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





Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County; the Hon. Donald J. O'Brien, Judge, presiding.


Rehearing denied September 26, 1974.

The Highway Insurance Company (hereafter Highway) and the Peerless Insurance Company (Peerless) on December 30, 1957, entered into a reinsurance treaty or agreement, by the terms of which Peerless became the reinsurer under a number of types of policies issued by Highway, including its workmen's compensation policies. The treaty provided that Highway would retain for its account liability its workmen's compensation policies to the extent of the first $25,000 of loss from a claim arising out of an accident, and the reinsurer Peerless agreed that it would indemnify and reimburse Highway for any loss paid by Highway in excess of the first $25,000 of a compensation award. It was agreed under the treaty that in the event of insolvency of Highway the reinsurance was to 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 by any receiver or liquidator having authority to determine and allow such claims."

On July 6, 1967, the Director of Insurance of the State of Illinois (the Director) filed a complaint in the circuit court of Cook County for the liquidation of Highway. An order was entered dissolving Highway and appointing the Director to "take possession of the property, books, records, business and affairs of Highway Insurance Company for the purpose of liquidating same."

On February 20, 1969, the Director filed a petition seeking an order that he as liquidator had exclusive claim to the proceeds of all reinsurance agreements and treaties which had been entered into by Highway. On March 20, 1969, a decree was entered which provided that the liquidator had exclusive "right, title and interest" to all funds due under reinsurance agreements which Highway had entered into as the ceding insurer, and the decree restrained all persons from instituting any action or proceeding in any court or agency which sought to interfere with the liquidator's exclusive right, title and interest to funds recoverable under reinsurance agreements or treaties entered into by Highway.

Highway had issued workmen's compensation liability policies in favor of the Advance Salvage Corporation and J. Kaplan & Sons, Inc. In July 1968 Herman Jackson, an employee of Advance Salvage, was given an award of approximately $61,000 by the Industrial Commission of Illinois because of an injury he sustained in the course of his employment, and in 1968, also, Joseph Schaden was awarded approximately $46,000 by the Commission against his employer J. Kaplan & Sons, Inc., for an injury he received in his employment.

On March 28, 1970, and April 2, 1970, respectively, Jackson and Schaden filed petitions to vacate and set aside the injunction which restrained them from proceeding against Peerless as to the portions of their judgments in excess of $25,000. On June 26, 1970, the petitions were denied and the appellate court, with one judge dissenting, reversed the circuit court. (9 Ill. App.3d 845.) We granted leave to appeal.

The nature of reinsurance was described by the court in People ex rel. Hershey v. Cosmopolitan Insurance Co. (1967), 89 Ill. App.2d 225, in which case another division of the appellate court held contrary to the result which the appellate court reached here. The court, quoting from Appleman, Insurance Law and Practice, said at page 228:

"Reinsurance, to an insurance lawyer, means one thing only — the ceding by one insurance company to another of all or a portion of its risks for a stipulated portion of the premium, in which the liability of the reinsurer is solely to the reinsured, which is the ceding company, and in which contract the ceding company retains all contact with the original insured, and handles all matters prior to and subsequent to loss. The true reinsurer is merely an insurance company or underwriter which deals only with other insurance companies as its policyholders." 13 Appleman, Insurance Law and Practice, sec. 7681, at 433-434 (1943).

It was stated by this court in Vial v. Norwick Union Fire Insurance Society (1913), 257 Ill. 355, 358, 362:

"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.' * * *

* * * There is no assumption of any liability of the Indemnity Company to the policyholders, nor any agreement on the part of defendant in error [the reinsurer] to pay any loss sustained by the policyholders. It is strictly a contract to indemnify the Indemnity Company against any losses it might sustain, but defendant in error assumed none of the liabilities of that company to its policyholders. The Indemnity Company continued liable, as before, to settle with its policyholders, and there is nothing in the contract to indicate that it was made for the benefit of the Indemnity Company's policyholders. It created no privity whatever between the Indemnity Company's policyholders and defendant in error, and therefore no right exists in plaintiff in error to maintain an action against defendant in error."

This view that the contract of insurance is separate from a contract of reinsurance and that the reinsurer does not have any liability to the person originally insured is, in the absence of special circumstances, not present here (see Fontenot v. Marquette Casualty Co. (1971), 258 La. 671, 247 So.2d 572), the almost unanimous view of courts which have considered the question. See Melco System v. Receivers of Trans-American Insurance Co. (1958), 268 Ala. 152, 105 So.2d 42; Crozier v. Lenox Mutual Insurance Ass'n (1961), 252 Iowa 1176, 110 N.W.2d 403; Winneshick Mutual Insurance Ass'n v. Roach (1965), 257 Iowa 354, 132 N.W.2d 436; In re Estate of Moebius (1950), 231 Minn. 219, 43 N.W.2d 104; Moseley v. Liverpool & London & Globe Insurance Co. (1913), 104 Miss. 326, 61 So. 428; Sofia Bros. v. General Reinsurance Corp. (Sup. Ct. 1934), 153 Misc. 6, 274 N.Y.S. 565; Pink v. American Surety Co. of New York (1940), 283 N.Y. 290, 28 N.E.2d 842; Squibb-Mathieson International Corp. v. St. Paul Mercury Insurance Co. (Sup. Ct. 1964), 44 Misc.2d 835, 254 N.Y.S.2d 586; In re Security General Insurance Co. v. General Insurance Co. (1966), 82 S.D. 47, 140 N.W.2d 676; Commercial Casualty Insurance Co. v. Columbia Gas Co. (1938), 22 Tenn. App. 656, 125 S.W.2d 493; United States v. Federal Surety Co. (4th Cir. 1934), 72 F.2d 964; Taggart v. Keim (3d Cir. 1939), 103 F.2d 194; Citizens Casualty Co. v. American Glass Co. (7th Cir. 1948), 166 F.2d 91; United States Fire Insurance Co. v. Smith (1935), 231 Ala. 169, 164 So. 70, 103 A.L.R. 1468; Empire State Insurance Co. v. Collins (1874), 54 Ga. 376; Stickel v. Excess Insurance Co. of America (1939), 136 Ohio St. 49, 23 N.E.2d 839; Insurance Co. of Pennsylvania v. Park & Pollard Co. (1920), 190 App. Div. 388, 180 N.Y.S. 143, aff'd, 229 N.Y. 631, 129 N.E. 936; see Couch, Insurance, sec. 801:66; 13 Appleman, Insurance Law and Practice, secs. 7681, 7694; Richards on Insurance, sec. 36, at 124; 103 A.L.R. 1486a.

It appears that only in Missouri (First National Bank of Kansas City v. Higgins (Mo. 1962), 357 S.W.2d 139) and in Michigan (Federoff v. Ewing (1971), 386 Mich. 474, 192 N.W.2d 242) have there been contrary holdings. In Federoff, which involved the very reinsurance treaty between Highway and Peerless we are considering here, the court permitted workmen's compensation claimants to recover directly from Peerless. The court stated inter alia that the reinsurance contract was expressly subject to provisions in the ...

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