in 1970. G.L. c. 175D. (St.1970, c. 261, § 1). The Commissioner of Insurance, pursuant to section 6 of that chapter, approved a Fund Plan of Operation on August 24, 1972. Membership in the Fund is mandatory for all insurers in the Commonwealth who write certain kinds of policies, including, but not limited to, motor vehicle insurance policies. ⁵

The Fund is a "nonprofit unincorporated legal entity" whose function is to pay certain "covered" claims ⁶ on policies written by an insolvent insurance company. G.L. c. 175D, §§ 3, 5. The Fund periodically assesses member insurers the amounts necessary to pay claims, plus expenses. Id. § 5(1) (c ). Payment is determined according to an insurer's over-all share of the insurance market. Id. The statute authorizes insurers to include in computing their rates the amounts paid in past years to the Fund. Id. § 13. When the Fund utilizes this mechanism, its cost of paying claims against insolvent insurers is thus ultimately passed on to the insurance-buying public. The Fund has paid $1,178,528 in losses arising out of the high-risk policies which Rockland ceded to the Facility, and has incurred certain handling expenses related to those policies. ⁷

The statute creating the Fund, G.L. c. 175D, predates the Facility statute, and has not been amended to provide for the payment of reinsurance proceeds from the Facility in the event of insolvency of a member insurer. ⁸

Rockland

Rockland became a member of the Facility upon the latter's inception, as the statute required, and as of January 1, 1974, it ceded to the Facility 11,500 high-risk policies. On July 10, 1974, a single justice of this court adjudged Rockland insolvent pursuant to G.L. c. 175, § 6, and appointed the Commissioner of Insurance permanent receiver. As of that date the Facility computed Rockland's writing member and participating member accounts for the period just before the insolvency decree, and during the post-insolvency period continued to compute Rockland's accounts, with certain adjustments to reflect the transfer of Rockland's policies to other insurers. In September, 1975, the Fund and the Receiver each demanded payment from the Facility of all amounts it owed to Rockland. The Facility made no payments and instead commenced this suit.

Both the Facility and the Fund urge us to hold that the Fund should receive the moneys in question. The Facility, however, maintains that it should have the right first to set off certain moneys owed by Rockland to the Facility in determining the amount due, a point which the Fund disputes. The Receiver argues that we should treat the moneys due to Rockland from the Facility as an asset of Rockland, that the amount should be paid to him and thereupon become available for distribution to all creditors, including the Fund, and that the Facility should not be allowed any set-off.

The Rockland insolvency is governed by G.L. c. 175, § 6, which authorizes the Receiver to "take possession of all the property and effects of the company, to settle its affairs, and to distribute its assets, subject to such rules and orders as the (Supreme Judicial Court) may prescribe." If, as the Receiver maintains, the Facility proceeds due to Rockland are an asset of the receivership, the Fund would share as a general creditor in the distribution of those proceeds and Rockland's other assets. G.L. c. 175D, § 8(2). Commissioner of Ins. v. Massachusetts Accident Co., 314 Mass. 558, 576-577, 50 N.E.2d 801 (1943). ⁹

The Fund and the Facility, in support of their claim that the Fund is directly entitled to the reinsurance proceeds of the Facility, rely on § 5(1)(b ) of the Fund statute (G.L. c. 175D). That section provides that "(t)he Fund shall . . . be deemed the insurer to the extent of its obligation on the covered claims and shall have all rights, duties and obligations of the insolvent insurer to such extent." To refute this claim, the Receiver points out that c. 175D was modelled upon the National Association of Insurance Commissioners (N.A.I.C.) Post-Assessment Property and Liability Insurance Guaranty Model Act. See 2 Official N.A.I.C. Model Insurance Laws, Regulations and Guidelines §§ 540-1 to 540-11 (1977). This act was also the model for insolvency funds (or "guaranty associations") in many other States. Id. at §§ 540-12 to 540-14. See, e. g., Neb.Rev.Stat. §§ 44-2401 [379 Mass. 533] to 44-2418 (1978); N.J.Stat.Ann. §§ 17:30A-1 to 17:30A-19 (Supp.1979). The N.A.I.C. model act contains neither specific language granting a fund priority creditor status, nor language granting a fund a direct right to reinsurance proceeds. The Receiver maintains that State legislatures which intend either result have added language to their fund statutes, and have kept their equivalents of § 5(1)(b ) as well. He cites as an example California, which has granted its Insurance Guaranty Association a direct right to "the benefit of any amounts recoverable on reinsurance contracts or treaties entered into by the insolvent insurer which cover any of the liabilities incurred by the insolvent insurer (with respect to covered claims actually paid by the Association)." Cal.Ins.Code § 1063.2(d) (West 1972). (In fact, California does not have a provision equivalent to G.L. c. 175D, § 5(1)(b). See Cal.Ins.Code §§ 1063-1063.13 (West 1972). Furthermore, California did not follow the N.A.I.C. model act. See 2 Official N.A.I.C. Model Insurance Laws, Regulations and Guidelines, § 540-12 (1977)). In addition, he cites cases which interpret other States' provisions analogous to G.L. c. 175D, § 5(1)(b ), as not granting a direct right of access to reinsurance proceeds. Skandia America Reinsurance Corp. v. Barnes, 458 F.Supp. 13 (D.Colo.1978). Skandia America Reinsurance Corp. v. Schenck, 441 F.Supp. 715 (S.D.N.Y.1977). General Reinsurance Corp. v. Missouri Gen. Ins. Co., 458 F.Supp. 1 (W.D.Mo.1977), aff'd 596 F.2d 330 (...