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Amer. Mut. Reinsurance v. Calvert Fire Ins.





APPEAL from the Circuit Court of Cook County; the Hon. ARTHUR L. DUNNE, Judge, presiding.


Mr. JUSTICE LINN delivered the opinion of the court:

Plaintiff, American Mutual Reinsurance Company (Amreco), brought suit for declaratory judgment against defendant, Calvert Fire Insurance Company (Calvert). In its suit, Amreco sought to have a contract of insurance entered into between the parties declared to be binding and in full force and effect. Calvert by way of answer and counterclaim alleged, inter alia, that the agreement constituted a sale of a security by Amreco and that, in connection with the sale, Amreco had violated Federal and State securities laws. On that basis, Calvert sought rescission of the contract and an award of damages. The trial court struck and dismissed the several affirmative defenses and counts of the counterclaim which alleged violations of the securities laws. Pursuant to Supreme Court Rule 308 (Ill. Rev. Stat. 1973, ch. 110A, par. 308) the trial court certified questions of law for interlocutory appeal.

Amreco's complaint alleged that it is an Illinois corporation in the business of reinsuring property and casualty risks and organizing and managing a reinsurance pool comprised of one hundred insurance companies. *fn1 Amreco undertakes to reinsure portions of property and casualty insurance policies issued by primary insurers to individual insureds, and in return receives a portion of the premiums paid for such policies. Calvert, an insurance company licensed to do business in Illinois, and the other insurance companies, participate in Amreco's insurance pool by accepting portions of the risks assumed by Amreco and receiving portions of the premiums earned. The agreement with Calvert, entitled "Multiple Line Participating Agreement," provides that Calvert's participation in this arrangement would commence January 1, 1974, and could be terminated by either party at the close of any December 31, by giving the other party 6 months prior written notice.

On April 22, 1974, Calvert requested "retro-active termination" of the agreement. Amreco has maintained that Calvert is bound for the minimum participation period of one year. By this suit Amreco seeks to compel Calvert to share the premiums and losses attributable to that period.

In its answer, Calvert set forth seven affirmative defenses, five of which were claimed to entitle Calvert to rescission of the contract and an award of damages. The first defense alleged that the participatory interests in the pool which Amreco sold constituted an offer and sale to the public of a security within the meaning of the Securities Act of 1933 (15 U.S.C. § 77a et seq. (1970)) and that Amreco did not comply with the registration requirements of the Act. The second defense alleged violations of the Securities and Exchange Act of 1934 (15 U.S.C. § 78a et seq. (1970)) in that Amreco had made omissions and misrepresentations of material fact. The third and fourth defenses alleged violations of the securities laws of Illinois and Maryland. The fifth defense alleged common law fraud in that Amreco's agents made material misrepresentations of fact, upon which Calvert relied, resulting in injury to Calvert.

The sixth defense alleged that Amreco lacked authority to maintain a suit on behalf of the other participants, and the seventh defense alleged that Amreco participated in and managed the pool without obtaining the approval of the Illinois Department of Insurance.

Calvert's counterclaim was comprised of four counts. The first three counts alleged that Amreco's offer and sale to Calvert of the participatory interest constituted a security and violated the Federal Securities Act of 1933, and the Illinois and Maryland securities laws, respectively. Calvert sought to have the purchase declared void and sought damages of two million dollars. The fourth count, seeking similar damages, alleged common law fraud by Amreco.

In its motion to strike the first, second, third, fourth and sixth defenses set forth in the answer, and to dismiss the first three counts of the counterclaim, Amreco alleged, inter alia, that its contract with Calvert did not constitute a security under Federal, Illinois, and Maryland law. Further, Amreco alleged that the McCarran-Ferguson Act (15 U.S.C. § 1011 et seq. (1970)) precluded application of Federal securities law, that the reinsurance contract was exempt from registration under section 3(a)(8) of the Securities Act of 1933, and that Calvert was a seller of reinsurance and not a purchaser of a security.

The trial court found that the agreement did not constitute a security and struck those portions of Calvert's answer and counterclaim containing such allegations. This interlocutory appeal followed. We affirm the result reached by the trial court.

• 1 At the outset we note that in determining the sufficiency of the answer and counterclaim when attacked by a motion to strike or dismiss, all well pleaded facts are taken as true. (City of Chicago v. Loitz (1975), 61 Ill.2d 92, 329 N.E.2d 208.) The disposition of the motions must be made upon a consideration of the allegations contained in Calvert's pleadings. (Mutual Tobacco Co. v. Halpin (1953), 414 Ill. 226, 111 N.E.2d 155.) Although the parties have urged us to consider affidavits submitted by their corporate officers, they cannot properly be considered in determining the sufficiency of the pleadings. Brooks v. Midas-International Corp. (1977), 47 Ill. App.3d 266, 361 N.E.2d 815.

The preamble to the reinsurance agreement entered into between Amreco and Calvert recited:

"An agreement of reinsurance between the American Mutual Reinsurance Company, Chicago, Illinois, (hereinafter called the `Company') and Calvert Fire Insurance Company, Philadelphia, Pennsylvania (hereinafter called the `Participant').

Whereas the Company issues to insurance companies (hereinafter called individually as an `Insurer') contracts and binders of reinsurance covering Property and Casualty ...

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