Court Opinion

ID: 9752696
Source: CourtListenerOpinion
Date Created: 2023-08-28 18:29:09.988947+00
Date Added: 2024-06-11T07:27:21.098168
License: Public Domain

*46SPAETH, Judge,
dissenting:'
I am unable to subscribe to the majority’s holding that appellant, the original insured, may not bring a cause of action against its reinsurer. The traditional rule barring such actions has been more often invoked than examined. The majority states that it can “perceive neither practical nor policy reason[s] for altering this rule,” at 232, but I submit that there are such reasons, and that the rule should be reexamined and abandoned.
The traditional rule grew up in the 1800’s, as the vintage of the authority cited by the majority indicates, when reinsurance and insolvency of insurance companies were not common. Today, reinsurance is common. One commentator considers it essential on major risks. Thompson, Critical Issues of the Eighties: How Trends in Reinsurance Will Affect Legal, Legislative, and Regulatory Actions, 26 Forum 1038, 1039 (1981) [hereinafter “Trends in Reinsurance”]. Insolvency of insurance companies is also, if not common, at least not rare, and the majority of states have enacted legislation designed to compensate insureds in the event of an insolvency. Shulman, Reinsurance: A Primer for the Practitioner, 3 L.A.Law. 34, 36 (1980). Thus the practical considerations in support of the traditional rule have changed.
The law has changed, too. The rationale of the traditional rule, relied on by the majority, is that there is no privity between the insured and the reinsurer. At 231. See 44 Am.Jur.2d, Insurance § 1877 (1969). But as appellant argues, the doctrine of privity, has been “largely discredited.” Appellant’s Brief at 15.
A look at the doctrine of privity in products liability law is instructive. From the 1800’s until about 1916, the doctrine was invoked to prevent persons injured by defective products from suing the manufacturer of the product. In MacPherson v. Buick Motor Co., 217 N.Y. 382, 111 N.E. 1050 (1916), Justice CARDOZO, observing that “[precedents drawn from the days of travel by stage coach do not fit the conditions of travel to-day,” supra at 391, 111 N.E. at 1053, *47held that a person injured as a result of a defective automobile tire had a right of action against the manufacturer of the tire, despite the lack of privity. The rationale was that the manufacturer expected that its product would be used in a certain manner, and was in a better position than the innocent consumer to know of the potential danger. This decision has been regarded as the impetus for changes in the law “responsive to ever-growing pressure for protection of the consumer coupled with a realization that liability would not unduly inhibit the enterprise of manufacturers and that they were well placed both to profit from its lessons and to distribute its burdens.” James, Products Liability, 34 Tex.L. Rev. 44 (1955). See Keeton, Owen, Montgomery, Products Liability and Safety, 41-55 (1980).
Similar policy considerations argue against invoking the doctrine of privity here. First, the reinsurer’s expectations are not disturbed if a suit by an original insured is brought directly against it, in the case of the intermediary’s insolvency, because the reinsurer was presumably prepared to pay anyway. In fact, in exchange for its accepting its share of the risk, the reinsurer typically “receives from the ceding company [the intermediate insurance company] an agreed percentage of the premiums, or a negotiated amount, payable to the ceding company by the insured.” Shulman, Reinsurance: A Primer for the Practitioner, 3 L.A.Law. 34 (1980). Second, like the product manufacturer, the reinsurer is often in a better position than the original insured to know the financial health of the insurance company, and, unlike the insured, can consider this in entering into the reinsurance agreement. Finally, the original insured may well go uncompensated in the event of insolvency of his insurance company if suit against the reinsurer is not permitted. Here, although the majority states that appellant “is protected by the bond, with sureties, which the contractor filed,” at 232, it is not evident that that is so. If it were, why would appellant file this suit? In any case, the majority’s argument proves too much: accept it, and MacPherson would have been decided the other way.
*48In this regard, it may be noted that the provisions of the Pennsylvania Insurance Guaranty Association Act, Act of Nov. 25, 1970, P.L. 716, N. 232, Art. 1, § 101, 40 P.S. § 1701.101 et seq. do not afford as direct a remedy for insureds as a suit against the reinsurer, given the Act’s prerequisites to recovery. See, Sands v. Pa. Ins. Guaranty Ass’n, 283 Pa. Superior Ct. 217, 423 A.2d 1224 (1980). Moreover, why should the Association, to which all property and casualty carriers are required to belong, be compelled to deplete its funds to pay an insured, when a specific reinsurer has been receiving premiums indirectly from the insured, and when that reinsurer accepted the risk of entering into a reinsurance agreement with a financially unsound insurance company? Surely the reinsurer is the party that should in fairness absorb the risk, and the one that can most effectively prevent it from occurring.
In addition to the lack of privity, one other reason has been advanced for barring the insured from an action against the reinsurer. It has been said that “[t]he theory behind precluding the original insured party from suing the reinsured directly is that such a party usually has no knowledge of the reinsurance contract and cannot claim that it relied upon such a contract . . . .” Housing Authority of Lebanon v. Envirohousing, 442 F.Supp. 1193, 1196 (M.D.Pa. 1978). Here, however, appellant knew of the existence of the reinsurance agreement, for the agreement was attached to the contractor’s bond. Thus, appellant reasonably expected that it was “doubly protected” by insurance company and reinsurer—it argued in fact that it thought the reinsurer was a co-surety—and yet the majority defeats that expectation by preventing appellant from asserting the reinsurer’s obligation. In my view, we should uphold appellant’s reasonable expectations. See Keeton, Insurance Law § 6.3(a) (1971) (discussing the importance of honoring the reasonable expectations of the insured). As one commentator explains,
Despite the general principle of law that the policyholder has no right to seek payment directly from a reinsurer, it should be evident that reinsurance can be a mainstay *49behind the original policy. The individual who purchases insurance is fortified by a virtual network of reinsurance companies. For example, an individual who purchases a $10 million policy may trigger the interrelationship of American and international capital; the insurance company may retain a small portion of the original policy it has written and pass on the balance to an American reinsurer or several American reinsurers who may choose to retain a part of that risk and, in turn, pass the remainder to markets throughout the world. Therefore, the original insured’s security has become international. When this is multiplied by the many sets of reinsurance relationships, the economic life of the general public is strengthened and both trade and industry are enhanced.
Thompson, Trends in Reinsurance, supra at 1043.
I should reverse the order of the lower court.