Skandia America Reinsurance Corp. v. Schenck, 74 Civ. 5470

Decision Date21 November 1977
Docket Number75 Civ. 120.,No. 74 Civ. 5470,74 Civ. 5470
Citation441 F. Supp. 715
PartiesSKANDIA AMERICA REINSURANCE CORPORATION, Peter Frank Tiarks, as Lead Underwriter, and Francis Everett Brander, as Lead Underwriter, Plaintiffs, v. Benjamin R. SCHENCK, as Superintendent of Insurance of the State of New York, and as Liquidator of Professional Insurance Company of New York, and the New Jersey Property-Liability Insurance Guaranty Association, Defendants. GENERAL REINSURANCE CORPORATION, Plaintiff, v. Benjamin R. SCHENCK, as Superintendent of Insurance of the State of New York, and as Liquidator of Professional Insurance Company of New York, and the New Jersey Property-Liability Insurance Guaranty Association, Defendants.
CourtU.S. District Court — Southern District of New York

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Kroll, Edelman, Elser & Wilson, New York City, for Skandia America Reinsurance Corp., Peter Frank Tiarks and Francis Everett Brander; Sol Kroll and Roy E. Pomerantz, New York City, of counsel.

Davis Polk & Wardwell, New York City, for General Reinsurance Corp.; Alfred E. Schretter, New York City, of counsel.

McGuire & Lawler, New York City, for The New Jersey Property-Liability Ins. Guaranty Ass'n; Andrew M. Lawler, New York City, of counsel.

Stryker, Tams & Dill, Newark, N. J., for The New Jersey Property-Liability Ins. Guaranty Ass'n; Elizabeth A. Westcott, Newark, N. J., Walter F. Waldau, Summit, N. J., of counsel.

Carb, Luria, Glassner, Cook & Kufeld, New York City, for Benjamin R. Schenck; Lewis Bart Stone, Jeffrey G. Gurren, New York City, of counsel.

Charles W. Havens, III, Washington, D. C., for Reinsurance Ass'n of America amicus curiae.

GAGLIARDI, District Judge.

This consolidation of two federal statutory interpleader actions raises a novel issue of insurance law. The plaintiff-stakeholders are reinsurance companies and underwriters who entered into reinsurance treaties several years ago with a presently insolvent casualty insurer. These treaties obligate plaintiffs, Skandia America Reinsurance Corporation ("Skandia"), General Reinsurance Corporation ("General Reinsurance"), and Peter Frank Tiarks and Francis Everett Brander, Lead Underwriters for Lloyd's of London ("Lloyd's"), to indemnify the insurer for liability on the policies it issued in excess of specified amounts of retained risk. Each treaty contains an "insolvency clause," which provides that in the event of the insurer's insolvency, the reinsurance proceeds which come due are payable to its "liquidator, receiver or statutory successor." Defendant Benjamin R. Schenck, Superintendent of Insurance of the State of New York ("Superintendent"),1 and the New Jersey Property-Liability Insurance Guaranty Association ("Guaranty"), each claiming to be the insolvent's statutory successor and, as such, entitled to the proceeds, have cross-moved for summary judgment pursuant to Rule 56, Fed.R.Civ.P.2 For the reasons which follow, the Superintendent's motion is granted and Guaranty's motion is denied. In addition, plaintiffs have moved to recover their attorneys' fees and disbursements.

Statement of Facts

The material facts, by virtue of a stipulation thereto on behalf of all the parties, are not in dispute. Prior to its insolvency, the Professional Insurance Company of New York ("Professional") was a casualty insurance company domiciled in New York and licensed to do business in numerous states, including New Jersey. Professional insured medical malpractice risks and, to limit its exposure on the policies it issued, entered into reinsurance treaties with the plaintiffs. These treaties, which took the form of "excess of loss" agreements, required plaintiffs to indemnify Professional for the excess of specified amounts of retained risk. Each of these treaties provided, moreover, that in the event of Professional's insolvency, the reinsurance afforded would be payable without diminution because of insolvency either directly to Professional or to its "liquidator, receiver or statutory successor." (Stipulation of Facts, Exhib. A, art. X; id., Exhib. B, art. III; id., Exhib. C, art. XI).

In 1973, Professional suffered irreversible financial difficulties. Defendant Superintendent declared Professional insolvent, and on October 17, the New York State Supreme Court, pursuant to N.Y. Ins. Law § 512 (McKinney 1966),3 ordered the Superintendent to take possession of Professional's property for the purpose of rehabilitation. The Superintendent was unable to effect a rehabilitation of the company, and on April 12, 1974, the Supreme Court ordered him to liquidate Professional pursuant to N.Y. Ins. Law § 514 (McKinney 1966).4 In accordance with that section, the Superintendent began to marshall Professional's assets and to receive claims for consideration and allowance in order that Professional's assets could be ratably distributed to its creditors. The Superintendent, therefore, demanded from plaintiffs the reinsurance proceeds that were due Professional on its matured risks.

