Court Opinion

ID: 7012637
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:11:46.045485+00
Date Added: 2024-06-11T16:10:15.863050
License: Public Domain

Mr. JUSTICE BURMAN dissenting: I do not agree with the majority’s conclusions that Peerless assumed direct liability to the policy holders of Highway and that the holder of a workmen’s compensation award has a greater right than other claimants against the estate of an insolvent insurer. I believe that the trial court correctly held that the liquidator of Highway Insurance is alone entitled to receive tire proceeds of the reinsurance agreement. The facts which give rise to this appeal are set forth in detail in the majority opinion. Briefly they are as follows: The appellants are holders of workmen’s compensation awards whose employers insured their workmen’s compensation liability with Highway Insurance Company (“Highway”). Highway in turn entered into a reinsurance agreement with Peerless Insurance Company (“Peerless”) under the terms of which Peerless agreed to indemnify Highway for all workmen’s compensation claims paid in excess of $25,000. In July, 1967, Highway became insolvent, and its liquidation was ordered pursuant to a complaint filed by the Director of Insurance. In March, 1969, the Circuit Court of Cook County decreed that the liquidator of Highway has exclusive right and title to the proceeds of reinsurance treaties entered into by Highway and enjoined all persons from asserting any claims against such proceeds. The appellants petitioned the trial court to vacate the injunction order and for leave to file a third party action against Peerless. The petition was denied, and this appeal followed. Reinsurance is generally defined as a contract made by one insurer with another to indemnify the first against a risk which it has already assumed. In such a situation the primary insurer becomes an insured of the reinsurer. (Vail v. Norwich Union Fire Insurance Society, 257 Ill. 355; Pioneer Life Insurance Co. v. Alliance Life Insurance Co., 374 Ill. 576.) A reinsurance treaty is an agreement between two insurance companies in which one agrees to cede and the other to accept reinsurance business according to the terms of the agreement. (Pioneer Life Insurance Co. v. Alliance Life Insurance Co., 374 Ill. 576.) It is well established that insurance contracts, like other contracts, are to be construed according to the sense and meaning of their terms, and if free from ambiguity are to be understood in their plain and ordinary sense. (Midwest Dairy Products Corp. v. Ohio Casualty Insurance Co., 356 Ill. 389.) In my opinion, the agreement between Highway and Peerless in the present case is plainly a reinsurance treaty, and I do not believe that Peerless assumed any primary liability to Highway’s policy holders. The agreement contains the following pertinent provisions: “ARTICLE I Classes of Business Reinsured: [Highway] will reinsure with [Peerless] and [Peerless] will accept reinsurance from [Highway] upon the specific terms and conditions set forth herein and in Exhibits ‘A’ and ‘B’ attached hereto and made a part of this Agreement * * *. ARTICLE III Liability Reinsured: The actual payment in cash by [Highway] of any loss shall be a condition precedent to any recovery under this Agreement, and subject to such condition, the liability of [Peerless] shall follow that of [Highway], and shall be subject within the applicable policy limits in all respects to all the general and special stipulations, clauses, waivers and modifications of [Highway’s] policy, binder, or other undertaking, and any endorsements thereon. In the event of insolvency of [Highway], this reinsurance shall be payable to its liquidator or receiver on the basis of the claim or claims allowed against [Highway] by any court of competent jurisdiction or any justice or judge thereof, or by any receiver or liquidator having authority to determine and allow such claims, provided, however, that the liquidator or receiver shall first give written notice of the pendency of the claim or claims and the re-insurer hereunder shall have all rights, as more fully set forth in Section 173 of the Illinois Insurance Code as amended July 24, 1945. EXHIBIT A Excess Reinsurance of Third Party Bodily Injury (including Medical Payments) and Property Damage Liability Business; Illinois Liquor Control Law Liability Business; Workmen’s Compensation and Employers’ Liability Business. Section 1 Cover: As respects business of [Highway] (falling within the scope or the classes set forth in the title of this Exhibit and not hereinafter excluded) in force at and becoming effective (including renewals) at and after 12:01 A.M., January 1, 1958, [Highway] shall retain for its own account liability for: 1. As respects Workmen’s Compensation and Employers’ liability business, the first Twenty-five Thousand Dollars ($25,000) of loss due to claims (relating to one or more policies and regardless of the number of insured involved) arising out of each accident, whether such claims involve any one or any combination of such classes of business; and [Peerless] shall indemnify and reimburse [Highway] for all losses paid in cash by [Highway] in excess of the retentions set forth in Items 1 and 2 above as respects each acident, subject to a maximum liability of One Million Dollars ($1,000,000) to [Peerless] as respects each accident.” The terms of the agreement are unambiguous, and it is apparent that Highway and Peerless entered into nothing more than a reinsurance treaty of the type commonly employed in the insurance industry. Of particular significance is the language in the section dealing with coverage: “As respects Workmen’s Compensation and Employers’ Liability business * * # [Peerless] shall indemnify and reimburse [Highway] for all losses paid in cash by [Highway] in excess of [$25,000] * * * as respects each accident * * By its terms the agreement is one of indemnity and contemplates the payment in full of loss claims by Highway with subsequent reimbursement by Peerless for the payment of claims which exceed $25,000. This is the normal character of reinsurance, and I believe that to conclude, as does the majority, that Peerless assumed primary liability for claims in excess of $25,000 to Highways policy holders is a strained and