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Maurer v. International Re-Insurance Corp.

Court of Chancery of Delaware, New Castle County

June 28, 1950

MAURER
v.
INTERNATIONAL RE-INSURANCE CORPORATION.

Page 823

[Copyrighted Material Omitted]

Page 824

William Prickett, Wilmington, for Lumbermens Mutual Casualty Co., Pacific Indemnity Co. and American Indemnity Co.

Arthur G. Logan, Wilmington, for the receivers.

HARRINGTON, Chancellor.

The defendant is an insolvent corporation and the question is whether Lumbermens Mutual Casualty Company, Pacific Indemnity Company and American Indemnity Company, parties to certain contracts binding International Re-Insurance Corporation, are 'policyholders' of that corporation.

In 1928, a corporation having the same name as the defendant was organized in California to conduct an insurance business. In May, 1931 the defendant corporation was organized in Delaware, and on June 9th of that year all of the assets of the California corporation were transferred to, and all of its liabilities were assumed by, the Delaware corporation. Before the appointment of the receivers, the defendant had conducted a reinsurance, general casualty insurance, and fidelity and surety business in various states of the Union and in Europe.

[31 Del.Ch. 355] Prior to October 31, 1932, it had engaged principally in the reinsurance business, wrote very little direct insurance, and had no authority to write fire or life insurance. In some cases, the reinsurance written was for a proportionate share of the risks, and in others for losses in excess of stipulated amounts. The contracts with Lumbermens Mutual Casualty Company, Pacific Indemnity Company and American Indemnity Company were made with the California corporation, but were among the obligations assumed by the Delaware corporation in June, 1931.

On June 9th of that year, International deposited with the Delaware Insurance Commissioner United States Treasury Bonds of the face amount of $250,000, purportedly pursuant to Chapter 20, Paragraph 643, of the Revised Code of 1915. At the hearing no trust agreement was produced, but some certificates issued by the Delaware Insurance Commissioner stated that the deposit was 'for the security and benefit of each and all of its policyholders and holders of its reinsurance contracts, agreements and treaties of every kind and nature * * *.' Other certificates were less specific.

On June 27, 1932, International withdrew the United States Treasury Bonds and deposited three California real estate mortgages with the Delaware Insurance Commissioner. They were transferred to that officer by three separate assignments, each of which stated that the deposit was 'in trust, however, for the common benefit and security of all of its policyholders and in accordance with the objects, uses, intents and purposes of the aforesaid Section 72 of Chapter 20 of the Revised Code of

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The statutory provision referred to in the assignments, Par. 643, § 72, Chapt. 20, Revised Code 1915, had been repealed prior thereto, and the Act then in force, Vol. 37 Laws of Delaware, Chapter 52, Section 14, authorized deposits[31 Del.Ch. 356] with the Insurance Commissioner 'upon such trusts as shall be designated by the company and approved by the Commissioner.' Both statutes were enacted in conformity with the laws of certain other states and in order to permit the Delaware corporation to do business in those states.

Notwithstanding the incorrect reference to the statute in the assignments, the language created a trust by private contract for the benefit of International's 'policyholders'. Maurer v. International Re-Insurance Corp., 20 Del.Ch. 173, 174 A. 360. This is true, though some certificates merely stated that the mortgages had been deposited by International with the Insurance Commissioner without stating the terms of the deposit. By order of this court, pursuant to statute (Art. 8, Chapt. 20, Revised Code of Delaware, 1935, § 538 et seq.), the mortgages so deposited were transferred by the Insurance Commissioner to the receivers. The mortgages were liquidated and, after the deduction of certain expenses, the receivers have in hand $512,797.64, which is the fund in which the claimants seek to participate.

The respective claims filed by Pacific Indemnity Company for $938,791.66, Lumbermens Mutual Casualty Company for $160,228.51, and American Indemnity Company for $50,243.57 were allowed against the insolvent corporation in ancillary receivership proceedings and were certified to the primary receivers for payment.

The right of the claimants to participate in the general fund in the hands of the receivers is not involved in this proceeding.

