Melco System v. Receivers of Trans-America Ins. Co.

• Decision Date: 20 March 1958
• Docket Number: 3 Div. 790,TRANS-AMERICA,3 Div. 791,3 Div. 789
• Citation: 105 So.2d 43,268 Ala. 152
• Parties: MELCO SYSTEM et al. v. RECEIVERS OFINS. CO. Granville TURNER v. RECEIVERS OFINS. CO. EMPLOYERS REINSURANCE CORP. v. RECEIVERS OFINS. CO. ,,
• Court: Alabama Supreme Court

Page 43

105 So.2d 43

268 Ala. 152

MELCO SYSTEM et al. v. RECEIVERS OF TRANS-AMERICA INS. CO.

Granville TURNER v. RECEIVERS OF TRANS-AMERICA INS. CO.

EMPLOYERS REINSURANCE CORP. v. RECEIVERS OF TRANS-AMERICA INS. CO.

3 Div. 790, 3 Div. 791, 3 Div. 789.

Supreme Court of Alabama.

March 20, 1958.

Rehearing Denied June 12, 1958.

Further Rehearing Denied Sept. 25, 1958.

Pritchard, McCall & Jones and Victor H. Smith, Birmingham, for Melco System and Seven-Up Bottling Co.

Frank Tipler, Jr., Andalusia, and Godbold, Hobbs & Copeland, Montgomery, for Granville Turner.

John R. Matthews, Jr., and Fred S. Ball, Jr., Montgomery, for Employers Reinsurance Corp.

Rushton, Stakely & Johnston and Jas. Garrett, Montgomery, for appellee receivers.

MERRILL, Justice.

The receivers of Trans-America Ins. Co., Inc., and insolvent domestic casualty insurance company, filed a petition in the Circuit Court of Montgomery County, In Equity, showing that Trans-America was the defendant in many law suits, and that Trans-America had a reinsurance treaty with Employers Reinsurance Corp. of Kansas City, Missouri, whereby Employers agreed to assume all liability for judgments against Trans-America in excess of $10,000. The petition further showed that Employers, while denying liability, had agreed to compromise the claims of Trans-America by paying $130,000 to the receivers, provided that this amount settled all claims against Employers by Trans-America, its receivers or any other persons, arising out of the reinsurance contract. The petition further alleged that the receivers felt it was to the best interest of the receivership and all the creditors that the offer be accepted, and asked the court to construe the reinsurance contract and ascertain if the settlement could be accepted by the receivers. The petition requested the court to select one or more creditors of Trans-America from the thousands located over the United States, and to permit the one selected to represent all the creditors of their particular class. Several creditors were named and notified but the only ones contesting are appellant, Melco System, to whom Trans-America had issued an automobile liability insurance policy under which appellant, Seven-Up Bottling Co. was also covered, and Granville Turner.

The lower court approved the compromise. The three appeals here considered were consolidated in one record.

3 Div. 790

Melco System and Seven-Up Bottling Company of Birmingham, Incorporated, a Corporation, et al.

v.

Receivers of Trans-America Insurance Company, a Corporation

The Melco System is in the automobile leasing business and leased a vehicle to Seven-Up Bottling Co. This vehicle was involved in a collision whereby one Mrs. Mooreland was injured, and she sued for $150,000. Her case was pending when the decree in the instant case was rendered. Trans-America had insured Melco and its lessee, Seven-Up, for $100,000 and reinsured with Employers for all liability over $10,000.

Melco, by special appearance, objected to the acceptance of the $130,000 offer. Melco contended that it had a right to proceed against Employers and that the receivers had no right to compromise its claim against Employers. After a hearing and testimony, the court held that it was to the best interest of the receivership to accept the compromise offer of $130,000; that this amount would be settlement in full of all claims, including that of Melco, and that the sum, when received by the receivers, should be general funds of the receivership. Melco argues that the evidence is insufficient to support a finding that the compromise should be accepted; that the insolvency agreement keeps the reinsurance agreement from being an 'ordinary' one, and that Melco is a third party beneficiary to the contract.

It seems to be agreed by all concerned that the reinsurance treaty alone would not permit any of the appellants to recover, because Employers did not become liable until Trans-America had paid a loss in full. It also seems to be agreed that the reinsurance treaty and the insolvency agreement must be construed together because they were executed on the same day and refer to the same matters. The insolvency agreement reads, in part, as follows:

'In consideration of the continuing and reciprocal benefits to accrue to the assuming insurer, the assuming insurer hereby agrees that, as to all reinsurance made, ceded, renewed or otherwise becoming effective after the effective date, the reinsurance shall be payable by the assuming insurer on the basis of the liability of the ceding insurer under the contract or contracts reinsured, without diminution because of the involvency of the ceding insurer, directly to the ceding insurer or its liquidator, receiver or other statutory successor, * * *'

The trial court followed cases which hold that ordinarily a contract of reinsurance is one of indemnity to the reinsured, and that a reinsurer is under no contract obligation to the original insured and does not become liable to him.

