Turner Const. Co. v. Seaboard Sur. Co.

• Decision Date: 16 March 1982
• Citation: 447 N.Y.S.2d 930,85 A.D.2d 325
• Parties: TURNER CONSTRUCTION COMPANY, Plaintiff-Respondent, v. SEABOARD SURETY COMPANY, American Reinsurance Company, The Home Insurance Company, Defendants, and General Reinsurance Corporation, Excess and Casualty Reinsurance Association, North American Reinsurance Corporation, Defendants-Appellants, INA Reinsurance Company, The Reinsurance Corporation of New York and Employers Reinsurance Corporation, Defendants.
• Court: New York Supreme Court — Appellate Division

Page 930

447 N.Y.S.2d 930

85 A.D.2d 325

TURNER CONSTRUCTION COMPANY, Plaintiff-Respondent, v. SEABOARD SURETY COMPANY, American Reinsurance Company, The Home Insurance Company, Defendants and General Reinsurance Corporation, Excess and Casualty Reinsurance Association, North American Reinsurance Corporation, Defendants-Appellants INA Reinsurance Company, The Reinsurance Corporation of New York and Employers Reinsurance Corporation, Defendants.

Supreme Court, Appellate Division First Department.

March 16, 1982.

Carole A. Burns, New York City, of counsel (Philip Schlau, New York City, with her on the brief; Newman & Schlau, P. C., New York City), for defendants-appellants.

Robert T. Carlton, Jr., Philadelphia, Pa. (Howard D. Venzie, Jr., and K. Gerard Amadio, Philadelphia, Pa., with him on the brief; Sacks, Montgomery, Pastore & Levine, New York City, and Venzie, Phillips & Warshawer, Philadelphia, Pa.), for plaintiff-respondent.

Before KUPFERMAN, J. P., and SULLIVAN, FEIN and ASCH, JJ.

SULLIVAN, Justice.

The issue presented is whether the obligee of a performance bond has a direct right of action against the reinsurers of such bond for the surety's alleged wrongful refusal to honor its obligations thereunder.

On January 2, 1979 plaintiff Turner Construction Company, the prime contractor in the construction of a highrise office building in New York City, subcontracted the electrical construction at the project to Burmar Electrical Corporation. To secure Burmar's faithful performance Burmar, as principal, and Seaboard Surety Company, as surety, on February 23, 1979, executed and delivered to Turner, as obligee, a performance bond in the penal sum of $9,372,246. In accordance with certain reinsurance agreements it had entered into eight years earlier, Seaboard then ceded a portion of its risk on the performance bond to each of the defendant reinsurers.

In 1971, Seaboard had entered into substantially identical reinsurance agreements (the agreement) with each of the eight defendant reinsurers (only three of which are involved in this appeal), whereby each of the reinsurers agreed to insure a variety of risks which Seaboard would thereafter underwrite. Under the agreement, the reinsurers did not have the right to decline a particular risk; reinsurance was automatically effected and a specific percentage of the risk assigned to each reinsurer on the basis of schedules attached to the agreement.

The agreement provided for the establishment of a fund, which would be managed and controlled by Seaboard, to offset incurred losses. Seaboard was required to furnish a monthly accounting of all reinsurance premiums, commissions, losses and a summary statement of the balance due. Depending on the amount, any balance owed to Seaboard was either to be paid to it directly or carried on account. The reinsurance agreement did not provide for the payment of loss under any of Seaboard's policies directly to Seaboard's policyholders or the beneficiaries.

When Burmar defaulted in the performance of its subcontract on May 8, 1979, Turner made demand upon Seaboard to carry out the performance and completion of the work. Seaboard refused, and notified Turner that it was rescinding the performance bond. Turner thereafter commenced an action on the bond against both Seaboard and the reinsurers, alleging that it would incur costs and expenses of $4,305,597.56 in excess of the price of the Burmar subcontract to complete the electrical work.

Shortly after issue was joined three of the defendant reinsurers moved for summary judgment dismissing the complaint on the ground that Turner has no right under either the reinsurance agreement or applicable law to maintain a direct action against a reinsurer. Special Term denied the motion, holding that in the circumstances presented such a direct right of action does exist. We agree and affirm.