The claim of Pacific Indemnity Company was based on a so-called 'Treaty of Reinsurance' and covered primary workmen's compensation and similar 'policies' written by the company insuring for a period of one year or less the liability of employers for injuries to or death of employees [31 Del.Ch. 357] 'and becoming effective while this Agreement is in force.' Pacific was to retain a certain percentage of the risks assumed by it under such policies but agreed 'to cede to the Reinsurer, and the Reinsurer' agreed (1) 'to accept by way of reinsurance' a certain percentage of Pacific Indemnity Company's 'Gross net writings' on a 'Quota Share basis', and (2) to pay certain specified amounts 'on an Excess basis' when the ultimate net loss in any one accident exceeded specified sums. The instrument also provided: (1) that the 'liability of the Reinsurer shall commence simultaneously with that of the Company and shall be subject * * * to all the general and special stipulations * * * of the original policy * * *'; (2) that the Company 'shall settle all claims in which this reinsurance may be interested, and the same shall be binding upon the Reinsurer * * *'; and (3) when so requested by the reinsurer, the Company 'will afford the Reinsurer an opportunity to be associated with the Company in the defense or settlement of any claim, suit or proceeding involving this reinsurance.'

All cessions on the quota share basis were to be set forth in a monthly statement issued by Pacific showing premiums 'on all reinsurance effected hereunder,' and analyzed as to line, etc. As respect cessions made on an excess basis monthly statements were also to be issued by Pacific to the reinsurer giving the total amount of the premiums earned during the preceding month and the amount of premium due from Pacific to International. International was to be notified of any claims involving it as the 'Reinsurer'. The 'Agreement' could be terminated as to future business on certain notice. The contract became effective September 1, 1928, and was to continue in effect until terminated as therein provided. By endorsements, it also covered policies issued by Pacific Indemnity Company on or after January 1, 1928, and on and after January 1, 1929. In the assignment of the instrument, the defendant bound itself as 'Reinsurer'.

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The contract of American Indemnity Company (and/or [31 Del.Ch. 358] American Fire and Marine Insurance Company) as their interests might appear, with the California company, designated the 'Reinsurer', was likewise called a 'Treaty of Reinsurance'. By that instrument, the reinsurer agreed to repay its share of any ultimate net losses which the company might pay by reason of the liability assumed under its automobile, motorcycle, elevator, garage, teams and general public liability policies 'issued while this contract is in force,' anc covering risks in excess of certain stipulated amounts on account of one or more persons injured or killed in an accident. The liability of the 'Reinsurer' was to commence simultaneously and automatically with that of the company on all policies issued during the existence of the treaty. Notice was to be given of any accident in which this 'reinsurance is * * * involved.' The defendant company was repeatedly referred to as the 'Reinsurer'. In event of cancellation, this 'treaty' shall remain in force and effect on all policies 'reinsured' prior to the effective date of cancellation. The instrument provided that the originating companies would report to International within twenty-five days after the close of each month, on bordereau forms all insurances effected for excess limits during the month. International, however, reserved 'the right to reject or cancel any risks or class of risks ceded' under the treaty. The so-called treaty was to take effect August 1, 1929.

The contract of Lumbermens Mutual Casualty Company (together with Federal Mutual Liability Insurance Company and/or American Motorist Insurance Company, as their interests might appear), assumed by the Delaware corporation, was also called a 'Treaty of Reinsurance', but the California company, with which the contract was originally made, was called the 'Reinsurer'. The agreement related to 'reinsurance of loss under Workmen's Compensation and/or Employers' Liability policies issued by the Companies.' By its terms, the 'Reinsurer' agreed to pay to the companies the portion of any loss in excess of a [31 Del.Ch. 359] specified amount 'sustained under policies issued by the Companies and which is the result of any single accident or series of accidents arising out of one and the same occurrence and which happen during the currency of this contract.' With certain exceptions, the contract also applied 'to all policies or contracts in force on the effective date hereof and commencing or renewed on or after the effective date hereof; provided, however, that in the event any of the Companies shall have other excess reinsurance continuing in force on and after the effective date of this contract, this reinsurance shall not be applicable to such policies or contracts as are covered by such other excess reinsurance.' The instrument provided for monthly notices to the so-called 'Reinsurer' of all premiums on policies 'covered hereunder during the previous month' and of any accident in which 'Reinsurance' was involved. A subrogation clause also described the original assignor as the 'Reinsurer'. A clause in the instrument stated that the word 'policy' as used therein, referred to the original insurance.

The exceptants claim that the word 'policy' is a general term applicable to all kinds of insurance contracts, and that the agreements relied on are what are termed 'open reinsurance policies.' The receivers, on the other hand, claim that in the United States, at least, reinsurance contracts are never known as policies, and that in any event the contracts relied on are nothing more than treaties or agreements for reinsurance.