Melco agrees that there is no liability on Employers if the recovery be less than $10,000. In that event, Melco would be in the same position as some twenty-five hundred other creditors, but Melco insists that as far as the excess of $10,000, it should have a preferred position and not be left with its claim as a general creditor. Melco also urges that the court erred in holding immaterial the following rider about reinsurance on the policy 'It is understood and agreed that Trans-America Ins. Co. has reinsured the excess of $10,000 bodily injury or property damage liability, or any combination of the two, under this policy with Employers Reinsurance Co. of Kansas City, Missouri. Any change in the reinsurance contract affecting this policy will be reported to Melco System, Inc. immediately.'

Melco does not claim that this endorsement created any privity between Melco and Employers but, since Trans-America issued the policy with that endorsement and collected the premiums for Trans-America or its estate, it is not entitled to be enriched at the expense of Melco. The appellees insist that the evidence justifies the finding of the trial court and that there can be no privity between Melco and Employers.

The basic questions presented are:

(1) Is Trans-America, or third parties under insurance policies issued by it, entitled to the proceeds of the reinsurance contract;

(2) If Trans-America is entitled to the proceeds, are they general assets;

(3) If Trans-America is entitled to the proceeds of the reinsurance contract, is it to its best interest that the compromise offer be accepted?

Melco insists that it is a third party beneficiary to the contract between Trans-America and Employers because the contract was made for the benefit of the policy holders of Trans-America.

It is uniformly the rule in Alabama and most other jurisdictions that under an ordinary reinsurance contract, there is no privity between the reinsurer and the insured authorizing a recovery against the reinsurer by the insured. United States Fire Ins. Co. v. Smith, 231 Ala. 169, 164 So. 70, 103 A.L.R. 1468; Moseley v. Liverpool & London & Globe Ins. Co., 104 Miss. 326, 61 So. 428; Empire State Ins. Co. v. Collins, 54 Ga. 376; Stickel v. Excess Insurance Co. of America, 136 Ohio St. 49, 23 N.E.2d 839; Insurance Co. of Pennsylvania v. Park & Pollard Co., 190 App.Div. 388, 180 N.Y.S. 143; Id., 229 N.Y. 631, 129 N.E. 936; 13 Appleman Insurance Law and Practice Sections 7681, 7694; Richards on Insurance, Sec. 36, p. 124; 103 A.L.R. 1486 a.; 46 C.J.S. Insurance §§ 1220 b, 1232 a. A different rule obtains where the contract of reinsurance goes further than the 'ordinary' contract as did the contract in United States Fire Ins. Co. v. Smith, supra. Thus we, as was the court in that case, are faced with the question of whether this policy was an 'ordinary' one. Stripping the insolvency agreement to the barest essential words, it says that in case of insolvency of Trans-America, '* * * the assuming insurer (Employers) hereby agrees that * * * the reinsurance shall be payable by the assuming insurer (Employers ) on the basis of the liability of the ceding insurer (Trans-America) under the contract * * * reinsured, * * * directly to the ceding insurer (Trans-America) or its liquidator, receiver or other statutory sucessor.'

We cannot extend or enlarge a contract by implication to embrace an object different from that originally contemplated by the parties. 'Courts cannot tamper with and change the terms of contracts, nor can they substitute as beneficiaries thereunder unnamed and unintended strangers who have nothing whatever to do with either the contracts or the contractors. To exercise such powers would be to usurp despotic authority.' Goodman v. Georgia Life Ins. Co., 189 Ala. 130, 66 So. 649, 650. It is clear the Employers would not pay Trans-America until Trans-America had paid a claim exceeding $10,000 and then, Employers would reimburse Trans-America for the excess. But if Trans-America became insolvent, then Employers would pay the excess directly to Trans-America or its receiver. There is no mention, hint or suggestion that Employers has agreed to do more than indemnify Trans-America, or its receiver, or that this contract is made for anyone's benefit other than Trans-America. We are constrained to hold that this was an 'ordinary' reinsurance contract.

The fact that Melco may have relied on the reinsurance rider would not entitle Melco or a judgment creditor of Melco to maintain an action directly against the reinsurer. This point, and the third party beneficiary contention, are covered in Greenman v. General Reinsurance Corp., 237 App.Div. 648, 262 N.Y.S. 569, 570, affirmed 262 N.Y. 701, 188 N.E. 128, where the court said:

'The plaintiff contends that, although he is not a party to the reinsurance contract, he is beneficially interested therein, and is entitled to recover that portion of the loss reinsured....