Opinion ID: 2551511
Heading Depth: 2
Heading Rank: 3

Heading: Is the Reliance Policy a Reinsurance Policy?

Text: The AIGA next argues that the AGCSF's claim is not a covered claim under the Guaranty Act because, according to the AIGA, the Reliance policy is not direct insurance, but is instead reinsurance. Specifically, the AIGA contends that the Reliance policy does not satisfy the definition of direct insurance as set forth in Alabama Insurance Guaranty Ass'n v. Pierce, 551 So.2d 310 (Ala.1989), and that by its terms it is instead reinsurance. We reject the AIGA's arguments. We first observe that, for essentially the same reasons we conclude above that the AGCSF and the Reinsurance Trust Fund are not insurers, we cannot conclude that the participation agreement issued by the AGCSF or the policy issued by the Reinsurance Trust Fund (to the extent the policy otherwise resembles insurance) properly could be classified as insurance under Title 27. See also Ala.Code 1975, § 27-4A-2 (describing such self-insurance programs as insurance-like). Second, as mentioned above, in Doucette the Connecticut Supreme Court noted that the framers of the model act on which the Guaranty Act was based indicated that a self-insured group  should be able to turn to the state's insurance guaranty association fund for protection. See 2 NAIC Proceedings, supra, p. 770 (`[i]f the excess insurance company is not able to deliver on its contractual promises, the insurance guaranty fund can be called upon if the excess company is a licensed company' ); id., p. 783 (`[l]icensed excess insurance companies not only are subject to closer regulatory supervision than unlicensed companies, but also provide workers' compensation groups with the additional protection afforded by state insolvency funds' ). 247 Conn. at 462, 724 A.2d at 492 (emphasis added); see also Iowa Contractors, supra. Third, the determination whether an insurance policy is reinsurance does not depend solely on whether there is an underlying insurance policy that is being insured. Instead, the determination whether an insurance policy is reinsurance also depends on whether the insured is itself an insurer. Reinsurance is insurance for insurance companies. 1A Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 9:1 (3d ed.2005); see also Black's Law Dictionary 1312 (8th ed.2004) (defining reinsurance as [i]nsurance of all or part of one insurer's risk by a second insurer, who accepts the risk in exchange for a percentage of the original premium). There are two parties to a reinsurance agreement.... The insurance company which is transferring or `ceding' its risk is known as the reinsured, the `cedent' the original insurer, or the direct insurer. The insurance company to which the risk is being transferred is known as the reinsurer. The only non-insurance company that has any relationship to this factual situation is the person or entity that acquires the original insurance contract from the original insurer, and this party is therefore known as the original insured. Couch on Insurance at § 9:2 (footnote omitted; emphasis added). Although the obligations of the AGCSF and the Reinsurance Trust Fund are insurance like, and thus the relationship between them and Reliance might resemble reinsurance in some respects, the AGCSF and the Reinsurance Trust Fund are not insurers under Alabama law. Accordingly, by definition, the Reliance policy could not properly be classified as reinsurance for purposes of the Guaranty Act. [26] Fourth, the AIGA wrongly reads Pierce as requiring the conclusion that insurance that is not paid to Wheeler or to M & D Power is not direct insurance. In Pierce, O.B. Pierce suffered an on-the-job injury while working for his son, Johnny Pierce, who was a vendor of the Tennessee River Pulp & Paper Company. Tennessee River's worker's compensation insurance was based on an agreement between Western Preferred Casualty Company (`Western'), American Excess Underwriters, Inc., (`American Excess'), and Early American Insurance Company (`Early American'). American Excess issued an insurance policy that named as insured the `vendors of Tennessee River Pulp & Paper Company'.... The insurance policy named Western as the insurer of Tennessee River's vendors. Additionally, the policy contained this attached endorsement by Early American: `EARLY AMERICAN INSURANCE COMPANY hereby agrees that in the event the WESTERN PREFERRED CASUALTY COMPANY fails to pay any loss which is payable under this policy, EARLY AMERICAN INSURANCE COMPANY shall become liable for the loss after receiving written notice and demand for payment from the insured. Any payment shall be subject to the terms and conditions of this policy.' .... After O.B. Pierce filed his action, he received an affidavit that stated that Western had been placed in receivership. American Excess nevertheless retained counsel to defend Johnny Pierce and it paid O.B. Pierce compensation benefits. Both American Excess and Early American were subsequently placed in receivership. After O.B. Pierce added the [Alabama Insurance] Guaranty Association as a party, the Guaranty Association learned that Western was not licensed to transact insurance business in Alabama and claimed that it had no responsibility either to make compensation payments to O.B. Pierce or to defend and indemnify Johnny Pierce. 