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People Ex Rel. Baylor v. Highway Ins. Co.

DECEMBER 13, 1972.






APPEAL from the Circuit Court of Cook County; the Hon. DONALD J. O'BRIEN, Judge, presiding.


Rehearing denied March 7, 1973.

In this action the petitioners, Herman Jackson and Joseph Schaden, are workmen's compensation claimants who sought to vacate an injunction entered in the Circuit Court of Cook County, which restrains all persons from obtaining judgments against the property or assets of the insolvent insurer of their employer and from pursuing any action which would interfere with the liquidator's exclusive right, title and interest to funds recovered under a so-called reinsurance agreement, discussed later herein.

The issues on appeal are whether workmen's compensation claims are subject to the "insolvency clause" of the insurance agreement and whether the injured workmen may proceed directly against the insurer to recover the proceeds of excess insurance.

On December 7, 1963, Herman Jackson, an employee of Advance Salvage Corporation, was injured in the course of his employment. He filed an application for adjustment with the Industrial Commission against Advance Salvage and Highway Insurance Company, its insurance carrier. An award was originally entered on January 9, 1967, but on July 22, 1968, the Commission entered a corrected decision for $61,090.41 for total blindness in both eyes.

On July 19, 1963, Joseph Schaden, an employee of J. Kaplan & Sons, Inc., was injured in the course of his employment. He filed an application for adjustment of claim with the Industrial Commission against J. Kaplan & Sons, Inc., and Highway Insurance Company, his employer's insurance carrier. On May 10, 1967, the arbitrator entered an award of $46,786.11.

On July 6, 1967, the Director of the Department of Insurance of the State of Illinois filed a complaint seeking to place Highway Insurance Company in liquidation, and on July 28, 1967, the court entered a decree that Highway be liquidated and dissolved.

On February 20, 1969, the Director of Insurance filed a petition seeking a court determination that the liquidator had exclusive claim to the proceeds of an insurance agreement entered into by Highway as the ceding insurer and Peerless Insurance Company, the excess insurer, and on March 20, 1969, the court so held. Under the terms of the insurance agreement between Highway and Peerless, Peerless was to pay the portion of a compensation award over $25,000 to a maximum of $1,000,000 for each accident. The agreement also contained an "insolvency clause" which provided that "In the event of insolvency of the Company, the reinsurance shall be payable to its liquidator or receiver * * *."

On March 28, 1969, a petition on behalf of Herman Jackson was filed seeking to vacate and set aside the injunction order entered on March 20, and requesting that an order be entered permitting him to pursue and enforce his claim for amounts above $25,000 directly against Peerless. On April 2, 1970, Joseph Schaden filed a similar petition requesting the same remedy. Both claimants recognize that, as to Highway, they are general creditors for the $25,000 claims chargeable to Highway.

On June 26, 1970, the court denied the petitions of Jackson and Schaden and entered an order providing that the funds of the excess insurer due under the agreement between Highway and Peerless "* * * belong to and are the property of the Liquidator and not Petitioners and said Petitioners have no interest therein and do not have any right to any of the relief sought in the said Petitions * * *." This appeal is taken from that order.

• 1 The petitioners contend that funds payable by an insurer by reason of a workmen's compensation award must be paid to the injured workman without diminution caused by the claims of others. They argue that the Workmen's Compensation Act as construed by the cases shows the strong and compelling policy of this state to preserve the full value of the workmen's compensation awards for the exclusive benefit of the injured workmen. Section 21 of the Workmen's Compensation Act (Ill. Rev. Stat., ch. 48, sec. 138.21), provides:

"No payment, claim, award or decision under this Act shall be assignable or subject to any lien, attachment or garnishment, or be held liable in any way for any lien, debt, penalty or damages."

In Lasley v. Tazewell Coal Co. (1921), 223 Ill. App. 462, the court refused to enforce an attorney's lien and stated:

"[T]he purpose of the legislature is evident; it undoubtedly intended that no lien of any kind should be allowed to intervene to prevent the workman from receiving the benefit of the monthly compensation awarded to him."

Also, see East Moline Works Credit Union v. Linn (1964), 51 Ill. App.2d 97, and McCormick v. McDougal-Hartmann Co. (1969), 111 Ill. App.2d 346.

The Director of Insurance points out the insolvency clause in the agreement states the excess insurance shall be paid to the liquidator and cites cases which hold a reinsurance agreement creates no privity between claimants and the reinsurer. In Vial v. Norwich Fire Insurance Society (1913), 257 Ill. 355, the court stated:

"Re-insurance is defined to be a contract that one insurer makes with another to protect the first insurer from a risk he has already assumed. It is not denied such contracts are lawful and valid. `The ordinary contract of re-insurance operates solely between the insurer and the re-insurer and creates no privity whatever between the re-insurer and the person originally insured. The contract of insurance and that of re-insurance remain totally distinct and unconnected, and the re-insurer is in no respect liable, either as surety or otherwise, to the person originally insured. (24 Am. & Eng. Ency. of Law, — 2d ed. — p. 249.)'" Also, see Baltica Insurance Co. v. Carr (1928), 330 Ill. 608; and Gill v. Peerless Casualty Co. (1958), 18 Ill. App.2d 338.

However, these cases do not involve workmen's compensation. If the "insolvency clause" of the excess insurance agreement is given effect, the claims of Jackson and Schaden would be inferior to preferred claims of certain creditors of Highway (see sections 807, 814, and 817 of the Illinois Insurance Code, Ill. Rev. Stat., ch. 73). More importantly, their claims would be on a par with those involving common law judgments which are not restricted in amount as are compensation awards. In Donoho v. O'Connell's, Inc. (1960), 18 Ill.2d 432, the court specifically recognized that protecting proceeds of a workmen's compensation settlement from encumbrances is a valid legislative purpose because of the limited nature of the recoveries. The court stated:

"The limited recoveries under these statutes do not include an allowance for pain and suffering, an element of damage which looms large in personal injury cases. It is common knowledge that the amounts recovered under these statutes are far smaller than amounts recovered in common-law actions. These are genuine differences of situation, which will support legislative classification."

Although reinsurance agreements have been construed to guarantee the policies of the insured (Weil v. Federal Life Insurance Co. (1914), 264 Ill. 425), the language of the agreement in the instant case indicates the intention of the parties was for Peerless to assume liability in excess of the first $25,000 rather than assume or guarantee Highway policies. In Carmack v. Great American Indemnity Co. (1948), 400 Ill. 93, the court held the Workmen's Compensation Act ...

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