Mission Ins. Co., In re

Decision Date05 December 1995
Docket NumberNo. B083725,B083725
Citation48 Cal.Rptr.2d 209,41 Cal.App.4th 828
CourtCalifornia Court of Appeals Court of Appeals
Parties, 96 Cal. Daily Op. Serv. 104, 96 Daily Journal D.A.R. 5 In re MISSION INSURANCE COMPANY et al. in Liquidation. Charles QUACKENBUSH, as Insurance Commissioner, etc., Plaintiff and Respondent, v. IMPERIAL CASUALTY AND INDEMNITY COMPANY, Defendant and Appellant.

Kirkland & Ellis, Tefft W. Smith, David A. Coulson, Chicago, IL, Kroll & Tract, Elliott M. Kroll, Washington, DC, Bruce M. Friedman and David K. Ng, Los Angeles, for Defendant and Appellant.

Rubinstein & Perry, Karl L. Rubinstein, Special Deputy Insurance Commissioner, Dana Carli Brooks, Robert H. Nunnally, Jr., Melissa S. Kooistra and Michael J. Rothman, Los Angeles, for Plaintiff and Respondent.

MASTERSON, Associate Justice.

Defendant Imperial Casualty and Indemnity Company ("Imperial") reinsured Mission Insurance Company ("Mission") and two of its subsidiaries under various reinsurance agreements. In turn, Mission (but none of its subsidiaries) reinsured Imperial.

In 1985, the Insurance Commissioner (the "Commissioner") placed Mission and its affiliated companies into conservatorship due to insolvency. In 1987, the Commissioner instituted liquidation proceedings. The Commissioner filed suit against numerous reinsurers of the Mission companies, including Imperial, to recover amounts due under the reinsurance agreements.

Imperial and the Commissioner entered into a settlement agreement resolving all of their disputes except one: whether Imperial could set off amounts owed to it by Mission against what it owed all three Mission companies. The settlement agreement provided that this issue would be resolved, if possible, in accordance with the California Supreme Court's anticipated decision on setoff issues in a pending case, Prudential Reinsurance Co. v. Superior Court, No. S014036.

After the high court rendered its decision in Prudential Reinsurance Co. v. Superior Court (1992) 3 Cal.4th 1118, 14 Cal.Rptr.2d 749, 842 P.2d 48 (hereafter Prudential Reinsurance ), the Commissioner permitted certain setoffs but denied others. When the parties could not agree on the outstanding setoffs, the Commissioner moved to enforce the settlement agreement (Code Civ.Proc., § 664.6), arguing that Imperial was not entitled to any additional setoffs under Prudential Reinsurance. The trial court agreed and granted the motion. We conclude that the trial court properly interpreted the parties' settlement agreement and correctly applied Prudential Reinsurance. We therefore affirm.


Reinsurance results when one insurer (the "ceding insurer" or "reinsured") "cedes" (transfers) part of the risk it underwrites to another insurer (the "reinsurer"). (Ascherman v. General Reinsurance Corp. (1986) 183 Cal.App.3d 307, 311 & fn. 5, 228 Cal.Rptr. 1.) "In a reinsurance transaction, policyholders pay premiums to their original insurer [the reinsured], who, in turn, pays a reinsurer a percentage of the initial premiums as consideration for reinsuring a specified part of the original risk. If, after a loss, the original insurer must compensate its policyholders, the reinsurer in turn indemnifies the [reinsured]." (Prudential Reinsurance, supra, 3 Cal.4th at p. 1123, 14 Cal.Rptr.2d 749, 842 P.2d 48.)

Imperial is a property and casualty insurance company based in Omaha, Nebraska. During the late 1970's and early 1980's, Imperial became active in the reinsurance market.

The relationship between Imperial and Mission began in the early 1980's. Mission reinsured Imperial. Imperial in turn reinsured Mission and two of its subsidiaries, Mission National Insurance Company ("Mission National") and Holland America Insurance Company ("Holland America"). 1 Imperial reinsured the Mission companies through a series of "treaties." 2 Those treaties referred to the Mission companies collectively as "the Company." A typical treaty contained the following setoff provision: "The Reinsurer [i.e., Imperial] may offset any balance(s), whether on account of premiums, commissions, claims, losses, adjustment expense, salvage or any other amount(s) due from one party to the other under this certificate of reinsurance or under any other agreement heretofore or hereafter entered into between the Company [i.e., the Mission companies] and the Reinsurer, whether acting as assuming reinsurer or ceding company."