Insurance is a contract whereby for a stipulated consideration called a premium, one party undertakes to indemnify another against loss by a certain specified contingency or peril called a risk. Webster's International Dictionary, 'Insurance'; 1 Couch Cyc.Ins.Law 3; see also Dover Glass Works Co. v. Amer. Fire Ins. Co., 1 Marv. 32, 29 A. 1039, 65 Am.St.Rep. 264. Essentially, reinsurance is a contract to indemnify one who has insured a risk. Friend [31 Del.Ch. 360] Bros. Inc. v. Seaboard Surety Co., 316 Mass. 639, 56 N.E.2d 6, 153 A.L.R. 962; People ex rel. Sea Ins. Co. v. Graves, 274 N.Y. 312, 8 N.E.2d 872; Pioneer Life Ins. Co. v. Alliance Ins. Co.,

Page 827

374 Ill. 576, 30 N.E.2d 66; 13 Appleman on Insurance Law and Practice, pages 433, 435; 46 C.J.S.., Insurance, § 1220, pages 195, 196; see also Greenman v. General Reinsurance Corp., 237 A.D. 648, 262 N.Y.S. 569. Some of the expert witnesses gave a similar definition of the term 'reinsurance'. But the authorities indicate that it is also applied to the ceding by one insurance company to another of all or a portion of its risks for a stipulated part of the premium and an agreement to indemnify it in case of loss. Webster's International Dictionary, 'Reinsurance'; 13 Appleman on Ins. Law and Practice, page 433.

Insurance originated in the custom of the merchants in ancient times and probably first dealt with marine insurance. 1 Couch Cyc. Ins. Law 2; Richards on Insurance 12. Usually contracts of insurance, as well as reinsurance, are contracts of indemnity, Dover Glass Works Co. v. American Fire Ins. Co., supra; 46 C.J.S., Insurance, § 1220, page 196, and were valid at common law. Phoenix Ins. Co. v. Erie & W. Trans. Corp., 117 U.S. 312, 6 S.Ct. 750, 29 L.Ed. 873. In practice, the written instrument expressing the contract of the insurer is called a 'policy'. Century Dictionary, 'Insurance'; Webster's Inter. Dict., 'Policy'; 18 Halsbury Laws of England 424. Likewise, a contract of indemnity made by one insurer with another to protect the first from a risk it has already assumed is termed a 'reinsurance policy'. Pioneer Life Ins. Co. v. Alliance Ins. Co., supra; People ex rel. Sea Ins. Co. v. Graves, supra; Hastie v. DePeyster, 3 Caines, N.Y., 190, 191; Boston Ins. Co. v. Globe Fire Ins. Co., 174 Mass. 229, 54 N.E. 543, 75 Am.St.Rep. 303; see also Forsikringsaktiesebskabet v. Attorney General, L.R. (1925) App.Cas. 639. While the evidence of experts with respect to the application of the term 'policy' to contracts of reinsurance, is conflicting, many of the claimants' exhibits are examples of its use.

[31 Del.Ch. 361] There are cases which conclude that the holders of reinsurance contracts made by a corporation, which subsequently becomes insolvent, are not policyholders of that corporation and cannot participate in the distribution of a fund deposited for the benefit of its policyholders (Aetna Casualty & Surety Co. v. International Re-Insurance Corp., 117 N.J.Eq. 190, 191, 175 A. 114; In re New Jersey Fidelity & Plate Glass Ins. Co., 191 A. 475, 15 N.J.Misc. 384; Shepherd v. Virginia State Ins. Co., 120 Va. 383, 91 S.E. 140; Cunningham v. Republic Ins. Co., 127 Tex. 499, 94 S.W.2d 140; People by Van Schaick v. General Indemnity Corp. of America, 274 N.Y. 510, 10 N.E.2d 523), but they are based on the construction of statutory provisions and do not govern this case. While reinsurance was known at common law and is in constant use in this country, the cases last cited hold that it is reasonable to infer that the statutes before the courts were only intended for the protection of the general public, holding primary insurance policies or claiming under other contracts expressly referred to in the statutes. They, therefore, conclude that the words 'policy' and 'policyholder', as used therein, do not include contracts of reinsurance between two insurance companies, and seem to regard them as participation agreements. See, however, Forsikringsaktiesebskabet v. Atty. General, supra. But we are considering the distribution of a trust fund created by a special agreement.

Another question is whether the claimants' contracts can be classed as reinsurance policies, or whether they are mere treaties for reinsurance. The claimants say that their exceptions to the receivers' recommendations with respect to the classification of their ...


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