The sole argument advanced by the reinsurers is that their agreement with Seaboard is purely a contract of indemnity which vests only the reinsured, Seaboard, with a right of action thereon. They correctly note that a reinsurance agreement is a contract of indemnity between the ceding insurer and the reinsurer, whereby for a stipulated portion of the premium the reinsurer obligates itself to reimburse the reinsured for loss sustained on risks insured by it. (See 13A Appleman, Insurance Law and Practice § 7681, p. 480.) Absent provisions to the contrary, "a reinsurer is under no contract obligation to the original insured and does not become liable to him." (Greenman v. General Reinsurance Corporation, 237 App.Div. 648, 262 N.Y.S. 569, aff'd 262 N.Y. 701, 188 N.E. 128; Jackson v. St. Paul Fire & Marine Ins. Co., 99 N.Y. 124, 129, 1 N.E. 539; People ex rel. Sea Insurance Co., Ltd. v. Graves, 248 App.Div. 255, 289 N.Y.S. 177, aff'd 274 N.Y. 312, 8 N.E.2d 872; Insurance Co. of Penn. v. Park and Pollard Co., 190 App.Div. 388, 180 N.Y.S. 143, aff'd 229 N.Y. 631, 129 N.E. 936.) In the circumstances presented herein, however, the reinsurers' amenability to a direct action by Turner is governed not by common law principles, but rather, by the Insurance Law of the State of New York and the express terms of the reinsurance agreement, which must be read in consonance with the statute.

Article XII of the reinsurance agreement provides that "reinsurance effected in accordance with the provisions of this Agreement shall be subject to the terms and conditions of the Standard Form of General Reinsurance Agreement revised February 1, 1950 of the Surety Association of America and Supplemental Agreement (promulgated March 15, 1951) and any subsequent supplemental agreement, except to the extent that said Standard Form is inconsistent with the provisions hereof." Section 14 of the Standard Form of General Reinsurance Agreement provides that "Agreement shall be deemed to comply with any law, whenever applicable, which provides that the Obligee or other beneficiary of the Bond shall have the right to maintain an action on such an agreement against the Reinsurer." These provisions must be construed against the background of section 315of the Insurance Law, which was intended to provide the obligee of a surety bond with a direct right of action against a reinsurer in instances where an insurer avails itself of reinsurance to avoid New York's statutory risk limitation.

Under Insurance Law § 47 an insurer doing business in this state may not expose itself to a loss of any one risk in an amount which exceeds 10% of its surplus to policyholders, except that any portion of such a risk which is reinsured with an authorized insurer may be deducted in calculating the 10% risk limitation. Thus, through the use of reinsurance credit an insurer is able to increase the volume of its business by accepting risks which would otherwise exceed its statutory limit. The underwriting of surety risks, however, has long been given special consideration by the legislature. Insurance Law § 315¹, which applies to fidelity and surety risks, requires that, in order to obtain the insurance credit, the reinsurance agreement must be "in such form as to enable the obligee or beneficiary to maintain an action thereon against the ceding insurer jointly with the assuming insurer ...." The history and purpose of this provision was outlined in a memorandum prepared by the State Insurance Department in 1952:

The provisions of subdivision 1 of Section 315 were originally enacted in 1919 as Section 24 of the former Insurance Law (Chapter 383, Laws of 1919). That legislation was based upon the "Uniform Security Provisions" which were recommended for enactment in the several states by the National Convention of Insurance Commissioners at a session held on April 15, 1919. This provision was drafted to protect the insuring public where the insurance company goes beyond the zone of safety and obligates itself under a bond in excess of the statutory limit which it is permitted to do by reinsurance, but in such event the intent was that the obligee should have the added protection of reinsurance. This purpose is quite different from that ordinarily intended by reinsurance, which is taken out to protect the company as a whole rather than to protect the individual insured, whose risk is reinsured. (McKinney's 1952 Session Laws of New York, p. 1227.)

In 1939 the Insurance Law was amended to provide:

No credit shall be allowed to any ceding insurer for reinsurance ... unless the reinsurance shall be payable, in the event of insolvency of the ceding insurer, to its liquidator or receiver .... (Insurance Law § 77L.1939, c. 882.)

This provision created a conflict with respect to the reinsurance of surety risks since section 315required that such reinsurance be in such form as to allow the obligee a direct right of recovery against the reinsurer. In order to reconcile the conflict, section 77 was amended (L.1940, ch. 87, § 168) "to remove the conflict with Section 315 and thereby permit reinsurance of surety bonds made directly to the obligee or beneficiary where the direct obligation represented by the surety bond was written for an amount in excess of the statutory limit of risk." (See McKinney's 1952 Session Laws of New York, p. 1227.) But, in order to reinstate the requirement of direct payment to the liquidator or receiver in the event of insurer insolvency with respect to all risks other than surety risks, section 77 was again amended in 1952 (L.1952, ch. 171, § 787), and now reads, in pertinent part:

Except as otherwise provided by section three hundred and fifteen of this chapter, no such credit shall be allowed any ceding insurer for reinsurance made, ceded, renewed, or otherwise becoming effective after September first, nineteen hundred fifty-two, unless the reinsurance agreement provides that payments by the assuming insurer shall be made directly to the ceding insurer or to its liquidator, receiver or statutory successor ....

Thus, as the...