Effective April 11, 1974, the New Jersey legislature created defendant Guaranty, pursuant to the New Jersey Property-Liability Guaranty Act ("New Jersey Guaranty Act"), codified as N.J.Stat.Ann. §§ 17:30A-1 to -19 (West Cum.Supp. 1977-78) (amended 1974).5 Guaranty is a private non-profit association of insurers writing property and liability insurance policies in New Jersey. Its purpose is to protect New Jersey insureds against insurer insolvencies by making good on unpaid claims against insolvent insurers doing business in New Jersey. See id. §§ 17:30A-2(a), -5(d), -5(e). Guaranty is authorized to raise the funds to pay these claims by making assessments against its member insurers in proportion to the amount of "net direct written premiums"6 each generates in a particular calendar year. Id. § 17:30A-8(a)(3). The member insurers are, in turn, empowered to increase the rates and premiums they charge by amounts sufficient to recoup the amounts they pay to Guaranty. Id. § 17:30A-16. After completing its organization process, Guaranty undertook its statutory duty of paying covered claims on Professional's New Jersey risks. Some of these New Jersey risks Guaranty paid have been sufficiently large to trigger plaintiffs' obligations under their reinsurance treaties with Professional.7 It may be expected, moreover, that other New Jersey risks reinsured by plaintiffs will soon mature.

Section 8(a)(2) of the New Jersey Guaranty Act provides that Guaranty "be deemed the insolvent insurer to the extent of its obligation on the covered claims and to such extent has all rights, duties, and obligations of the insolvent insurer as if the insurer had not become insolvent." Id. § 17:30A-8(a)(2). Relying upon this section to claim that it is Professional's statutory successor under the reinsurance treaties or, alternatively, that it is equitably subrogated to Professional's claims against the plaintiffs because it has paid its matured New Jersey risks, Guaranty has demanded from plaintiffs all of the reinsurance proceeds arising out of the matured New Jersey risks. In addition, to preserve its right to a distribution of Professional's assets in the New York liquidation proceedings, Guaranty filed a proof of claim with the Superintendent pursuant to N.Y. Ins. Law § 544 for the amount it had paid on account of Professional's policy obligations.

Plaintiffs admit their liability to pay proceeds under the reinsurance treaties, both as to risks that have matured and as to others that will do so. Because Professional was dissolved by the New York Supreme Court's order of liquidation, plaintiffs' obligation to pay the reinsurance proceeds runs to Professional's "liquidator, receiver or statutory successor." Faced with the conflicting claims of the Superintendent and Guaranty, which had escalated into separate state court lawsuits in New York and New Jersey, plaintiffs commenced two separate actions under the Federal Interpleader Act, 28 U.S.C. § 1335 (1970). Soon thereafter, this court issued an order restraining the Superintendent and Guaranty from instituting or prosecuting any proceeding affecting the reinsurance proceeds. Skandia America Reins. Corp. v. Schenck, No. 74-5470 (S.D.N.Y. Jan. 23, 1975). The two interpleader actions were subsequently consolidated by stipulation, and the instant cross-motions for summary judgment followed.

Jurisdiction

In its earlier decision ordering the claimants to refrain from prosecuting actions against the plaintiffs, this court determined that it could properly exercise subject matter jurisdiction over this action. All of the requirements of the federal interpleader statute appeared to be met. The amount in controversy exceeded $500, and the fact that the Superintendent's and Guaranty's claims did not have a common origin or were, in part, only potential claims did not defeat jurisdiction. See 28 U.S.C. § 1335 (1970). Moreover, this court held that because the rival claimants were citizens of New York and New Jersey respectively, the minimum diversity among claimants required by the statute appeared to be met. Skandia America Reins. Corp. v. Schenck, No. 74-5470, at 4-5 (S.D.N.Y. Jan. 23, 1975), citing State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 87 S.Ct. 1199, 18 L.Ed.2d 270 (1967) and Merrill, Lynch, Pierce, Fenner & Smith, Inc. v. Cavicchia, 311 F.Supp. 149 (S.D.N.Y.1970). Although none of the parties has questioned this initial determination that the exercise of jurisdiction is proper, further clarification of that decision may be helpful in light of the fact that the Superintendent has been sued in his official capacity.

Federal statutory interpleader is available only if there are "two or more adverse claimants of diverse citizenship as defined in section 1332 of title 28." 28 U.S.C. § 1335(a)(1) (1970). A state is not a "citizen" for purposes of diversity jurisdiction. Consequently, a suit between a state and a citizen of another state falls without the diversity...

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