551 So.2d at 311. This Court first held that the AIGA had no obligation to pay any claim against either Western Preferred Casualty Company or American Excess Underwriters, Inc., because neither of them had been licensed to transact insurance in Alabama. We reached the contrary conclusion as to Early American Insurance Company, however, and went on to consider whether its endorsement was direct insurance under the Guaranty Act: Neither the legislature nor this Court has defined `direct insurance' as that term is used in this context. In making our determination of the meaning of `direct insurance,' as that term is used in the Act, we must determine what the legislature intended the words to mean. Alabama Farm Bureau Mutual Casualty Insurance Co. v. City of Hartselle, 460 So.2d 1219, 1223 (Ala. 1984). The intention of the legislature must be determined primarily from the language of the statute itself if it is unambiguous, and the words used in the statute must be given their natural, plain, ordinary, and commonly understood meaning. Id. In determining the definition of the term `direct insurance' in the Florida Insurance Guaranty Act, a Florida appeals court, confronted with a situation similar to that presented here, where there was little guidance as to the definition of the term, wrote the following about the plain, ordinary meaning of the word `direct,' as it was used in the Florida act: `All agree that the legislature intended the act to have no applicability to insurance which was not direct insurance. However, nowhere in the Act, or in Florida Statutes generally, is the term direct insurance defined. Nor does it appear that direct insurance is a term of art in insurance law generally. The simple word direct when used as an adjective is readily and commonly understood to mean immediate; without deviation or interruption; by the shortest route; without circuitry; without any intervening medium, agency or influence....'  Zinke-Smith, Inc. v. Florida Insurance Guaranty Association, 304 So.2d 507, 509 (Fla.Dist.Ct.App.1974). Considering those commonly understood meanings of the word direct as described by the Florida appeals court, we hold that `direct insurance' as used in the Act refers to an insurance contract between an insured and an insurer that has accepted a designated risk of a designated loss to the insured. In the present case, Early American, which was licensed to transact insurance business in Alabama, agreed that, if Western failed to pay any loss payable under the policy, then Early American would be liable to pay for such a loss. Early American, thus, by virtue of an insurance contract, accepted the designated risk that if Western failed to pay Pierce, then Early American would pay Pierce the amount due under that policy (that amount would be the designated loss, of course ). Accordingly, the endorsement Early American made as a licensed insurer in Alabama constitutes `direct insurance' within the meaning of the Alabama Insurance Guaranty Association Act, and the Guaranty Association is bound to provide coverage under the provisions of the Act. 551 So.2d at 312-13 (emphasis added). Among other things, [27] the AIGA argues that the Reliance policy does not constitute direct insurance because it provides indemnity coverage to the Reinsurance Trust Fund rather than coverage to the direct insured or any third parties. Although the AIGA made the foregoing argument in its initial appellate brief, on remand it stipulated that Reliance had issued the Reliance policy to the three members of the [Reinsurance Trust] Fund, one of whom is the AGCSF, and that the policy provide[d] for reimbursement to the individual members of the [Reinsurance Trust] Fund for `loss paid or payable as a result of: (A) Compensation and other benefit payments required of the Reassured [Insured] by the Workers Compensation Law of any state ...'. Thus, we will consider those facts as settled between the parties. That said, the AIGA misreads Pierce. It is true that in Pierce, the insurance was considered direct insurance because the proceeds of the policy were paid directly to the injured employee. It is also true that, in Pierce, if Western had been the party to directly pay the injured employee and Early American Insurance Company had merely indemnified Western, the policy under which that indemnification had been made would have constituted a policy of reinsurance. This would have been true in Pierce, however, because Western was an insurer. Here, in contrast, although Reliance did not make a payment directly to Wheeler, the entity to which it was obligated to make payment, AGCSF, was not an insurer. That obligation, therefore, is not an obligation under a reinsurance policy. Furthermore, in Zinke-Smith, Inc. v. Florida Insurance Guaranty Ass'n, 304 So.2d 507 (Fla.Dist.Ct.App.1974), the primary case upon which Pierce relied, a Florida appeals court noted that `direct insurance' as used in the [Florida Insurance Guaranty] Act refers to an insurance contract between the insured and the insurer which has accepted the risk of a designated loss to such insured, which relationship is direct and uninterrupted by the presence of another insurer.  304 So.2d at 508 (emphasis added). As the Zinke-Smith court further recognized, even a policy of reinsurance would, of course, be direct insurance as between the parties thereto, i.e., the insurer-reinsured on the one hand and the reinsurer on the other hand. 304 So.2d at 509 (emphasis added). The court then explained that, as concerns the scope of the Act, the same was not intended to apply to reinsurance, because reinsurance was insurance for insurers, who were precluded from recovery under the pertinent provisions of Florida law. Id. As noted, however, the AGCSF is not an insurer. Accordingly, the Reliance policy was one of direct insurance only, not reinsurance. Given the parties' stipulations, we conclude that the Reliance policy directly insured the AGCSF as to its risk of loss for the payment of workers' compensation claims in excess of $400,000. The AGCSF is not an insurer, and the Reliance policy was not a policy of reinsurance. [28] Based on the foregoing, the judgment of the trial court is affirmed. 1060495AFFIRMED. 1071194AFFIRMED. COBB, C.J., and STUART and BOLIN, JJ., concur. LYONS, J., concurs in part and concurs in the result.