wholly unwarranted interpretation of the agreement. As Peerless is a reinsurer of the risks assumed by Highway, its liability, if any, to Highway’s insureds must be considered in that light. It is now well established in Illinois that “[t]he ordinary contract of reinsurance operates solely between the insurer and the reinsurer, and creates no privity whatever between the reinsurer and the person originally insured. The contract of insurance and that of reinsurance remain totally distinct and unconnected, and the reinsurer is in no respect liable * * * to the person originally insured.” (Vail v. Norwich Fire Insurance Society, 257 Ill. 355.) As the court in Vail points out, such a rule grows logically out of the realization that the contract is one of indemnity and is created for the benefit of the ceding insurer and not the benefit of its policy holders. The precise question of whether policy holders of the primary insurer can maintain a direct action against a reinsurer was considered in Gill v. Peerless Casualty Co., 18 Ill.App.2d 338. The reinsurance agreement construed by the court in Gill was identical to that in the present case. In holding that such an action could not be maintained the court stated: “By none of the provisions of the agreement did [the reinsurer] obligate itself to pay any loss sustained by a policy holder of the Blackhawk Company to such policy holder. Its agreement was to pay the Blackhawk Company but only after the Blackhawk Company had paid a loss on a claim in excess of $5,000. The express language of this agreement makes it an excess reinsurance contract and as such its provisions are not enforcible by appellant.” The theory that policy holders of the primary insurer are third party beneficiaries of the reinsurance agreement has also been rejected. See People ex rel. Hershey v. Cosmopolitan Insurance Co., 89 Ill.App.2d 225. The appellants in the present case are holders of workmen’s compensation awards. Their right of action against Highway is established by Section 4 of the Workmen’s Compensation Act (Ill. Rev. Stat. 1971, ch. 48, par. 138.4), which permits holders of unpaid awards to proceed directly against their employer’s liability insurer and makes the insurer primarily liable for the amount of the award along with the employer. Thus the appellants here are claiming through their employers who are the policy holders. The employers in the present case could have maintained an action against Highway, but not against Peerless, and I see no reason why the appellants should be allowed to do so. Moreover, the agreement in the present case expressly provides that in the event of the insolvency of Highway the reinsurance shah be payable to its liquidator or receiver and mentions section 173 of the Insurance Code. In 1965, section 173 was divided into sections 173.1, 173.2 and 173.3, which embrace the same material. Sections 173.2 and 173.3 (Ill. Rev. Stat. 1971, ch. 73, sec. 785.2 and 785.3), provide in part: “No credit shall be allowed as an admitted asset or as a deduction from liability, to any ceding company for reinsurance unless the reinsurance * * * agreement provides that payments by the assuming company shall be made directly to the ceding company or to its liquidator, receiver, or statutory successor, except where the contract specifically provides another payee of such reinsurance in the event of the insolvency of the ceding company 6 * */’ (Emphasis added.) Since the enactment of section 173, it has been customary for reinsurance agreements to contain a so-called “insolvency clause” of the type suggested by the statute. Thus the agreement in the present case provides for payment of the reinsurance to the liquidator or receiver of Highway in the event of its insolvency. Speaking of an identical clause, the court in Cosmopolitan said: “This contract appears to us to be clear and unambiguous. It needs no construction. It is an agreement whereby an insurance company reinsured risks that it had previously underwritten. The object and purpose in ceding part of these risks was to protect itself. By this contract an insurance company purchased insurance. A loss payable to it in the event of insolvency became payable to the liquidator. The language of the policy on this point could not be more clear nor concise.” (Emphasis added.) The inclusion of the insolvency clause is further evidence of the relationship contemplated by the parties. By reversing the trial court’s decision the majority in essence holds this provision to be unenforceable and casts doubt upon the validity of sections 173.2 and 173.3. I also do not believe that anything in the Workmen’s Compensation Act requires an exception to the general rules set forth above. The court in Carmack v. Great American Indemnity Co., 400 Ill. 93, established the principle that the provisions of the Workmen’s Compensation Act are incorporated in any contract to insure an employer’s workmen’s compensation liability. However Carmack involved a dispute between an employer and his insurer over whether the insurer was liable for the extra portion of an award paid because the claimant was a minor and thus did not concern reinsurance. The rule of Carmack may be necessary to protect the policy embodied in the Workmen’s Compensation Act; however, there is no reason to extend it to cases involving reinsurance. The reinsurance contract is an undertaking completely separate from that of the contract of primary insurance and its purpose is the protection of the primary insurer. Furthermore, there are compelling reasons for upholding the terms of the agreement in the present case. The insolvency of an insurance company creates a hardship for many classes of persons. Perhaps foremost among these are the policy holders who have valid claims against the company under their contracts of insurance. The proceeds of the reinsurance agreement in the present case are general assets of Highway which should inure to the benefit of all persons who have claims against it. By granting a preferred status to the appellants in the present case the majority is undermining the public policy embodied in the Insurance Code and is establishing a precedent which will jeopardize the orderly liquidation of insolvent insurers. For the foregoing reasons I would affirm the judgment.