As noted, in October 1985, the Commissioner placed each of the Mission companies in conservatorship due to insolvency. By 1986, on a "bottom line" basis, Imperial owed the Mission companies more than they owed Imperial. In February 1987, the Commissioner placed each of the Mission companies into liquidation proceedings. The assets of each company were transferred to separate trusts for the benefit of creditors, including policyholders. During the conservatorship period and into the liquidation period, Imperial continued to pay loss obligations to the Mission companies as they became due, even though Mission was apparently no longer making any loss payments to Imperial. Throughout this period, Imperial took the position that it was entitled to offset the loss payments Mission owed it against the loss payments Imperial owed the Mission companies. In other words, Imperial treated the Mission companies as a unit, seeking to reduce the amount it owed the Mission companies (under the treaties in which Imperial was the reinsurer) by the amount Mission owed it (under treaties where Mission--not Mission National or Holland America--was the reinsurer). Imperial based this claim to a setoff on Insurance Code section 1031. 3 The Commissioner eventually rejected this position.

The Commissioner filed suit against numerous reinsurers of the Mission companies, including Imperial, to recover amounts allegedly At the time the parties executed the settlement agreement, the California Supreme Court had granted review in Prudential Reinsurance Co. v. Superior Court, supra. That case involved setoff issues between the Mission companies and another reinsurer, Prudential Reinsurance Company. The Commissioner and Imperial agreed to distribute the disputed funds in accordance with the decision anticipated in Prudential Reinsurance. In that regard, the settlement agreement distinguished between two categories of contracts. "Section I contracts," valued at $10,741,000, involved amounts due between Imperial and Mission in their capacities as reciprocal reinsurers. 4 "Section II contracts," valued at $7,134,000, involved amounts owed by Imperial to Mission National and Holland America under the treaties in which Imperial reinsured those Mission subsidiaries. 5

due under various reinsurance agreements. In November 1991, Imperial and the Commissioner entered into a "Reinsurance Commutation and Settlement Agreement" (the "settlement agreement"), which the trial court approved the following month. Among other things, the settlement agreement required Imperial to deposit $17,875,000 into a trust account. That was the amount in dispute between Imperial and the Commissioner over Imperial's claim to a setoff.

The settlement agreement set forth several scenarios to dispose of the funds at issue, dependent upon the various possible bases of decision by the Supreme Court. Under the first scenario, if the court did not allow any post-liquidation setoffs, all of the funds in the trust account would go to the Commissioner. Under a second scenario, Imperial was entitled to the section I contract funds if Prudential Reinsurance allowed company-to-company setoffs.

Under a third scenario, the parties addressed the distribution of the section II contract funds. Imperial was entitled to those funds "in the event" the Supreme Court allowed setoffs "in the context of the use of contractual language which states in effect that the ceding 'Company' as used in the contract means all of the several Mission Companies listed in said contract." 6 If the high court did not allow setoffs in that context, the section II funds were to go to the Commissioner. However, if the Supreme Court did not resolve the issue of setoffs in the context described, the parties were to meet and confer in a good faith attempt to resolve all disputes. If informal resolution failed, they were to submit the matter to the trial court.

The settlement agreement contained a comprehensive mutual general release of all claims except the setoff issue. It also included the following provision for attorneys' fees: "In the event of a breach of this Agreement or should consideration fail for any reason, both parties shall have all rights and remedies available at common law. In addition, both parties shall have the right to exercise any of the following remedies: a) the right to bring suit on the Agreement for the amount due under the Agreement plus attorneys' fees, costs, and interest.... All remedies shall be cumulative."

On November 30, 1992, the Supreme Court filed its decision in Prudential Reinsurance. The parties herein agreed that Prudential Reinsurance authorized company-to-company setoffs, as contemplated by the second scenario in the settlement agreement. Accordingly, the Commissioner released to Imperial the $10,741,000 allocated to the section I contracts, and there is no issue before us as to those contracts. However, the Commissioner interpreted Prudential Reinsurance as not allowing a setoff with respect to the section II contracts, so he refused to release The Commissioner argued that the parties had agreed to be bound by the setoff principles announced in Prudential Reinsurance and that the Supreme Court had rejected the type of setoff sought by Imperial on the section II contracts, i.e., offsetting amounts owed to Imperial by Mission (the parent company) against what Imperial owed to Mission National and Holland America (the Mission subsidiaries). The Commissioner also sought an award of attorneys' fees pursuant to the...

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