Opinion ID: 1856277
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Heading: Is the Mission Policy Direct Insurance or Reinsurance?

Text: The Association contends it is not liable for claims filed by the Group. To support this contention, the Association argues that the provisions of Iowa Code chapter 515 make it liable only for claims made under policies of direct insurance. Because the Mission policy is not direct insurance, but instead reinsurance, the argument continues, the Association is not liable. A. Direct insurance. The Association's position implicates several provisions in Iowa Code chapter 515B, the Insurance Guaranty Association Act. As the name implies, the Act simply provides a mechanism for the payment of unpaid claims against insolvent insurance carriers. Section 515B.1 of the Act describes its scope. According to this section, the Act's provisions apply to all kinds of direct insurance authorized to be written by an insurer licensed to operate in this state under chapter 515 or chapter 520, with certain exceptions not pertinent here. Iowa Code § 515B.1. Direct insurance is not defined in the Act. The Association was created by section 515B.3. All insurers licensed to transact insurance business under either chapter 515 or chapter 520 are automatically members of the Association. See id. §§ 515B.1, 515B.2(4), 515B.3. The parties concede that Mission was so licensed and was a member of the Association both at the time the policy was issued and when the losses occurred. The Association is obligated by the Act to pay all covered claims against insolvent members to the extent and amount set out in section 515B.5(1)(a). A covered claim is defined in the Act as an unpaid claim arising out of and within the coverage of the policy issued by the insolvent member. Id. § 515B.2(3). A covered claim does not include an amount due any reinsurer, insurer,... or underwriting association, ... or self-insured portion of the claim. Id. The direct insurance argument urged by the Association was rejected under substantially similar circumstances in Zinke-Smith, Inc. v. Florida Insurance Guaranty Association, Inc., 304 So.2d 507, 508-09 (Fla.App.1974). Florida's guaranty association statute, like Iowa's, is patterned after the National Association of Insurance Commissioners (NAIC) Model Act. Zinke-Smith, a single self-insured employer, sued the Florida Insurance Guaranty Association to recover a loss that the employer suffered when its excess insurer became insolvent. The Zinke-Smith policy was substantially similar to the Mission policy because it required the excess insurer to reimburse the employer directly for all payments under the policy. Like Iowa's Guaranty Association Act, the Florida statute covered only direct insurance but did not define it. The Florida court defined direct insurance, as used in the Florida statute, as 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. Id. at 508. The court quickly recognized that the excess policy met this test. Id. We approve of, and adopt, the Florida court's definition of direct insurance. The Association apparently has no quarrel with this definition of direct insurance but argues there is no direct relationship between Mission and the members of the Group. It points out that in Zinke-Smith the policy was issued directly to a self-insured employer and that the insurer was directly obligated to the employer under the terms of the policy. In contrast, the Association argues, the relationship between Mission and the members of the Group was not direct, but was interrupted by the Group. To support its argument, the Association points to two factors: (1) under Mission's policy, Mission was only obligated to the Group, the insured under the policy, but not to its members; and (2) the liability agreement between the Group and its members specifically provided that the Group was directly and primarily liable to its members. As the Group properly points out, the Association's argument focuses on the wrong relationship. The relevant relationship, we think, is between Mission and the Group. The only insurance contract at issue here is between Mission, as the insurer, and the Group, as its insured. The Mission policy was not interrupted by the presence of another insurer. We see no significant difference between a single self-insured employer and a group of self-insured employers. In both instances, the insurer's relationship is with the employer or the group of employers, and not with the individual employees. Given the objectives of chapters 87 and 515B and their interrelationships, we think the Association's distinction in treatment based on whether a single employer or a group of employers purchases excess insurance would produce a result not intended by the legislature. Iowa Code chapter 87 has the laudable objective of insuring payment of injured workers' claims whether the employer purchases insurance or is self-insured. Chapter 515B has a similar, laudable objective: insuring payment of such claims when self-insured employers purchase excess coverage. The Association's distinction would frustrate those objectives and be contrary to our long-established rule that favors broad interpretation of workers' compensation coverage. See Teel v. McCord, 394 N.W.2d 405, 406-07 (Iowa 1986). We hold that the Mission policy meets the requirements of Iowa Code section 515B.1. It is direct insurance according to our adopted definition of direct insurance, and it was written by an insurer licensed to operate under Iowa Code chapter 515. See Iowa Code § 515B.1. B. Reinsurance. The Association characterizes the Mission policy as reinsurance and, therefore, not within the scope of Iowa Code section 515B.1. We do not agree. The Mission policy is what it purports to be, excess liability insurance. In his treatise on insurance, Appleman takes the position that a contract by a self-insurer for excess coverage is not reinsurance but merely a policy for excess insurance with a deductible or stated amount of retention. 7B J.A. Appleman, Appleman on Insurance § 4601, at 184 (W.F. Berdal ed. 1979); accord Zinke-Smith, 304 So.2d at 508-09. This characterization by Appleman tracks the definition of excess insurance from L.E. Davids, Dictionary of Insurance 96 (1977): [a] policy ... covering the insured against certain hazards, which applies only to loss or damage in excess of a stated amount. The risk of initial loss or damage, so excluded in the excess policy... may be carried by the insured himself or may be insured by another policy... which is known as primary protection. The terms of the Mission policy bring it clearly within this definition. For example, Section II of the policy entitled Specific Excess Coverage provides: As respects loss which the [Group] sustains as a result of each occurrence, the [Group] shall retain under this Section II loss in the amount of the retention specified in Item 6(a) of the schedule and [Mission] hereby agrees to indemnify the [Group] against loss in excess of such retention, subject to the policy limit specified in item 6(b) of the Schedule. (Emphasis added.) The retention amount specified in Item 6(a) of the schedule is $300,000. The loss, in excess of this retention amount, against which Mission agreed to indemnify the Group is $9,000,000. Moreover, the specific excess and aggregate excess provisions of the Mission policy track the requirements of administrative regulation 56.3(2) concerning workers' compensation group self-insurance. The regulation pertinently requires a self-insured group to maintain excess insurance of not less than $3,000,000 per occurrence and limits a retention to one generally available to associations with similar exposures and annual premiums. 191 Iowa Admin. Code 56.3(2)(b). The regulation also requires the group to [m]aintain annual aggregate excess insurance with limits above the aggregate retention of not less than $2,000,000, with an aggregate retention no greater than the estimated earned normal premium collected in the policy year less all estimated expenses during the year including excess insurance premiums. 191 Iowa Admin.Code 56.3(2)(c). Of course, our conclusion that the Group is not an insurer for chapter 515B purposes fully answers the Association's reinsurance argument. Mission did not insure another insurerthe hallmark of a reinsurance contract. See Davids, Dictionary of Insurance 218. Moreover, according to the evidence, Mission certainly believed it was writing excess insurance and not reinsurance. It paid a premium tax on the full amount of the Group's premium. Under Iowa Code section 515.24 it was exempt from paying tax on reinsurance premiums. Further, Mission was prohibited from writing reinsurance under reinsurance treaties with reinsurers with which Mission had reinsured its own undertakings. According to the testimony of a Mission representative, Mission was not set up to write reinsurance but was set up to write excess workers' compensation insurance for self-insured employers. The district court correctly concluded that the Mission policy was direct insurance rather than reinsurance.