[32 Del.Ch. 472] C. Edward Duffy, of Wilmington, for appellant.
Arthur G. Logan, of Logan, Marvel & Boggs, of Wilmington, for receivers of International Re-Insurance Corporation, appellees.
Before SOUTHERLAND, C. J., and TUNNELL and LAYTON, JJ.
SOUTHERLAND, Chief Justice.
The Insurance Commissioner of Pennsylvania, as Statutory Liquidator of the business and affairs of Keystone Indemnity Exchange, a reciprocal insurance exchange under the laws of Pennsylvania, filed in the receivership of International Re-Insurance Corporation in the court below a creditor's claim based upon a contract dated August 15, 1930, insuring the subscribers of the Exchange, in an amount not exceeding $1,000,000, against loss by reason of liability for assessment for which they were liable as policyholders[32 Del.Ch. 473] of the Exchange. The Special Master appointed by the Chancellor to hear claims recommended disallowance on three separate grounds. The Chancellor agreed with the Special Master, and by order dated April 9, 1951, Del.Ch., 78 A.2d 744, disallowed the claim on the same grounds. This appeal followed.
The facts are as follows:
Keystone Indemnity Exchange (hereinafter called 'the Exchange') was organized in Pennsylvania in 1919 under the insurance laws of that State applicable to reciprocal and inter-insurance exchanges. Art. X, Secs. 1001-1011, 40 P.S. §§ 961-971. Such an exchange is an unincorporated group of subscribers who exchange insurance contracts with each other providing indemnity among themselves from loss. The group operates through a common attorney-in-fact, to whom is given by each subscriber a power of attorney under which he represents each subscriber individually in exchanging insurance with the others. Long v. Sakleson, 328 Pa. 261, 195 A. 416.
Keystone was organized in 1919 and was duly authorized to transact business. Its attorney-in-fact was Keystone Indemnity Company. For some years the policies issued by the attorney-in-fact imposed upon the policyholder (the 'subscriber') no liability for the debts of the Exchange beyond the premium paid for protection. The Act of April 9, 1929, amended the Pennsylvania insurance laws to require that powers of attorney under which reciprocal insurance is to be effected or exchanged 'shall provide that the liability of the subscribers, exchanging contracts of indemnity, shall make provision for contingent liability, equal to not less than one additional annual premium or deposit charged.' Insurance Laws, State of Pennsylvania, Sec. 1004(c), Act of April 9, 1929, P.L. 464, 40 P.S. § 964(d). Some time after the passage of the amendatory act of 1929, the Exchange inserted the following provisions in its policies:
[32 Del.Ch. 474] 'N. In the event that the premium herein provided for, together with the premium deposits of other subscribers, and the reserves and surplus funds maintained by Keystone Indemnity Exchange shall be insufficient to pay the losses incurred, Assured shall be contingently liable for an additional amount, not to exceed, however, the annual premium or deposit charged herein. It is understood and agreed, however, by and between the subscriber and Keystone Indemnity Company, Attorney-in-Fact, that the said Keystone Indemnity Company shall procure adequate insurance and reinsurance in Companies of acceptable standing providing indemnity against any such contingent premium liability on the part of the Assured as herein provided.'
Thereafter a contract dated August 15, 1930, was executed between the Exchange, acting through the attorney-in-fact, and International Re-Insurance Corporation, a California corporation. By endorsement dated June 9, 1931, the obligations of International under this agreement were assumed by its successor, International Re-Insurance Corporation, a Delaware corporation.
The following are pertinent excerpts from the contract:
'Memorandum of Agreement
between the Keystone Indemnity Exchange of the City of Philadelphia, Pennsylvania, acting through its Attorney-in-Fact, the Keystone Indemnity Company, also of Philadelphia, Pennsylvania, hereinafter called Keystone, of the first part and the International Reinsurance Corporation of Los Angeles, California, a corporation, hereinafter called International, of the second part.
'In consideration of the payment of the premium as hereinafter provided and
'1. International will indemnity the subscribers of the Exchange against loss by reason of liability for assessment for which they are liable as policy holders of Keystone, under their signed Agreement and Power of Attorney in addition to their annual earned premium, up to an amount not exceeding One Million Dollars ($1,000,000.00).
'The liability of International shall be limited to any assessment which may be levied, in addition to the annual earned premium, but not exceeding One Million Dollars ($1,000,000.00).
'2. In no event shall liability attach to International unless and [32 Del.Ch. 475] until the Exchange has paid losses which together with required reserves shall exceed one hundred per cent (100%) of the gross earned premium income during the twelve (12) months period ending on the day immediately prior to the declared date of assessment. For all purposes of this Agreement, the term 'gross earned premium income' shall be understood to mean the pro rata proportion of every policy holder's premium applicable to that policy period (in respect of every such policy holder) which is in force during such period, with allowance of an amount not exceeding twenty-five per cent (25%) for management expense.
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'4. The premium rate for this contract shall be one half of one per cent ( 1/2 of 1%) of the gross original premium income of Keystone during the year reinsured; said gross original premium income shall consist of all original advance or deposit premiums, less cancellation and return premiums, but shall not be reduced by an amount paid for this or other reinsurance, or by dividends declared, paid or credited to subscribers.
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'12. This Agreement may be cancelled at any time at the request of Keystone or International by giving three (3) months' notice of such cancellation. If this Agreement shall be cancelled as hereinabove provided, or become void or cease, the premiums having been actually paid to International, the unearned portion shall be returned to Keystone, the earned premium retained by International in the event of the policy being cancelled by it being computed at the rate of one half of one per cent ( 1/2 of 1%) of the gross original premium income of Keystone as specified in paragraph four (4) above during the time the Agreement has been in force or at the customary short rate of the annual minimum deposit premium within mentioned, whichever is the greater.
'13. This Agreement shall take effect at and from 12:01 A.M. August 15th, 1930, and shall remain in force and effect until 12:01 A.M. August 15th, 1931, unless previously cancelled by either party as provided in paragraph 12.'
By endorsement dated December 2, 1931, paragraph 13 was amended to read as follows: '13. This Agreement shall take effect at and from 12:01 A.M. Eastern Standard Time, August 15th, 1930, and shall remain in full force and effect until cancelled by either party, as provided in paragraph numbered 12. of said Agreement.'
[32 Del.Ch. 476] On July 1, 1932, International canceled the agreement, effective October 1, 1932.
In April, 1933, the Chancellor appointed Receivers for International on the ground of insolvency.
On May 18, 1933, the Court of Common Pleas of Dauphin County, Pennsylvania, finding the Exchange to be insolvent, directed the Insurance Commissioner of Pennsylvania to take possession of its property and liquidate its business and affairs.
On September 12, 1938, the Court of Common Pleas of Dauphin County ordered that the subscribers of the Exchange holding policy contracts exchanged among said subscribers and issued from April 9, 1929, to May 18, 1933, should pay an amount equal to one annual deposit premium on each policy issued to them for the purpose of paying losses of the Exchange unpaid at the date of dissolution and other legal obligations and expenses. The assessment aggregated nearly $3,000.000.
On December 30, 1941, the Insurance Commissioner of Pennsylvania, as Statutory Liquidator of the Exchange, filed a claim in the receivership of International in the amount of $1,000,000 'for indemnity for subscribers of said Exchange against assessment that has been levied to pay outstanding losses.' An amended claim was filed on August 1, 1949, which, like the original claim, is founded upon the assessment liability of the subscribers, it being asserted in the amended claim that the liability of those subscribers whose policies were exchanged during the period from August 15, 1930, to October 1, 1932 (the duration of International's contract), will not be less than $1,000,000. Both claims are alleged to be filed 'on behalf of subscribers of said Keystone Indemnity Exchange.'
In addition to some formal objections, the Receivers excepted to the claims on the ground that nothing was due under the contract of August 15, 1930. As before stated, the Special Master sustained the Receivers' exceptions on three [32 Del.Ch. 477] grounds. On Exceptions to the Special Master's report the Chancellor upheld the Special Master's findings.
First, the Chancellor held that the contract of International ran to the subscribers individually; that it was not an asset of the Exchange; that the Liquidator took no rights therefrom as Liquidator; and that, having failed to adduce any evidence of authority to represent the subscribers in enforcing their individual rights to indemnity against International, he had no standing to press the claim.
Second, he held that assessment was a prerequisite to any liability of International; and that since no assessment was made until 1938, a date long after the agreement had been terminated by cancellation, no loss for which International was liable had occurred within the life of the agreement.
Third, he held that the failure to file a definite claim for loss within the period of two years following the termination of the agreement barred any recovery on the claim.
From the judgment embodying these conclusions the Liquidator has appealed.
Passing over the first of the three grounds on which the Chancellor based his decision, we take up the second, which concerns the effect of the cancellation by International of the agreement of August 15, 1930.
It is elementary that an insurance contract may properly include provisions for its cancellation, and that an insurer who reserves that right may exercise it by complying with the conditions of the contract. 29 Am.Jur. sec. 275; Couch, Cyc.Ins.Law, sec. 1406; Pacific Mut.Life Ins. Co. v. Strange, 226 Ala. 98, 145 So. 425; Camp v. AEtna Ins. Co., 170 Ga. 46, 152 S.E. 41, 68 A.L.R. 1166. Indeed, it appears to be admitted in the claim itself that International effectively canceled its agreement as of October 1, 1932. The question at once arises whether any loss insured against occurred while [32 Del.Ch. 478] the contract was in force; if not, the claimant cannot recover.
What was the nature of the risk assumed by International? The parties are in sharp disagreement as to the proper construction of the contract in suit, that is, whether it is one of liability (appellant's contention) or one of strict indemnity only (the Receivers' contention). For our present inquiry we think the distinction immaterial. We shall assume, without deciding, the correctness of a construction favorable to appellant, i. e., that the risk insured was the risk of liability to assessment and not the risk of actual loss to the individual subscribers resulting from payment or the recovery of a judgment. The question nevertheless recurs: Did any loss occur while the contract was in force?
From the moment when the Pennsylvania Act of April 9, 1929, became effective, the subscribers of the Exchange became liable to assessment. That liability, however, was only contingent. It could become an actual liability only after the assessment had been made. The impaired financial condition of the Exchange did not create the actual liability; that could flow only from the making of the assessment itself. It appears to be the settled law of Pennsylvania again in an action to recover an assessment against a member of
a mutual fire insurance company the statute of limitations runs from the time of the actual making of the assessment, and not from the date of the occurrence of losses which eventually make an assessment necessary, nor even from the date when insolvency is actually established. Eichman v. Hersker, 170 Pa. 402
, 33 A. 229
; Schofield v. Turner, 213 Pa. 548
, 62 A. 1068
. The same rule appears to be applicable to assessments of subscribers to a reciprocal exchange.
The contract in suit appears to have been drawn in the light of these principles. Paragraph 1, which defines the risk assumed, indemnifies against 'loss by reason of liability for assessment', and its language cannot be construed as an undertaking to indemnify against a weakened [32 Del.Ch. 479] financial condition of Keystone eventuating in ...